1031 exchange scams can devastate investors

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Do you know who's holding your funds?

August 13, 2008

By Ilyce Glink
Inman News

A recent report in the Wall Street Journal highlighted yet another 1031 exchange company that had stolen investors' funds and used them to fund an expensive lifestyle.

Thousands of real estate investors have used 1031 exchanges to defer capital gains and other taxes due when buying replacement investment property. When the rules are properly followed, a 1031 exchange -- also referred to as a Starker trust or Starker exchange -- allows a real estate investor to buy and sell real estate without having to pay any federal income taxes on the sale of the property. The payment of any taxes is deferred until the owner of the property dies or sells the property and does not use a 1031 exchange.

1031 exchanges are generally used for real estate transactions but can also be used for investments in other types of properties, including airplanes, cars, trading cards and even musical instruments. But these investments have to be true investments, and the sale of one must be followed by the purchase of another like-kind investment: a real estate asset for another real estate asset, or an airplane for an airplane.

According to Scott Nathanson, senior vice president of Nationwide Exchange Services, a company that acts as a qualified intermediary, the problem is that 1031 exchange companies are unregulated, and security isn't high on their list of priorities.

"Making sure that (investors') 1031 funds are secure is expensive and time-consuming," Nathanson says. "So a lot of 1031 exchange companies don't do it."

In the past few months, Nathanson says, the faltering economy and slowing real estate market have meant trouble for many 1031 exchange companies that aren't quite on the up and up.

In Chicago, two attorneys who operated small 1031 exchange intermediary companies in addition to their legal practices were found to have skimmed $1 million, in one case, of investors' funds. In one of the cases, the attorney skimmed a little bit from each of the investors' funds over many years, Nathanson explained.

But the sheer magnitude of some of the cases, which Nathanson and investigators refer to as Ponzi schemes, is startling.

In Denver, the owner of the Southwest Exchange Inc. acquired a number of small 1031 exchange companies, combined them together and then took $100 million of $150 million in funds to invest in some European breast implantation technology.

"As long as there is new money coming in that you can use to pay out the 1031 exchange funds that have to go out, you're OK," Nathanson explains. "But as soon as the market slowed, he needed to get those funds back into the 1031 exchange company, but apparently couldn't."

On the East Coast, the owner of another 1031 exchange company used the company as his private piggy bank, pulling another $100 million out of it for personal use.

Nathanson says that real estate investors looking to do a 1031 exchange should ask companies a few basic questions to help establish where their funds will be held and how safe they are.

First, ask where the funds will be held and how they will be held. Nationwide Exchange Services, which Nathanson believes is the only 1031 exchange company that is Sarbanes-Oxley Section 404 compliant, holds funds only in FDIC banks. Not only that, the funds are held in a special escrow trust account so if a bank goes under, the funds are safe even if there is more than $100,000 in the account.

Nathanson says it takes an extra day to get the funds out of the special trust account, "but it's amazing how patient people have become in the wake of the Indymac Bank failure."

Next, ask if the 1031 exchange company has a fidelity bond and if you can get a copy of it. Nathanson says his company has a $55 million fidelity bond to protect customers.

"In a bad economy, where 1031 exchange companies cut corners is with the bonds, which can be expensive," he adds.

Finally, ask if the 1031 exchange company carries errors and omissions insurance on each exchange. The answer you're looking for is yes, because the E&O policy covers mistakes such as funds being erroneously wired to the wrong location.

If you have 1031 exchange funds held with a company that doesn't follow best security practices, the end result can be devastating.

"The IRS is unforgiving on this issue because they say you have the right to choose any 1031 exchange company you want. If you choose a company that turns out to be a bunch of crooks, the IRS says it's your problem. You still owe the taxes," even if you can't buy a replacement property and you have lost your money, Nathanson explains.

How much could you owe? If you failed to complete the 1031 exchange for any reason, you'd owe capital gains tax on your profit, any state taxes that would have been due and the recapture on any depreciation you took.

In short, you could be completely wiped out, especially if you have been doing 1031 exchanges over and over again, deferring hundreds of thousands of dollars in profits.

"It's most people's life savings, and they never ask these important questions about security. What we are often asked is why we're going to keep the funds in a trust account that only earns 2 percent," Nathanson says. "They keep asking if there isn't a place where we could earn a little more."

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

Composite decking not infallible

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Despite benefits over natural wood, warping and rotting still possible

August 15, 2008

By Paul Bianchina
Inman News

Check over the results of virtually any home improvement survey, and you will see that adding a deck consistently ranks at or near the top of the list in terms of both desirability and payback on investment. If a deck is high on your wish list, one of the primary decisions you are no doubt struggling with is what type of decking material to use -- natural wood, or one of the new plastic composite materials that have been getting so much attention lately.

The relative advantages and disadvantages of natural wood are pretty well known. On the plus side, there is the pure, natural beauty of wood, something the composites have been striving with mixed results to emulate. In the eyes of many homeowners and builders alike, nothing can ever replace the subtle grain variations and smooth glow of a piece of redwood or cedar, or one of the hardwoods such as teak or Ipe.

Then there are the obvious drawbacks to wood, which include splintering, cracking, insect and water damage, and the need for regular maintenance every one to two years. It's a tough balancing act between looks and upkeep.

So, enter the composite decks, one of the faster-growing segments of the building material industry. They have been heavily marketed, with the consistent underlying theme being that composites offer much of the beauty of wood without the hassles. True or not?

Actually, most of the main selling points of composite decking seem to be true, if occasionally a little overoptimistic. Composite decking is typically a very stable material, without the cracking and splintering associated with natural wood. You're not going to pick up a splinter walking across one of these decks, and they are also a pretty undesirable meal for an insect.

Low-dimensional shrinkage -- the tendency for a 6-inch-wide board to stay 6 six inches wide after exposure to the elements -- is also an advantage to composite decking. However, to say unequivocally that these materials will not warp would be a bit of an overstatement. There is still that possibility, and it's imperative that the manufacturer's rated spans not be exceeded, and that there is sufficient support and an adequate number of fasteners used.

While the exact composition of composite decking materials varies, they are in large part made from recycled materials, another definite advantage. Some of the decking materials can also be recycled themselves should the time come to remove the deck, but that's something you should clarify when you're shopping and comparing brands.

While virtually all of the composite decking materials contain some form and percentage of plastic or vinyl, many also contain a certain amount of wood fiber. Even though the wood fiber is blended with the liquid plastic during the manufacturing process, it is not completely impervious to rotting. The percentage of wood fiber in the makeup of the material is another consideration when shopping, and it's generally considered best to look for a product with less than 50 percent wood fiber in it.

While composite decking may not have succeeded completely in its quest to duplicate the beauty of natural wood, it's still a very attractive material in its own right. Composite decking now comes in a wide variety of colors and texture patterns, and the ability for a deck designer to select a color that blends with the deck's environment, or even to combine colors for dramatic effect, is one of the material's chief advantages. Curves are also typically easier to achieve with composite materials than with natural wood, although tight curves and intricate designs can still present some challenges to the deck builder.

That brings us to maintenance, one of the primary selling features of composite decking. Compared to natural wood, composites really do win this battle hands down, with none of the regular applications of stains and sealers associated with wood. They are not completely maintenance-free, however, and it's important that you follow the manufacturer's instructions for regular cleaning in order to maintain the best appearance. Certain substances can stain composites, such as grease from the barbecue, so it's also important that spills be cleaned up quickly and thoroughly.

Finally, there is the question of durability over time. Composites have simply not been around long enough to be able to say with complete certainty that they will or won't perform well after 10 or 15 years in the backyard. And don't be suckered in by an attractive warranty. As with virtually all building materials, the typical warranty has so much legalese in the fine print and so many exclusions for everything from improper storage at the dealer's yard to installation methods that don't strictly adhere to the manufacturer's sometimes unreasonable standards as to be pretty much useless.

If you're thinking about a composite, your best bet is to simply shop around, ask questions and do your homework. Then ask the dealer or decking contractor for the names of several people who've had similar materials in place for three years or longer, and go check a couple of them out to see for yourself how they're holding up, and what the owner's experiences with them have been.

Better ROI: real estate or stocks?

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Landlording is hard work, but tax benefits may tip scale

August 15, 2008

By Ilyce Glink
Co-written by Samuel J. Tamkin
Inman News

Q: I have decided that if I am to invest in real estate, it will be single-family ranch-style houses with the goal of breaking even on a monthly basis. I'll either hold the property long term (if it looks like I'll make money by increasing the rent over time) or sell after I've fixed it up.

We have ample investments that will give us retirement any time we want, now or even 10 years from now. But my intention with these real estate investments is to make our later years more "flush" as well as provide something for our heirs.

My question is this: How do I determine whether or not investing in single-family homes is even necessary given our financial position? I've run a "basic" analysis of what a $25,000 investment in an account will be in 20 years at 7 percent vs. buying a $90,000 ranch house with 20 percent down, and $7,000 in other costs up front. I've projected just 2 percent average annual appreciation in home value.

The difference between putting the $25,000 in cash into an investment account and buying homes is not huge, but the effort required with real estate is much larger. I want to be sure that the effort I put toward this venture is rewarded and this whole project is not just something to keep me busy.

I'd really hate it if I found out I barely made more than if I'd stuck my money in a mutual fund.

A: This is a great question, and one that every real estate investor should take the time to ponder. But, there's no short answer.

You've done your homework and that's a good thing. But one issue you need to account for in real estate is the possibility that the value of your asset will not only not appreciate but might depreciate. The second item that you need to factor in is whether you have accounted for other expenses in leasing the property and your inability to lease the home from time to time.

These factors may make your decision easier. If you factor in these additional expenses, you may find that your analysis would move you towards not buying real estate.

While residential real property can be a good investment, for most people it's a home. That home is a place to live in and a way to live in a particular neighborhood and community. For many years, homes appreciated rapidly but were never investments. Now that the residential bubble has burst, we won't know whether single-family homes will appreciate as they did in the past or if they will stay at roughly the same value for a number of years before rising again.

For now, in many places, single-family homes are declining in value. According to several indices, homes in many metropolitan areas have fallen anywhere from 10 to 28 percent in value over the past 18 months.

Another point to consider: the long-term costs of maintaining your properties. The longer you own a home, the more costly it is to own it. Roofs, boilers and air-conditioners need replacing over the years. Homes need exterior work and maintenance. All of those costs need to be factored into your decision. If you've already put aside a maintenance and upkeep budget, your decision will be more informed.

All wannabe landlords have to decide if they're up to the task of dealing with tenants. Some people just hate the idea that a tenant can call at any time of the day or night (even if the call never comes). If you're averse to handling tenant calls about problems with your house and decide to hire a manager to take care of these issues, you'll erode your stream of income.

Finally, there will be costs involved when it comes time to sell your property. You can expect to pay anywhere from 4 to 6 percent commission, plus other closing costs, such as title, taxes and other fees.

Being a landlord is a lifestyle, not just an investment. Unfortunately, it's difficult to quantify the cost of your time and effort in retirement. But if you can get your properties to a cash-flow-positive level within the first few years of owning them, you'll likely build a stable source of income for your retirement, and your heirs.

Even if your rate of return is equal to putting your cash into a mutual fund, you might find the tax benefits of owning investment property will tip the scale toward real estate rather than the stock market for a portion of your portfolio.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

When home won't sell, consider rent-to-own

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Buyer should have proper insurance, finances to justify arrangement

August 14, 2008

By Ilyce Glink
Inman News

Q: I am trying to sell my other house in Atlanta. It is paid off, so I have no mortgage hanging over my head. However, I do have a mortgage on my new property. When I sell my former residence, I'll pay off the new mortgage.

I have had interest in the property for the past six months, but my agent informed me the other day that a buyer is floating the idea of a lease/purchase of the house. What is your opinion/advice on a lease/purchase of a home? Is this something I should consider?

A: In this type of market, there are some reasons why you might consider doing a lease/purchase, also known as a lease with an option to buy.

Here's how it works: Typically you and the buyer will agree on a purchase price and a monthly rental fee for the lease. The buyer will pay a nonrefundable option fee to purchase the property at the agreed-upon amount. You may agree to credit a portion of the rent and the nonrefundable option fee toward an eventual down payment (buyers who don't have a down payment often do a lease/purchase).

The financial terms are negotiable and you need to make sure that you know more about the person that will be living in your home than if you were just selling them the home.

When you typically sell a home, the sale is completed within two months of signing the contract. But when you lease the home, your arrangement could last a year or longer. You might want to know more about the buyer's credit history, obtain references, or get to know the buyer better before signing a lease/purchase.

For example, you wouldn't want to rent the home out to someone who will fail to take care of it. You'll want to be sure to have enough of a security deposit so that the buyer has an incentive to keep the home in good shape. You'll want to make sure the buyer has insurance for his belongings and liability insurance in case there is an accident at the home. And you'll want to make sure the buyer has enough income to pay the monthly lease payments until he decides to buy the home or until the end of the lease term.

What you don't want is a tenant who ends up keeping your home off the market, never buys the home, and leaves the home in worse shape than it was in when you gave him the keys.

At the end of the lease term, typically a year, the buyer will tell you whether he is ready to pick up the option and purchase the house or if he prefers to pay another nonrefundable option fee and continue to rent. The buyer might also tell you that he doesn't like the property or can't afford to buy it and is walking away from his nonrefundable option fee and won't continue to rent the home.

If the person interested in your home meets your criteria, it may be a good deal for you to do a lease/purchase, particularly if you are having trouble keeping up with the financial cost of owning two homes and because you'll finally be bringing some cash in for the property.

While there will be wear and tear with any tenant, it isn't a good idea to leave a property vacant for any period of time. Also, because the tenant may actually be interested in purchasing the property someday, he may take better care of the property than a regular tenant would.

Taxwise, I'd remind you that you'll need to have lived in that house as your primary residence for two of the past five years in order to keep up to $250,000 in profits (up to $500,000 if you're married) tax free.

If you decide to go ahead, please treat the lease/purchase as a purchase first, lease second. You should sign a purchase/sale agreement and then have an attorney draw up a lease that discusses the rent credit you are offering, the purchase price, the nonrefundable option fee (should you choose to have one) and other details.

And, please, you should consider using a real estate attorney to assist you in the documentation for the lease/purchase of the home.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

You're 'too scary for my buyers'

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Why some agents don't refer best home inspectors

August 12, 2008

By Barry Stone
Inman News

Dear Barry,

As a real estate broker, I read your column regularly and with great interest. But some of your articles trouble me. They suggest that Realtors routinely avoid the most thorough home inspectors and that they even label good inspectors as "deal killers." This charge seems unfair and in poor taste. Good agents, whether they represent buyers or sellers, want an inspector to perform a thorough inspection. Would you be willing to rethink your position on this? --Terry

Dear Terry,

Let's both give some thought to this issue.

The articles you mention were never intended to offend, but to shed light on an entrenched ethics problem that infects not all but many in the real estate profession: namely, the conflict of interest when Realtors refer home inspectors to their clients. Some will flinch at the voicing of this matter, preferring to deny its existence. But there is an elephant in the room, and it cries to be recognized.

The trunk of the problem is this: Agents don't get paid until the sale is completed, and defect disclosure can make buyers change their minds about the sale. Since the best home inspectors disclose more defects, a large number of real estate agents regard the best home inspectors as "deal killers" -- not because those inspectors actually kill deals, but because their thoroughness engenders the fear that they might kill a deal. As a result, some agents do not refer the best inspectors to their clients. Meanwhile, unwary clients assume that they are getting top-notch home inspection referrals from their agents.

Fortunately, there is also a positive side to this portrait. While some agents are avoiding so-called "deal killers," there are other agents who truly represent the interests of their clients and who recognize the value of total and unabridged disclosure. These agents are the shining stars of the profession, the ones who recommend only the most thorough and qualified home inspectors to clients. Agents of this caliber deserve praise and recognition for the exemplary work that they do.

Thus, we have two dissimilar groups of agents -- the compromised and the committed -- separated by an ethical divide that tarnishes the public image of the real estate industry, while jeopardizing the financial interests of trusting home buyers.

A sophisticated response to these charges has developed among the compromised agents, and it goes like this: Because real estate commissions are paid by the sellers, agents must represent the interests of sellers only. Thus, an agent is justified in recommending a mediocre inspector. From a legalistic standpoint, that may be an arguable position. From an ethical perspective, it is inexcusable. As for liability, it is foolish and risky. After all, how does a substandard inspection benefit the sellers or their agents if faulty disclosure produces a lawsuit after the sale? Obviously, it does not.

The more common justification for avoiding thorough inspectors, however, is the ad homonym approach: Just label the best home inspectors as "nit-picky," "too scary for my buyers," or just plain "deal killers." Thus discredited, those inspectors are no longer "worthy" of referrals.

Home inspection may be the only profession where good work discourages referrals. If that were not so, only the best inspectors would be recommended by Realtors. Instead, many referrals go to inspectors who are inexperienced and less than thorough in their findings.

Articles that expose these facts are thought by some to be in poor taste. What is more distasteful, however, is misleading a trusting home buyer in the choice of a home inspector. If such practices were not so common, there would no need for articles such as this one. Hopefully, this will be addressed once and for all by leaders within the real estate profession.

To write to Barry Stone, please visit him on the Web at www.housedetective.com.

Homeowners feel title office should pay for mistake

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$200 fee pops up months after purchase

August 11, 2008

By Benny Kass
Inman News

DEAR BENNY: We just bought a house in a community association and the title company handled all the fees and the settlement charges. We have been in the house for three months and we just got a $200 bill for an initiation fee for our association. The property manager told me that the title company should have called and asked about fees. Although we paid three months of fees in the settlement charges for the association, the title company never inquired about an initiation fee. The property manager said if they had called for all the fees they would have been told about this fee. I called the title company and they admitted they screwed up. But they said I would have had to pay for it anyway. I feel they should pay. Am I right? --Vito

DEAR VITO: If you look carefully at all of the documents you signed at settlement, I suspect you'll find that you agreed to be responsible for any mistakes made by the lender as well as the title company.

The title company made a mistake, and for the small amount of money they should be gracious and pay the $200. But if they are unwilling to do so, I would pay the fee and cross that company off your list for any future business.

DEAR BENNY: My mother died and left a 55 percent share of her house to me and a 45 percent share to my brother. She named me executor of her estate. My brother and I want to keep the house and rent it out. What is the best way to handle the title, and the division of costs and proceeds from the rental of the house? --Thomas

DEAR THOMAS: You are from Texas and because I don't practice law there, I can provide you only general advice. You really should consult a local attorney for specific answers.

You are the executor (called personal representative in many states) of your mother's estate. Typically, the executor -- once appointed by the probate court -- becomes the legal title owner.

You should convey the property to you and your brother. You will be the grantor in your capacity as executor, and you and your brother will be the grantee. Since you will each own a different percentage interest in the house, you probably will want to take title as "tenants in common" -- 55 percent to you and 45 percent to your brother. That means that each of you should have separate wills so that on your deaths your portions of the house can be distributed as you each desire.

It should be noted that in a few states, two people can take an undivided interest as joint tenants.

Even though he is your brother, I recommend that you enter into a partnership agreement, spelling out such matters as who will handle the funds, what happens if one of you wants out of the deal (or dies), and whether there should be a time established in the future when you will want to sell the property.

You can also consider taking the title in a limited liability company. This should be discussed with your attorney and your financial advisors.

DEAR BENNY: Our 30-year-old home has quadrupled in value. My husband just passed away, but I don't intend to sell this year. How do I find out the current "investment-value basis," or whatever it is called, which I understand is higher on his date of death than when we purchased it? Who do I call? As a future single seller, I know I will have the $250,000 tax exemption on gain, but how will I know what basis to use? Do I simply pay for a private appraisal now, and keep it in my file? I don't think I want a "reappraisal," which would raise my yearly property tax. Would putting the home in my own name also bring higher property taxes? I need information about all this. Who can help me? --Joyce

DEAR JOYCE: The "investment value basis" is referred to as the "tax basis." You have raised a number of questions, many of which I cannot answer because I do not know all of the facts. For example, if you and your husband owned the property together (such as in tenants by the entirety -- where permitted by law -- or joint tenants), then you do not have to file probate regarding the house.

I also need to know if you are in a community property state, such as California. The "stepped-up basis" laws are different there. If you are not in a community property state, you have to go back to the original purchase price. For example, you and your husband bought the property for $40,000 many years ago and made $20,000 worth of improvements. The basis for tax purposes in this example is $60,000. You and your husband each had a basis of $30,000. On his death, the property is worth $200,000. Half of this value is added to your basis, so for tax purposes your basis is now $130,000 (your $30,000 plus $100,000).

As you will see from the answer to the next question, you now have two years from the date of death in which to sell the house and take the full up-to-$500,000 exclusion of gain. If you do not sell within the two years, you can claim only up to $250,000 of tax-free profits. Clearly, if your gain is less than $250,000 you need not sell quickly. But if your gain is much greater than that, you might want to consider selling so that you can pocket your gain instead of paying money to Uncle Sam. Currently the federal capital gains tax rate is 15 percent. There is no guarantee that it will be the same when a new administration takes over in Washington.

So, I would seriously consider whether it makes sense for you to sell before those two years are up.

You have to hire a private appraiser who will work with you and your tax accountant in preparing the tax return, which is needed as a result of your husband's death. Your legal and financial advisors should be consulted for specific information.

DEAR BENNY: My wife died in April of this year. I need to sell this big house and downsize. Since we have been here for 22-plus years, if the capital gains is over the single-person limit for exclusion, could I use her share? Would that be only for this tax year? --Martin

DEAR MARTIN: My condolences to you and your family. There is, however, some good news. Last December, a new law was enacted that will allow you to take the up-to-$500,000 exclusion of gain if you sell the house within two years from the date that your wife died.

Let's review the law. If you file a joint tax return, and you and your spouse have owned and lived in the house for two years out of the five years before it is sold, you can exclude up to $500,000 of the profit you make when you sell your house. If you a not married, or file a separate tax return, the exclusion is limited to $250,000.

Up until last December, you could get the full $500,000 exclusion only if you sold your house in the tax year in which your wife died. Thus, in your case, you would have had to sell it by December of this year.

Now, so long as you and your wife owned and lived in the house for more than two years, you have until December of 2010 in which to claim the full "up-to-$500,000" exclusion.

DEAR BENNY: My wife and I are considering buying a condominium unit here in Virginia. How do we check the financials of a condominium association? We want to be sure the association is on a sound financial footing. Any guidance you can provide would be appreciated. --George

DEAR GEORGE: In the Commonwealth of Virginia, potential condominium purchasers are entitled to receive -- and review -- what is known as the "resale package." Many states have such a legal requirement. This package should include the legal documents (declaration, bylaws, rules and regulations), the most recent budget, and a statement of the amount of reserves that the association has available for future repairs, maintenance or improvements.

You should carefully review this package, but watch your deadline. Generally you have only three days from the date you receive this package in which to cancel your sales contract -- although I strongly recommend that the contract require that you get at least seven days in which to opt out.

You should insist on reviewing the most recent financial audit prepared by an independent auditor -- usually a CPA. You should talk with the property manager to determine the number of delinquent owners in the complex. You are not entitled to learn their names, but with all the foreclosures that are occurring throughout the country, it is critical that you obtain this information.

I am assuming that you are buying a "resale" condominium and are not looking to buy from a developer. The developer must provide you with a document entitled "Public Offering Statement," which will contain the proposed budget. Unfortunately, my experience is that many such budgets are lowballed by developers so that the condominium fees will be low. Once control of the association is turned over to the owners, all too often the newly elected board of directors is faced with a political dilemma. They know they have to increase the condominium fees, but don't want to antagonize those members who voted them into office.

You are smart to be concerned about the financial condition of a condominium association in which you will be an owner. Unfortunately, too many people do not take the time to review the legal documents or the financials before they take title to their unit.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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Got renter's insurance?

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For foreclosure victims, coverage may prevent another financial tragedy

August 06, 2008

By Ilyce Glink
Inman News

The number of foreclosures has doubled since last year. That means a lot of former homeowners are now looking for a new place to hang their hats.

Many former owners are becoming renters again for the first time in a long time. And there are new lessons to learn: You're not quite the master of your own domain, because you merely lease the property instead of owning it. You have to live by the landlord's or building's rules and regulations. And, you have to remember to change your insurance coverage.

It's easy to remember that when you own a property, you need to budget for homeowners insurance. Your mortgage company requires you to buy a one-year insurance policy when you buy a home, or you will not be allowed to close.

But there is no one to remind a renter that renter's insurance is just as important -- although much less expensive.

Approximately 87 million Americans rent their home, and Harvard University's Joint Center for Housing Studies predicts another million former homeowners will join their ranks this year. And yet, just 40 percent of renters have renter's insurance, according to a new survey by Allstate.

Why don't renters buy insurance for the contents of their home? The Allstate survey found that 43 percent haven't made time to look into it; 33 percent believe that coverage is too expensive; 23 percent believe they don't have enough valuables to make renter's insurance worthwhile; and 10 percent believe landlords are responsible.

It's easy to be fooled into thinking your stuff doesn't have value when you're a renter. Typically, college students move up into the world with hand-me-down furniture of the well-worn variety. But in fact, television sets, computers and even hand-me down furniture have value, and a theft, fire, flood or other catastrophe could leave renters in the lurch if disaster strikes.

The typical renter has $30,000 worth of contents -- but that's not necessarily a number known by the renter, who typically undercounts his or her possessions. Like homeowners, renters need to take an objective look at the contents of their property and think about how much it would cost to replace them.

But few do. In fact, the Allstate survey found that just one-third of renters have done a home inventory checklist or tried to estimate the cost of replacing everything in their home.

What can you do to protect yourself? Before buying a renter's insurance policy, you should start by doing a home inventory. (This is a good exercise for homeowners as well.) Make a list of all of the possessions you own or are financially responsible for in your rental unit, including furnishings, appliances, artwork, electronic and recreational equipment, books and knickknacks.

Back up your inventory with digital photographs of each item and video to help determine where it is located. If you're so inclined, you can draw a floor plan of the unit and indicate where the major items are located, or use a floor plan provided by your landlord.

In this age of digital technology, you may want to create this as an online file, so that the inventory of possessions, electronic photos and digital video exist together, and can be used to bolster your case in the event of a loss.

Once you have a list of your possessions, you'll want to think about how much it would cost to replace them, if your home is completely destroyed. You might think all you need is a couch, table, chairs, television, computer and new cell phone. But what about plates, glasses and silverware? What will you cook with? Do you need a new toaster oven? And, what about clothes and jewelry?

Add it all up, and you could easily spend $20,000 to $50,000 replacing the contents of a one- or two-bedroom home.

Next, it's time to shop around for the best renter's insurance policy you can find. Your credit score will play a role here, so pull a copy of your credit history at AnnualCreditReport.com (and buy a copy of your credit score for about $7 at the same site). The higher your score, the better terms, condition and price you'll be offered for your renter's insurance policy.

Be sure to shop around and talk to a number of insurance companies about their rental insurance policies. Some may offer discounts if you buy your auto insurance and renter's insurance together. Stacking insurance policies can sometimes net you as much as a 15 percent savings.

But the pricing of a renter's insurance policy may surprise you. Renter's insurance typically costs about $15 per month, or about $180 per year for a $30,000 policy.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

Please don't accept my short-sale bid

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How can buyer pull out of contract without losing $3,000?

August 08, 2008

By Ilyce Glink
Co-written by Samuel J. Tamkin
Inman News

Q: I have a question about bids and short sales. My wife and I have put a bid in on a house and it is a short sale. We offered $275,000 and we have seen paperwork showing that the owners purchased it for around $350,000.

The sellers have 90 days under the papers we signed to respond to our offer. We have not had any inspections or a survey/appraisal completed yet. The more we think about it, we are worried we jumped the gun on this offer.

We might want to get out of the deal before they officially accept our offer. They have $3,000 of our cash in escrow. We would like to know if we can pull out without losing our $3,000.

A: If, as you have indicated, the sellers have not yet accepted your bid to purchase their property, you should be able to withdraw your offer. But as with so many things, the devil is in the details.

Some contract forms bind the buyer to the offer for some time. During that period of time, the buyer can't cancel, rescind or withdraw the offer. But if your contract doesn't have that language, you will need to send a written notice to your sellers, the listing agent and the closing agent, if there is one handling your transaction, that you withdraw, cancel and rescind your offer to purchase the home.

To protect your $3,000 you might want to have a real estate attorney review your contract and send the notice to the sellers.

If your sellers have accepted your offer to purchase their home, you can't rescind your offer but in some parts of the country you still might have the ability to terminate the contract. If your contract has a contingency provision allowing you to get legal advice on the purchase, that contingency may also allow you to terminate the contract as a result of having discussed the issues of the purchase with your attorney.

Finally, if your contract has an inspection contingency clause, you might be entitled to terminate the contract if you find things wrong with the home and the seller refuses to fix those items to your satisfaction.

In each of these instances, you would be wise to use a real estate attorney to help you navigate the legal issues involved and make sure you can get your deposit back.

Q: Who legally owns the house on the day of closing in Pennsylvania?

A: When you purchase a home in Pennsylvania or in any other state, either the contract of purchase or local custom will dictate who is responsible for the expenses of the home on the day of closing.

When you attend the closing of the home (or, as it is referred to in some states, the settlement), you become the owner of the home at the time you receive the keys and the seller receives his or her money.

Most all homes accrue expenses on a day-by-day basis. In most cases, there are real estate taxes to be paid. In other cases, there are homeowner association dues that accrue daily with utilities and other expenses.

The customs vary from state to state and even from county to county. In some states, the seller is deemed to be the owner of a home on the day of the closing and that seller has to pay all costs associated with the ownership of that home that day. The opposite is true in other counties.

Some transactions go as far as to state that a buyer pays all costs relating to the ownership of the home if the closing occurs before noon, but the seller will pay all those expenses if the closing occurs in the afternoon.

Because this is such a local issue, and it varies by county, it's impossible to tell you what your financial responsibilities are for the day of closing. But your real estate agent or closing agent should be aware of these local customs and can guide you.

If your question relates to who gets to live in and possess the home on the day of the closing, the best thing is to have the seller out of the home when the buyer is ready to tender his money to the seller.

In some parts of the country, the custom is to allow the seller to remain in the home the day of the closing or even up to two weeks after the closing. However, if I were representing a buyer, I wouldn't want a buyer to close on the purchase of the home unless the seller were willing to pay for his stay in the home after the closing and would be willing to put up a substantial amount of money to assure the buyer that the seller will move out on a specific date and has the money available to pay for that post-closing possession of the home.

If the seller is unwilling to pay for the post-closing possession of the home or is unwilling to put up enough security to satisfy the buyer that the seller will move out on time and will deliver the home in the condition required under the contract, then the seller should move out on the day of the closing and before the buyer delivers his money to the seller.

While this view may be different than some of the customs and practices in some parts of the country, it protects the buyer from a seller who decides not to move out of the home. It also protects a buyer from a seller who damages the home after the sale or when the seller is moving out, and it encourages a seller to respect the terms of the contract and deliver the home to the buyer on time and in the condition required under the contract.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

New solutions for getting your home sold

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REThink Real Estate

August 07, 2008

By Tara-Nicholle Nelson
Inman News

Q: I need to get my home sold -- now. It's in great condition, but it has been sitting on the market for months. I've reduced the price to where my Realtor thinks it should be. Do you have any out-of-the-box suggestions for moving my house?

A: Welcome to the wonderful world of real estate in 2008. You are not alone -- sellers across the country are struggling to figure out what they can proactively do to unload their homes. I'm assuming that you've surfed the Web and followed all the typical suggestions about sprucing up curb appeal, making sure your place smells nice, and so forth. If you haven't, do that first. I'll also assume that you know how long homes take to sell in your area -- if you don't, ask your Realtor for the average number of days a home like yours stays on the market. Without this information there's no way to know if your home is actually lagging on the market or if it is taking the normal amount of time in your area to sell.

The majority of my personal real estate clients are buyers; these days, I'm showing upwards of 50 houses a week. From my personal experience actually standing inside a huge number of homes with a huge number of buyers and working with them all the way through the home-buying process, I have seen which strategies work and which ones don't -- and I'm happy to share some strategies you might not have heard before. To position your home better for sale, though, you first should reposition your understanding of the nature of your task.

Mindset Management

When you embark upon the adventure of selling your home, you took on the temporary job as a marketer/salesperson. Your Realtor recommends and executes much of the marketing strategy, but there are a number of core decisions involved in getting your home sold, of which you are the sole arbiter. For example, pricing is the single most impactful determinant of whether or not your home sells, and how quickly. You are the ultimate pricing decision-maker.

As the chief marketer/sales decision-maker of your home, you must do as professional marketers do, and get inside the minds of those to whom you are marketing: home buyers. What are their wants, needs, priorities and concerns? What are the ways you can position your home to resolve or address these issues? Because your home is probably your single largest and most important asset, it is easy to get wrapped up in what you need to get out of the sale. In this market, though, when buyers are hesitant and tons of low-priced foreclosures and short sales are your competition, you must go above and beyond to address the needs of prospective buyers if you want to make your home stand out from the crowd and get sold.

Need-to-Knows

A primary concern among today's buyers is that they may not be able to get financing. In fact, I find that buyers often erroneously disqualify themselves; they think that obtaining a mortgage will be more difficult than it actually is. As a marketer, your job is to position your home to overcome buyers' perceived obstacles to buying your home, including financing concerns. I often see articles advising sellers to simply finance the homes for buyers to resolve this issue; however, most sellers who have an urgent need to sell are simply not able to do so because their mortgage loans must be paid off upon sale, or there is no equity in their home, or they need the cash from the sale to move into their next home. While seller financing may be unrealistic, there are other ways you can facilitate financing for buyers considering your home.

Another thing buyers today respond strongly to is a home with a strong emotional pull. These days, so much of the news about real estate and the average buyer's experience of the home-buying process is centered around finances, market considerations and negotiating that I find even the most hard-core, business-focused buyer who has pledged to never fall in love with a house will find all hesitation fall away and overcome her own objections to buying if she has a strong reason to love a particular home.

Finally, in order to get your home sold, you must successfully reach not only buyers, but also buyer's brokers. In the olden days (e.g., 2005), the California Association of Realtors used to say that more than 80 percent of qualified home buyers were represented by buyer's brokers and agents. As the market has grown more complex to navigate, financing has grown tougher to secure, and buyers have grown more apprehensive, I would hazard a guess that the percentage of buyers who are using Realtors has increased.

Action Plan

Here are my three suggestions of solutions to get your home sold without further ado, by addressing buyers' concerns about financing, helping them feel an emotional pull to your home, and making it more attractive to buyer's brokers:

1. Show buyers how to finance your home and guide them to down-payment assistance. Buyers with decent qualifications who just don't have a lot of money for a down payment can often finance a home with no money down -- even on today's mortgage crunched market -- by pairing a government loan, such as an FHA loan, with a down-payment assistance program. Some down-payment assistance programs are specific to first-time home buyers; others, like Nehemiah and AmeriDream will give any buyer 1-6 percent of the purchase price for his or her down payment so long as you, the seller, agree to match that gift in a grant to the organization (the grant comes out of your proceeds at escrow; you don't have to write them a check or anything.)

Market your home as a participating home in Nehemiah or AmeriDream, and make sure that your property fliers include the contact information of a mortgage broker who is familiar with these and other down-payment assistance programs. The fliers should also include some 95 percent and 100 percent financing scenarios, including interest rates, payments and any assumptions on which the scenarios were based. Your Realtor can help you ensure that the sales price you agree to accounts for the grant you will need to make to the down-payment assistance program, if any.

2. Help buyers fall in love with your house. I've seen buyer's respond very well to love letters and care packages left out by sellers. Write a letter, explaining how and why you fell in love with the house; tell stories of how your family lived well in it; and tell buyers about the neighborhood amenities and events that you walk to or participate in. If you have favorite neighborhood vendors, list their contact information and include notes about 80-year-old Zelda who runs the dry cleaner on the corner, and insider tips, like where you can find secret parking spaces for the farmers' market on Saturday. And buyers love to see a care package that includes marked-up menus from the neighborhood restaurants and take-outs, old utility bills to give them a ballpark estimate, and appliance manuals -- it makes them feel like their lives will be just that little bit easier when they move in.

If you're a tech type, considering doing a love letter in YouTube video form, too, and adding that link to your home's Web site and online marketing.

3. Make it easy and advantageous for buyer's brokers to show and sell your house. As a buyer's broker, for every 50 houses I show, I pass up hundreds more. Many of the homes on the market now are either bank-owned properties or are otherwise vacant. Vacant homes are very easy for me to show -- no appointments necessary, and my clients don't have to visualize the place around funky furniture or bite their tongue when verbally processing what they are seeing. If at all possible vacate your house, or ask for no more than a voicemail message notification of showing. If there are 10 homes similar to yours and yours requires an appointment to show, and especially if that appointment is tough to make, chances are that yours will just not get shown and, accordingly, will not get sold. Similarly, complicated instructions about what to do with your pets (e.g., leave the gray cat in, the black dog out, and the purple ferret in the fridge) make me less likely to show your home unless it is uniquely suited to my clients' needs.

If you find your home not being shown as much as you'd like, also consider offering a buyer's broker incentive. Properties that offer 4 percent commissions or significant bonuses for being sold by a certain date do attract more buyer-broker interest.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online.

STAMP OF APPROVAL

Numerous Web sites display property listings, but it's unclear how often the listings are updated. "If you're looking at a database that is 12 hours old, 24 hours old or even longer, you might miss out on opportunities," says Realtor.com President Errol Samuelson. Of the 909 Multiple Listing Services that provide listings to Realtor.com, only 214 update information every 15 minutes. In an effort to better serve buyers, the site will start time-stamping listings when they are posted or updated beginning sometime this summer.

Source: Chicago Tribune (07/27/08) Sichelman, Lew
© Copyright 2008 INFORMATION, INC. Bethesda, MD (301) 215-4688

FOR STANDOUT LISTINGS

Real estate experts underscore the importance of digital photos and mobile phones in generating interest in property listings. Large photos - and plenty of them - are important for online listings, and Realtor.com has been designed to permit up to 25 photos per listing for an extra fee. Additionally, photo size has been increased by 140 percent. Move Inc. President Lorna Borenstein says, "Consumers tell us if they don't see multiple photos on a listing, they doubt the credibility of the Realtor." Experts note that the best photo should be shown first, contrary to the trend of displaying kitchen or bathroom pictures first. Borenstein points out that it also is important to post photos even of homes that are not in the best condition and to label them "fixer uppers." She adds that making sure listings can be viewed on smartphones is "critical for your business."

Source:
Inman News (07/24/08) Carter, Matt
© Copyright 2008 INFORMATION, INC. Bethesda, MD (301) 215-4688

FOCUS ON YOUR HOME PAGE

Real estate professionals need to take a close look at their Web site home pages to ensure they attract visitors' attention from the start. The home page should offer a teaser, something that prompts them to click further into the site. The site also should feature content for buyers, sellers, other agents and brokers, and local businesses so visitors can find useful information in one place. For instance, the site should have listings, sell-through statistics, rate calculators and community links. Additionally, agents should showcase their personalities and build credibility by sharing a little about themselves. Finally, they should freshen up their sites regularly by posting new content and changing headlines.

Source: RISMedia (07/21/08) Aleagha, Peyman
© Copyright 2008 INFORMATION, INC. Bethesda, MD (301) 215-4688