Tag Archives: real estate investing

Foreclosure Activity Up 53% Over June 2007

Default notices, auction sale notices and bank repossessions were reported on 252,363 U.S. properties during June 2008, a 3 percent decrease from the previous month but still a 53 percent increase from June 2007, according to the latest RealtyTrac Foreclosure Market Report.

The report also shows that one in every 501 U.S. households received a foreclosure filing during the month.

“June was the second straight month with more than a quarter million properties nationwide receiving foreclosure filings,” said James J. Saccacio, chief executive officer of RealtyTrac. “Foreclosure activity slipped 3 percent lower from the previous month, but the year-over-year increase of more than 50 percent indicates we have not yet reached the top of this foreclosure cycle. Bank repossessions, or REOs, continue to increase at a much faster pace than default notices or auction notices. REOs in June were up 171 percent from a year ago, while default notices were up 38 percent and auction notices were up 22 percent over the same time period.”

Nevada, California and Arizona continued to document the three highest state foreclosure rates in June.  Florida, Michigan, Ohio, Colorado, Georgia, Indiana and Utah were other states that made the top ten.

For the third month in a row, California and Florida cities accounted for nine out of the top 10 metropolitan foreclosure rates among the 230 metropolitan areas tracked in the report.

RealtyTrac noted that “Foreclosure filings were reported on 8,713 Nevada properties during the month, up nearly 85 percent from June 2007, and one in every 122 Nevada households received a foreclosure filing — more than four times the national average.”

“One in every 192 California properties received a foreclosure filing in June, the nation’s second highest state foreclosure rate and 2.6 times the national average.”

“One in every 201 Arizona properties received a foreclosure filing during the month, the nation’s third highest state foreclosure rate and nearly 2.5 times the national average. Foreclosure filings were reported on 12,950 Arizona properties, down less than 1 percent from the previous month but still up nearly 127 percent from June 2007.”

“Foreclosure filings were reported on 68,666 California properties in June, down nearly 5 percent from the previous month but still up nearly 77 percent from June 2007. California’s total was highest among the states for the 18th consecutive month.”

“Florida continued to register the nation’s second highest foreclosure total, with foreclosure filings reported on 40,351 properties in June — an increase of nearly 8 percent from the previous month and an increase of nearly 92 percent from June 2007. One in every 211 Florida properties received a foreclosure filing during the month, the nation’s fourth highest state foreclosure rate and 2.4 times the national average.”

“Foreclosure filings were reported on 13,194 Ohio properties in June, the nation’s third highest state foreclosure total. Ohio’s foreclosure activity increased 7 percent from the previous month and 11 percent from June 2007. The state’s foreclosure rate ranked No. 6 among the 50 states. Other states in the top 10 for total properties with filings were Arizona, Michigan, Texas, Georgia, Nevada, Illinois and New York.”

“Seven California metro areas were in the top 10, and the top three rates were in California: Stockton, with one in every 72 households receiving a foreclosure filing; Merced, withone in every 77 households receiving a foreclosure filing; and Modesto, with one in every 86 households receiving a foreclosure filing. Other California metro areas in the top 10 were Riverside-San Bernardino at No. 5; Vallejo-Fairfield at No. 7; Bakersfield at No. 8; and Salinas-Monterey at No. 10.”

“The top metro foreclosure rate in Florida was once again posted by Cape Coral-Fort Myers, where one in every 91 households received a foreclosure filing — fourth highest among the nation’s metro foreclosure rates. The foreclosure rate in Fort Lauderdale, Fla., ranked No. 9. LasVegas continued to be the only city outside of California and Florida with a foreclosure rate ranking among the top 10. One in every 99 Las Vegas households received a foreclosure filing in June, more than five times the national average and No. 6 among the metro areas.”

“Metro areas with foreclosure rates among the top 20 included Phoenix at No. 12, Detroit at No. 13, Miami at No. 15 and San Diego at No. 17”

RealtyTrac does not expect foreclosure activity to ease up until 2009.

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Real Estate Values Per Square Foot Down More than 20% in Six Major Markets

Real estate prices continue to fall in most markets, according to Radar Logic Incorporated, a real estate data and analytics company that calculates per-square-foot valuations.

Among the key findings of the latest report from Radar Logic:

  • The broad housing slump continued as consumers showed persistent lack of confidence and difficulty in financing home purchases.
  • April 2008 continued to exhibit price per square foot (PPSF) weakness compared to last year in almost all markets. One MSA showed net year-over-year PPSF appreciation, one was neutral, and 23 declined.
  • The Manhattan Condo market showed a 3.6% increase in PPSF year-over-year coupled with an increase in recent transactions despite a modest decline of 0.7% in month-over-month prices.
  • Charlotte’s increase of 1.5% in year-over-year PPSF moved its rank among the 25 MSAs to number 1. This represents an increase over the 0.1% year-over-year PPSF appreciation last month.
  • Columbus showed year-over-year PPSF appreciation of 0.2% for April 2008, which is an increase from last month’s year-over-year decline of 4.3%.
  • New York declined 3.0% year-over-year in April 2008, its second decline in Radar Logic’s published history (beginning in 2000).
  • Sacramento, the lowest-ranking MSA, showed a 31.7% decline from April 2007, which is consistent with last month’s decline of 30.6%.

 The ten biggest declines in per-square-foot values from last year were in these markets:

Sacramento (-31.7%)

Las Vegas (-29.9%),

San Diego (-28.1%)

Phoenix (-25.6%).

Los Angeles/Orange County (-23.4%).

Miami (-22.4%).

St. Louis (-19.8%).

San Francisco (-19.7%).

Tampa (-16.6%).

Detroit (-16.1%).

You can read the full Radar Logic report here.

Major Law Firm Creates “Distressed Real Estate” Section as Crisis Deepens

In what could be a new and significant trend in American legal practice — and a sign that the real estate crisis is expanding — the prestigious Philadelphia-based law firm Ballard Spahr Andrews & Ingersoll LLP has announced that it is establishing a “distressed real estate” section. 

The firm’s “Distressed Real Estate Initiative” will involve at least 16 core lawyers in ten offices throughout the country, including those in Mid-Atlantic and Western locations hardest hit by the housing bust and the mortgage crisis, including Los Angeles and Las Vegas.

The purpose of the section, according to the firm, will be “to provide representation in acquisition, restructuring and bankruptcy matters.”

 “In this period of turmoil in the financial markets and economic uncertainty, new real estate opportunities and challenges present themselves,” said Michael Sklaroff, chair of Ballard’s Real Estate Department. “We stand ready to serve clients with respect to existing positions and also in assisting them in acquisitions and debt and equity investments in troubled projects.”

Ballard Spahr Andrews & Ingersoll was founded in 1886 and now employs more than 550 lawyers in twelve offices located throughout the mid-Atlantic corridor and the western United States.

When there is blood in the water, the sharks will appear.

Don’t Get Scammed! — 10 Tips to Avoid Getting Ripped Off by Real Estate and Foreclosure Investment Scams

There are a lot of real estate scams out there and many of them are now offering the bait of making easy money in the foreclosure market.

Scammers like to run with the hot trend — and right now the hot trend in real estate is foreclosures and distressed property.

Of course, there is money to be made by investing in distressed and foreclosed real estate.

But as with any other kind of investing, making money in distressed property and foreclosures requires significant expertise and experience and adequate capitalization. 

Before you trust your money to a stranger who tells you he has a sure-fire way to make lots of cash by investing in the hot, once-in-a-lifetime foreclosure and distressed property market, make sure that he has the expertise and experience and the capital (not just yours!) to back up his claims.

Here are 10 tips to avoid being taken in by scammers who promise you quick and easy returns on your real estate investment:

1. Be very skeptical and ask lots of questions. 

2. Get the names of the people who will be running the investment fund.  In particular, get the names of the people who will be making the investment decisions.  Demand that they tell you their business and investment track record and that they provide you with documentation of their claims. 

3. Check their qualifications.  Make sure that they are licensed securities or real estate professionals and not just telemarketers. 

4. Research all the names you get.  Use the Internet.  Do a google search for the investment fund and for anyone involved in the fund or business.  Search for their names and the name of the investment fund on scam.com, the Securities Fraud Search Engine, and  other community web sites and bulletin boards, as well as the Better Business Bureau.  Also check their names with your state Attorney General and the Securities and Exchange Commission.  Carefully read the online material on telemarketing fraud put out by the U.S. Department of Justice. 

5. Find out whether the people raising the money for the investment fund are licensed securities brokers.  If not, don’t invest.  You can check their broker status here.

6. Before you invest, get the advice of people you trust.  Ask your attorney, your real estate broker, your financial advisor, and your adult children what they think about the investment.  On the other hand, avoid pressure from relatives and friends to invest in “can’t miss” schemes.

7. Get all promises or claims in writing and save copies of the paperwork. Verbal agreements don’t mean anything. Demand documents and then review them carefully.  Ask your attorney, your real estate broker, your financial advisor, and your adult children to review them as well.  Even when you get promises in writing, remain skeptical, especially regarding revenue projections.  At best, these projections are guesses; at worst, they’re outright lies.  Be particularly skeptical about projections in a business plan.  Remember that a business plan is not a legal document — you can put anything you want in a business plan and scammers always do.

8. Take your time before deciding whether to invest.  Scammers use lots of tactics to pressure you to make a decision.  Don’t let anyone rush you into an investment.  If they tell you, “only a few lucky investors can get in, so you must act right away,” it is almost certainly a scam.

9. Demand to know how much of your investment, or the total fund raise, is actually going to purchase property and how much is going to pay the people who are raising the money.  Don’t trust any investment where more than 10-15 percent of the total raise is going into the pockets of the fund-raisers. 

10. Live by the rule: If something sounds too good to be true, it probably isn’t.  If someone tells you that there is a “guaranteed return on your investment,”  it is almost certain that you should invest your money somewhere else.  Scammers play on greed and fear.  Deals that promise exceptional returns — and deals that must be done now — are the hallmarks of a scam.

 

1031 Exchanges Between Related Parties — and Other 1031 Exchange Issues

Special rules govern 1031 exchanges between related parties, and running afoul of them can turn your tax-free exchange into a taxable sale. 

Here is an example:

Brad and Ellis are brothers. Brad lives in Dallas, Texas, where they grew up, and Ellis lives in a suburb of Boston, where he settled after law school. As a result of an inheritance from their grandparents, Brad and Ellis own several houses in Dallas as joint tenants.

They have rented these houses to tenants and divided the expenses and the profits equally between themselves. The largest of these houses is a five bedroom ranch style home sitting on 3.5 acres.

Brad now wants to move into this house, and wants Ellis to sell him his one-half ownership so that Brad can own the house on his own. The house’s fair market value at the time of their inheritance was $600,000. Its current fair market value is $950,000.

Ellis points out to his brother that if he sells his share of the house to Brad, he will be required to pay capital gains taxes of approximately $45,000. Instead, Ellis proposes that they do a Section 1031 exchange, in which he and Brad would swap their portions of ownership of several of the properties that they own together.

Specifically, Ellis proposes that Brad exchange his joint ownership portion of two of their smaller properties with a combined current fair market value of $890,000 for the ranch house property worth $950,000 that Brad wants. Once Ellis has sole ownership of these properties, Ellis plans to remodel and sell them within the next two years.

Does Ellis’ proposal make sense?

What about the $60,000 difference in value between the property that Ellis wants to exchange in return for the ranch house?

Are there any special problems for the brothers to consider, and is there anything that they could do to avoid these problems?

The first point to recall here is that special rules apply to Section 1031 exchanges with anyone who is a “related party” to the taxpayer.

Related parties include family members, such as spouses and lineal descendants (parents and children, brothers, sisters, grandparents and grandchildren), as well as corporations, partnerships, trusts, and estates in which a related person owns more than 50 percent either directly or indirectly.

You can engage in a Section 1031 exchange with these related parties, but only if neither the relinquished property nor the replacement property is sold or otherwise disposed of within two years of the transfer.

The IRS monitors exchanges between related parties by requiring that both parties file a special tax form, Exchange Form 8824, in the year of the exchange and for the next two years.

In this example, Brad and Ellis can exchange properties, but the exchange will be treated as a taxable sale if either the relinquished property or the replacement property is sold or otherwise disposed of within two years of the transfer.

Thus, if either Brad or Ellis sells or otherwise disposes of the property involved in the exchange within two years of the transfer, the IRS will retroactively disqualify the original transaction as a Section 1031 exchange and order that capital gains taxes be paid.

Moreover, if either brother sells or disposes of the property before the two year holding period is over, the other brother will be required to pay capital gains taxes on the transaction even though he was not the party who sold or disposed of the exchanged property.

Here, if Ellis carries out his plans to remodel and sell the property he receives in the exchange within the next two years, the IRS will retroactively declare the exchange to be a taxable sale and both Ellis and Brad will be required to pay capital gains taxes.

Accordingly, Brad should consider doing the exchange only if Ellis agrees, in the written documents controlling the exchange, to a provision specifying that if either party triggers the taxation of gain within the two year holding period, the innocent party will be reimbursed for the adverse tax consequences.

In addition, a transaction to qualify as a Section 1031 exchange, both the relinquished and the replacement properties must be held for use in a trade or business, or for investment. In this example, Brad wants to move into one of the exchanged properties and use it as a personal residence.

If he does so, the property is not held for use in a trade or business, or for investment, and the transaction will not qualify as a Section 1031 exchange. Brad can move into the five bedroom ranch style home only after a prudent holding period of at least two years, during which he uses the property in a trade or business or for investment.

Brad should also be concerned about the $60,000 difference in fair market value between the property he will be giving up and the property he will receive in the exchange.

In order to use Section 1031 to avoid paying any capital gains taxes, the basic rule is to exchange up, never down.

Here, if the exchange were to go forward as Ellis proposes (that is, Brad would receive property with a fair market value of $890,000 in exchange for property with a fair market value of $950,000), then Brad will have a capital gain of $60,000 on which he will required to pay capital gains taxes.

To contact Melissa J. Fox about serving as a qualified intermediary, attorney, or broker, or for other 1031 exchange, legal, or real estate services , send an email to strategicfox@gmail.com

 

Disgraced Ex-Governor Eliot Spitzer Starting Real Estate ‘Vulture’ Fund

Do you want to profit from the housing crisis and the mortgage meltdown?

Disgraced ex-New York Governor Eliot Spitzer might have just the opportunity you’ve been looking for.

Spitzer is putting together a real estate “vulture fund” to buy and flip distressed property, envisioning projects valued between $100 million and $500 million.

According to the New York Sun, “Eliot Spitzer, in his first big business venture since he was shamed out of office by a prostitution scandal, is shopping around a plan to start a vulture fund that would scoop up distressed real estate assets around the country, revamp them, and flip the properties for a profit. Late last month, the former governor of New York gathered a group of high-level Washington, D.C.-based labor union officials in a conference room at the headquarters of his father’s real estate business in Manhattan and pitched them his idea for starting such a fund, a source said.”

Eliot Spitzer’s father is multi-millionaire Manhattan real estate developer Bernard Spitzer, known for building one of New York City’s largest real estate firms (one of his properties is The Corinthian, a spectacular 55-story, 1.1 million square foot apartment building), as well as for bank-rolling his son’s political career.  The ex-Governor has been working with his father’s firm since resigning last March.

The Sun stated that “In the half-hour meeting, Mr. Spitzer told the officials that he was determined to take his ailing father’s real estate company to ‘the next level’, the source said. Mr. Spitzer said he would lay out his business plan in greater detail at a later date, and would ask the labor officials to consider investing pension fund money under their control.”

“Mr. Spitzer is moving aggressively to occupy a niche created by the credit crunch, the subprime mortgage crisis, a surge in foreclosures, and a declining real estate market. He is looking to mine for riches in projects that banks are no longer willing to finance.”

Spitzer apparently believes that the prostitution scandal that cost him the Governor’s office (and a fast-track to even higher political office) was really a blessing in disguise:

“During the meeting, Mr. Spitzer expressed relief that he was no longer burdened with the frustrations of being governor, according to the source. And, in contrast to his repentant resignation speech that he delivered beside his tearful wife, Silda Wall, he took a more relaxed view of his indiscretions. He has told friends and associates that he is consoled by passersby who stop him on the city sidewalks and tell him that sex is ‘no big deal’ and that the disclosure that he frequented prostitutes was distorted out of proportion, the source said. Europeans, the former governor has noted, have been especially supportive of him and perplexed by the fallout from the scandal.”

Spitzer’s real estate dreams may have to be put on hold, however, as federal law enforcement authorities might force him to make other plans.

The New York Post reports that ” The noose appears to be tightening around sex-crazed ex-Gov. Eliot Spitzer.”

According to The Post, “The federal case against him is so strong that prosecutors had no interest in striking cooperation agreements with the ringleader of Spitzer’s hooker-supplier, Emperors Club VIP, and his second in command, sources told The Post‘s Murray Weiss. Prosecutors have records of Spitzer’s transactions, phone records and taped conversations with Emperors Club, and are confident they need little more to nail him on charges that could include violating prostitution laws and money laundering, sources said. Probers are also said to be looking into whether he used campaign funds to pay for his pleasures.”

“The case against Spitzer includes the cooperation of curvy call girl Ashley ‘Kristen’ Dupre and a second hooker. Her old boss, Mark Brener, 62, will plead guilty Thursday without the sweetheart deal he was hoping for – he’ll have to serve up to 30 months in the slammer on money-laundering and prostitution-conspiracy charges.”

In addition, Temeka Lewis, who worked for Brener at the Emperor’s Club, pled guilty in a cooperation agreement that requires her to testify about Spitzer’s involvement with the prostitution ring and his alleged attempts to conceal payments for sex.

We think that a “vulture fund” meeting with Eliot Spitzer where he pitches cashing in on the foreclosure crisis doesn’t help improve the image of labor unions or union leaders.

We also think that anyone considering investing in Spitzer’s real estate project should think about whether the fund could do without the presence of the ex-Governor for several years while he stays at the Gray Bar Hotel.

 

Top 10 Steps for State Governments to Tackle the Mortgage Crisis

The Brookings Institution, one of the nation’s most prestigious think tanks, has issued a new report on the mortgage crisis focusing on the role of state governments. 

The report, entitled “Tackling the Mortgage Crisis: 10 Action Steps for State Government,” was written by Alan Mallach, a Senior Fellow at the National Housing Institute and a Visiting Scholar at the Federal Reserve Bank of Philadelphia, and suggests “10 Action Steps” that can be taken by state governments to “tackle both the immediate problems caused by the wave of mortgage foreclosures and prevent the same thing from happening again.”

The 10 steps are:

  • Help borrowers gain greater access to counseling and short-term financial resources.
  • Ensure a fair foreclosure process.
  • Encourage creditors to pursue alternatives to foreclosure.
  • Prevent predatory and fraudulent foreclosure “rescue” practices.
  • Establish creditor responsibility to maintain vacant properties.
  • Make the process as expeditious as possible.
  • Ensure that the property is ultimately conveyed to a responsible owner.
  • Better regulate the mortgage brokerage industry.
  • Ban inappropriate and abusive lending practices.
  • Establish sound long-term policies to create and preserve affordable
    housing, for both owners and renters.

These seem like common sense steps to us — although the debate over what in fact are “inappropriate and abusive lending practices” and “sound long-term policies to create and preserve affordable housing” — will be where the reform process is likely to break down.

We’ve noted before that “while the federal government’s response to the mortgage and real estate crisis appears to be paralyzed by partisan politics, the States are taking the initiative in trying to protect homeowners facing foreclosure.”

The Brookings Institution agrees:

“Although most media attention has focused on the role of the federal government in stemming this crisis, states have the legal powers, financial resources, and political will to mitigate its impact. Some state governments have taken action, negotiating compacts with mortgage lenders, enacting state laws regulating mortgage lending, and creating so-called ‘rescue funds.’ Governors such as Schwarzenegger in California, Strickland in Ohio, and Patrick in Massachusetts have taken the lead on this issue. State action so far, however, has just begun to address a still unfolding, multidimensional crisis. If the issue is to be addressed successfully and at least some of its damage mitigated, better designed, comprehensive strategies are needed.”

As we’ve pointed out, “Unless a national consensus is quickly reached on dealing with the rising tide of foreclosures — and we believe this is unlikely to happen when presidential candidates are competing for votes based on whose plan is best for dealing with the mortgage and real estate crisis – we think lenders can expect to fight individual battles over foreclosure in all 50 States. Given the negative publicity that lenders have had in the media, and with a bitterly fought presidential election on the horizon, these are not battles that the lenders are likely to win.”

Since delinquent and at-risk borrowers have far more political leverage in many state capitols than they have in Washington, the Brookings Institution report not only provides a road map for individual state action, but also further increases the pressure on the mortgage industry and their supporters in the federal government to come up quickly with an effective national plan for dealing with the foreclosure crisis.