§1031 EXCHANGES KEEP REAL ESTATE MOVING

Have you been feeling it?  We sure have!  Real estate transactions have been up considerably in the last few years and a large percentage of those have been 1031 Exchanges.  When speaking with our clients, the high volume of exchanges can be attributed to a number of reasons.  

Real estate remains strong and investors are starting to look for ways to change or build upon their portfolios.  Properties that held as stable investments through the downturn are now showing significant appreciation and equity.  Since multiple properties can be acquired through a single Tax Deferred Exchange, investors can diversify their real estate portfolio, thereby hedging the investment risk inherent in a single property.  These replacement properties can offer greater income and long-term appreciation potential.

For some, it’s all about the taxes: In 2013 the Affordable Healthcare Act began imposing a 3.8% tax on certain investment income, including capital gains, for those with an Adjusted Gross Income exceeding $200,000 for single filers and $250,000 for married couples filing jointly. Additionally, the American Taxpayer Relief Act raised the top long-term capital gains rate from 15% to 20% for those with a taxable income of $400,000 for single individuals and $450,000 for married couples filing jointly.  Both of these taxes, combined with the 25% Depreciation Recapture Tax and the state capital gains tax, cause a substantially greater amount of equity to be due to the Federal Government at tax time.  With upwards of 1/3 the gain due in taxes, Investors utilize 1031 Exchanges to preserve their equity and grow their portfolio!

For others, Exchanging is an estate planning tool:  Investors want the income and benefits of ownership while they are alive, but want the property and hard-earned equity to pass on to their heirs upon death.  When a taxpayer dies, the estate receives a stepped up basis in the inherited property.  As a result, all of the built in gain disappears upon the taxpayer’s death.  This taxpayer could have exchanged multiple times during their lifetime, leaving their heirs with a sizable benefit that would have otherwise been greatly reduced if the taxpayer had sold the property outright, paid the taxes and just given the remaining cash to the future heirs.   

These strategies are excellent tax saving opportunities for a 1031 Exchange, and for all those involved in the real estate transaction.  We pride ourselves on not only being the industry leader in service and security, but we also strive to help our clients and their advisors keep current on tax issues pertaining to §1031 exchanges and applications for them. IPX1031® is your complete information resource. For more information about us, IRC Section 1031, or our complimentary monthly webinars, visit our website at http://www.ipx1031.com.

Patricia A. Flowers is Vice President with Investment Property Exchange Services, Inc.(IPX1031), the largest and most secure Qualified Intermediary in the country.  In 2004, Patricia received one of the first industry-awarded Certified Exchange Specialist® (CES®) Designations. In her role she strategically guides investors and advisors through the process, structuring transactions to help investors preserve equity and save thousands in taxes.

Patricia’s involvement spans the legal, financial, brokerage, tax and real estate industries, where she has participated in thousands of Exchanges. She is a member of various associations, including CREW-Boston (Women in Commercial Real Estate) and the Federation of Exchange Accommodators (FEA). Patricia is a frequent lecturer on IRC §1031 Exchanges, an instructor for CLE, CPE and CE credit, and author of numerous articles including an ongoing column the New England Real Estate Journal.

She can be contacted at 617-423-1031 or patricia.flowers@ipx1031.com

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Should I Renovate…?

Written by Walter Boomsma, instructor. See his blog.

A question we often hear from potential sellers is whether or not they should renovate or otherwise improve the property before selling. While there’s no one correct answer (except “it depends”), most licensees will recommend some degree of “freshening” — cosmetic improvements that might fall under the headings of staging or curb appeal.

paintBut what about the “bigger” stuff? Should we remodel the bathroom?

Every year Remodeling Magazine reports the results of research designed to determine which projects have the greatest dollar return. The results of the most recent survey are reported on REALTOR.COM and might surprise you. While sexy renovations may help with the sale, it doesn’t necessarily mean a great increase in value. The top return was attic insulation–statistically it returns more than the cost.

We ought to bear in mind (and explain to prospective sellers) that the value of the improvement shouldn’t simply be measured in dollars, but having some data beats pulling our opinions out of the air. If you look at the chart, note also there are regional differences. Also, pay attention to what people are saying. I know when I talk with folks who are buying and selling two things that come up consistently are “energy efficiency” and “aging friendly.” It shouldn’t be a surprise to hear that in Maine where we have an aging population and some mighty cold weather.

One of the funnier questions I had a few years ago came from a young couple who wondered, “Should we remodel and add a bedroom if we’re planning to sell in ten years–will we get back the money we spend?” That’s some strategic thinking! In this case, they ultimately decided ten years living in a home with the additional bedroom would be worth spending the money–even if the long-term payback wasn’t guaranteed. There are too many “it depends” to answer the dollar question with any degree of certainty.

Seth Godin recently wrote a piece (Economics Is Messy) about the difference between value and profit. When considering the “Should I renovate…?” question, it’s an important distinction. The average dollar “return” on improvements is about 64%, making most improvements a loss if we only measure in dollars. When we look at the value we include factors like how much more salable the property becomes and how much pleasure the current owner will reap from the improvement. Those factors add value and may well offset the lack of dollar profit.

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Arthur Gary – REEA Spotlight Member!

Congratulations to Arthur Gary, today’s Spotlight Member on the REEA homepage!

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“New” Core Courses — but let’s not call ’em that

Written by Walter Boomsma, instructor. See his blog.

When my oldest daughter was a toddler we were at the beach. In a parental desire to show her things and develop her understanding and vocabulary, I pointed out sea gulls. (She liked animals and birds–still does.) In short order, she began pointing and saying, “Daddy! Birds!” Somewhat absent-mindedly I would reply, “Those are seagulls, Bethanie.”

After several of those exchanges, she said pointedly, “Daddy, you can call them seagulls. I’m going to call them birds.” I have always admired her independence. On this occasion, I opted to accept her refusal to adopt my vocabulary.

But names can be important. So after announcing that “new core courses” are being released, we will not be referring to them as “new” and “old.” We need some fairly precise language here, so I will refer to them by their proper names. Effective October 1, 2016, there be a Core Course for Designated Brokers 2 and a Core Course for Brokers and Associate Brokers 2. These courses effectively replace the Core Course for Designated Brokers 1 and the Core Course for Brokers and Associate Brokers 1. When I say “replace,” understand that the courses numbered 2 are different than the courses numbered 1–both in content and application.

So what should you take (or have taken) before you renew your license?

What hasn’t changed:

Designated Brokers must take the “Core Course for Designated Brokers.” Brokers and Associate Brokers must take the Core Course for Brokers and Associate Brokers. That’s actually pretty straight-forward.

Where it potentially gets confusing:

Whenever there’s a change in core courses, the question always raised is “which core course do I need to have completed when I renew my license?” The answer is, “It depends!” While figuring out the answer initially sounds a bit daunting, this too is fairly straight forward. It depends on the expiration of the license you are renewing. It might help if you have that information before reading further.

Brokers and Associate Brokers with a license expiration date prior to April 1, 2017 (and who renew before that date) may fulfill the core course requirement with either the Core Course for Brokers and Associate Brokers 1 OR the Core Course for Brokers and Associate Brokers 2.

Designated Brokers with a license expiration date prior to April 1, 2017 (and who renew before that date) may fulfill the core course requirement with either the Core Course for Designated Brokers 1 OR the Core Course for Designated Brokers 2.

Brokers and Associate Brokers with a license expiration date on or after April 1, 2017 (and who renew after that date) must fulfill the core course requirement with the Core Course for Brokers and Associate Brokers 2.

Designated Brokers with a license expiration date prior to April 1, 2017 (and who renew before after date) must fulfill the core course requirement with  the Core Course for Designated Brokers 2.

The same explanation would apply to activating a currently inactive license. If you activate before April 1, 2016, either course is acceptable. On or after April 1, 2017, you must have the appropriate Course 2.

If you are at all confused, don’t guess! If you call or email me, the first question I’m going to ask you is “When does your license expire and when to you plan to renew it?” That one bit of information will allow us to determine the correct answer 99% of the time. You can, of course, also ask your DB or call the Maine Real Estate Commission if you need some help determining the answer.

As a reminder, continuing education is only required to renew a license. Sales Agents, for example, are not required to have continuing education hours–a Sales Agent License is not renewable. A Sales Agent’s “continuing education” is the Associate Broker Course. Associate Brokers who plan to take the required course and apply for a Broker License would also not need “continuing education.” Personally, I still think continuing education is a great idea in both of those scenarios even though it’s not required. I remember one sales agent who came to the Associate Broker Course with a lot of “under contracts” during a very depressed market. His classmates were in awe and wonder. He explained, “I’ve taken over 40 hours of continuing education. There might be a correlation!”

I will be teaching both the Core Course for Brokers and Associate Brokers 2 and the Core Course for Designated Brokers 2 on Friday, October 7, 2016 at the Ramada Inn in Bangor. For more information and to register, you can call the Arthur Gary School of Real Estate at 856-1712 or visit the Arthur Gary School of Real Estate Website.

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What Worries Real Estate Buyers – – do you know what your clients are worried about?

Written by Walter Boomsma, instructor. See his blog.

According to a recent study by Redfin, buyer’s worries have changed slightly. Of course, that makes sense because we all know the market changes constantly. Last year (2014) buyers were most worried about inventory. This year “prices” are in the number one spot. Actually, the worry seems to be more about prices rising and affordability becoming an issue.

Some will suggest that reflects an improving market with good news for sellers. Others will suggest that buyers are showing a lack of confidence in the general economy.

According to the survey of 3,500 buyers, the top five worries this year are:

  1. Prices (prices are rising or too high)
  2. Competition from other buyers
  3. Inventory (there aren’t enough houses to choose from)
  4. Selling my current home first
  5. Having enough for a downpayment

You might find it interesting to compare that with the top five worries last year. It will not take too much creativity to support your current opinion of the state of the market and the direction it’s taking. But you’ll have to rationalize some things. For example, the fourth worry of buyers last year was that mortgage rates might rise before they could buy–that didn’t make the list this year. Another concern last year that didn’t make the list for 2015 was “fatigue” — referring to buyers finding the process difficult and tiring.

Most know that all generalities are false. In this case, that’s especially true because “worries” are very personal. So while how those 3500 people felt is mildly interesting, real estate licensees should be much more focused on a much smaller number–the number of clients you are working with.

You want to know a lot about your client. Most of those things are basic and concrete. The questions you ask probably include things like, “What is your price range?” and “How many bedrooms?” and “How much land?”

Those are certainly important conversations. But why not ask “What are you worried about?” Some will say, “Nothing,” partly because they are overwhelmed with excitement and haven’t thought about the concerns. It might be tempting to accept that answer. But aren’t there some things a buyer should be worried about?

One of the saddest listings I ever took involved a couple in the middle of a divorce. The short version of their story was they visited Maine and fell in love with our great state. They spent the last few days of their vacation finding a real estate licensee and then a house. It was a very smooth and speedy transaction–their agent handled “everything” while they went home to pack. The realities started showing up after they were settled in their new home. One spouse was forced to return to their home state to find employment that wasn’t available in the vacation area they’d bought. The other found work, but it involved a long commute with resulting childcare and expense issues. Thus began the breakdown of the family. The home they purchased was not an “easy sell” so by the time they realized their mistake, the market was not in their favor.

A little “worrying” during the process might have made a world of difference in the outcome. Personally, I think the licensee who represented them in the purchase should have noticed there were some things they weren’t worried about and raised some of the issues they weren’t seeing.

Of course, licensees also find themselves representing worriers. Folks in the real estate business like to focus on “making it easy” and “getting to closing.” If that’s the case, remember that it’s easier to smooth the road if you locate the bumps and potholes. No matter how you cut it, a discussion of worries with clients (buyer or seller) just makes sense.

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When Should I Take the Associate Broker Course? –the answer might surprise you!

Written by Walter Boomsma, instructor. See his blog.

take_a_walk_150_clr_8169At first, this seems like an easy question. But there are a number of factors contributing to the answer. Let’s review some basic facts.

A sales agent license is non-renewable and is valid for two years. In other words, you must be prepared to apply for and receive your associate broker license upon expiration of your sales agent license. (There are some circumstances which allow for a one year exemption, but they are exceptions. You should plan on becoming licensed as as associate broker at the end of your two year license term.)

An associate broker license includes two important qualifications. First, you must have been licensed as a real estate sales agent for two of the past five years. Second, you must complete the Associate Broker Course. (MRS Title 32, Chapter 114, Section 13199) In other words, you must successfully complete the Associate Broker Course before your sales agent license expires. But you still can’t become an associate broker until you’ve completed two years as a sales agent.

So an “easy” answer is “You should take the Associate Broker Course while you are licensed as a sales agent.” It would also be an accurate answer, but it doesn’t tell the whole story. A good follow up question is “Should I take the Associate Broker Course soon after I get licensed as a sales agent, or wait a while?”

The answer to that question depends on several important factors:

  1. How much practical experience are you gaining as a sales agent? The Associate Broker Course is designed to be more about experience and application than the Sales Agent Course. In fact, the Associate Broker Course is based largely on case studies and scenarios. Until you’ve been involved in an actual transaction, the course simply won’t have full value. In addition, completion of the Associate Broker Course includes a requirement you submit a completed Documented Field Experience Form. This form is completed in partnership with your designated broker or mentor and is designed to insure you’ve had some “hands on” experience.
  2. How available is the Associate Broker Course in your area?  The course is 60 hours long and is not something you can complete at the last minute in a few days. In the Bangor area I tend to teach it twice a year–spring and fall for the Arthur Gary School of Real Estate. That means there are three opportunities to chose from during your two year term as a sales agent. Note, however, that we alternate between weekday and weekend courses. If your schedule limits when (day of the week) you can take the course, that limits your choices.
  3. How certain are you that you are going to remain licensed? There are many different reasons that someone might decide not to pursue a career in real estate. Since taking the Associate Broker Course is an investment, it might make sense to wait until your second year as a sales agent.

There simply is no one answer to the question–you have to consider the factors. I have had students get licensed as a sales agent and come back to take the Associate Broker Course within a few months. Their explanation is “I want as much education as I can get as quickly as I can get it.” How can you argue with that?! (Again, understanding you’ll gain the best education if you’ve had at least some hands on experience.) I’ve also had students procrastinate taking the course for various reasons. Unfortunately that sometimes means I get a frantic email or phone call when they realize they are facing expiration of their licenses next month. It really is easier to plan ahead.

Let’s take a hypothetical student named Suzie who gets licensed on March 15, 2015. Her license is set to expire on March 15, 2017.  Using the “Spring/Fall” schedule I teach, that means Suzie can plan to take the Associate Broker Course in in fall 2015 at the earliest. She’ll have a spring and fall opportunity in 2016. She might have an opportunity to take the course in spring 2017 but will need to have completed it by March 15th.

Remember that the Bangor course I teach with the Arthur Gary School of Real Estate alternates as a weekday or weekend course. The spring course is typically a weekday course and the fall course is a weekend course. If Suzie is working full time and can only take the course on the weekends, she’ll need to take it either in the fall of 2015 or the fall of 2016. There are, of course, other courses available from other providers and instructors. I just happen to like having students return! I wish I’d kept track, because I know there are a number of students who have completed all of their licensing courses with me from sales agent through broker.

If you find this confusing or are uncertain what will work best for you, don’t hesitate to give me a call or email. We can talk through your options and figure out what works best!

–Walter Boomsma

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Getting Ready To Get Ready…

Written by Walter Boomsma, instructor. See his blog.

“Necessity never makes a good bargain.” –attributed to Ben Franklin

Ben was a rather practical fellow and in this case I think he wanted to remind us that necessity can reduce our leverage and make us too impulsive. During the sales agent licensing course, I often describe “pop-tart” agents–usually newly licensed, they sit at the “up desk” waiting for the phone to ring or someone to walk in with at least a remote interest in real estate. They then “pop” out of the chair thrilled with the opportunity to demonstrate their new skills. “Let’s go look at some houses!”

But are they demonstrating their skills and value, really?

I recall some years ago watching this happen. In less time than it takes to tell, a newly licensed agent took a highly motivated buyer on a showing, wrote an offer and got it accepted. You can well imagine her excitement. But she only had twenty-four hours to celebrate her luck and skill before the designated broker found himself negotiating cancellation of the agreement after it turned out the buyer was afflicted with oniomania or CBD (Compulsive Buying Disorder). CBD is characterized by an obsession with shopping and buying and is believed to affect nearly 6% of the population. Fortunately, the seller was sympathetic and understanding.

We can certainly dissect Ms. Poptart’s performance and come up with a number of places where she probably went wrong. It would make for an interesting case study or group discussion and I suspect the answers would include comments about qualifying the buyer, asking for proof of funds, etc. All good points.

But note that those types of answers are actually defensive in nature–geared to avoiding something (such as a failed contract). While preventing problems can be an important part of the role of the agent in a transaction, it’s actually a very narrow focus. A comparison: do we use a GPS to keep from getting lost?

Many agents come to understand this difference after a few transactions. They learn to love calls from buyers or sellers that come way in advance. That’s when they can do their best work for their clients. That best work is to devise a pre-buying or pre-selling action plan. These agents start their client relationship with questions like

  • “Have you bought and sold real estate before?”
  • “What did you like best about the experience/transaction?”
  • “What did you find least enjoyable about the experience?”

These are data-gathering questions that allow the agent to work with the client in a relatively unhurried and relaxed environment and build an approach everyone can work with. One of my personal favorite questions is “Have you considered how you are going to go about this?” More often than not, the client doesn’t understand the question which suggests the answer is “no,” and this points to the need for a plan. You may be good at preventing and solving problems, but you should be even better at planning!

Everyone benefits from good planning. I recall an agent telling me she had shown a potential buyer sixty properties. I’m guessing the buyer had a plan that didn’t really include buying. Clearly the agent did not have a plan–other than to go with the buyer on showings.

There’s a difference between a motivated client and an impulsive client. Impulsive clients can sound very appealing, but they can also be a nightmare to work with… and are often prone to the dreaded “buyer’s (or seller’s) remorse.” Another observation you’ll hear in my classes is “You never want to get a call from a client that starts with ‘You never told me…‘”

Unhappy clients rarely blame themselves for what happened. Since you are the likely target of blame, why not accept the responsibility for what happens by creating a plan? Just remember, it’s not your plan. It’s a shared plan, developed with your client. You may slow down those impulsive clients. You may speed up those unmotivated or fearful clients, but it’s all part of the plan. Necessity never makes a good bargain, but intelligent planning often does.

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