Month: May 2007

I run into a lot of investors looking to take advantage of the 1031 Exchange. If you’re not sure what a 1031 Exchange is, there’s a good article about the 1031 Exchange on the Texas A&M Real Estate Center website. As the article states, “the key advantage of a 1031 exchange is that it allows an investor to dispose of a property without incurring a capital gain tax liability.” The capital gain tax liability isn’t avoided, but is delayed – to be paid in the future upon the eventual non-exchange sale of the final property.

As the logic goes, the current unpaid taxes can be applied to a larger down payment on a new property, thus allowing an investor to acquire a more expensive replacement property than would have been possible with the lesser after-tax proceeds that would be available without the 1031 exchange.

The question that comes up for me when considering the advantages of delaying the payment of a capital gain tax liability is “what tax rate will I be paying when I eventually do pay the tax?”.

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This story below outlines some of the problems appraisers are having with being pressured to over-value homes. Most of the pressure comes from Lenders, but increasingly they feel it from Realtors also, according to a recent survey of appraisers.

The problem appraisers have in a rising market is that appraisers are tied to a strict valuation methodolgy that doesn’t allow the freedom to add subjective value to a home, or to factor in “hot market” inflation the way we can as Realtors. They are handcuffed by strict guidelines, which is probably best when all things are considered, though it can be troublesome for us at times.

For example, when I write an offer for a buyer on a hot listing with multiple offers, I always perform a market analysis to justify the offer price. Often, especially in South and Southwest Austin, our market analysis (CMA) shows a value below the list price, but I know my buyer will not win the multiple offers if we stick to the value shown by the CMA. The CMA is looking in the rear view mirror ar recent sales. In a hot market where prices are rising, the CMA doesn’t reflect what the current market, that day, is willing to pay for the home because of the lag in value inherent in using sales comps that can be 3 months old.

So we add “hot market factor” which is arrived at in a somewhat subjective way based largely on the Active/Pending ratio for the area, the average number of days on the market for active, pending and sold listings, and gut instinct. Then I always ask a buyer, “how disppointed will you be if you miss out on this one?”. The answer to that question determines how high we jump, or not.

If I think an appraiser might have trouble finding comps on a particular deal, I’ll offer to help with providing comps that I think are good one. Sometimes appraisers will call and ask for help if they can’t hit the value. I never pressure an appraiser though, and I let the buyer know, right from the start, of the possiblity that the home might not appraise in a hot market if we’ve bid the price up, and we discuss the options up front, which normally is simply the Buyer accepting the property with a higher downpayment so the loan to value ratio can be met.

Here is the story.

Appraisers Feel More Pressure to Boost Values
Source: REALTOR® Magazine Online

WASHINGTON – Appraisers say they’re feeling a lot more pressure in recent years to boost their estimates of residential property values for loan approvals, according to a just-released survey.

Valuation pressure primarily comes from mortgage brokers, according to respondents to the 2007 National Appraisal Survey, conducted by market information provider October Research Corp. for Forsythe Appraisals LLC in St. Paul, Minn.

Pressure from Lenders

Seventy-one percent of appraisers said mortgage brokers applied pressure in 2007, up from 60 percent who said that in 2003. Increasingly, real estate practitioners are also applying pressure, with 56 percent of respondents citing such pressure, up from 47 percent four years ago, the survey shows.

In addition, 75 percent of those appraisers say if they refused to modify a property valuation, they were subjected to negative ramifications. Sixty-eight percent said they lost the client as a result; 45 percent said they didn’t get paid.

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Saw this today in the Wall Street Journal. The Discount Broker Redfin has stopped allowing members of the public to post comments about MLS listings on the Redfin site. They’ve been fined $50K by the local MLS in Seattle. Interesting. Seems kind of creepy to me – many of the comments the hired “reviewers” would write about people’s homes were catty or insulting to the Sellers. Plus, if I were a buyer, I’d want to see homes in person and make up my own mind about the merits, or lack thereof, instead of relying on what others say.

Redfin hasn’t made it to Austin yet, but they’ve been giving MLS Boards and Realtors fits in other markets. Mainly because they admitedly want to disrupt and change the current real estate commission structure.

Brokerage Firm Stops Posting Home Reviews
Wall Street Journal
May 15, 2007; Page D3

A discount real-estate-brokerage firm based in Seattle, under pressure from rival brokers, has stopped posting Internet reviews of homes listed for sale.

Glenn Kelman, chief executive officer of brokerage firm Redfin Corp., said the reviews were popular with users of the firm’s Web site. A team of 15 free-lance reviewers, paid by Redfin, toured open houses in the Seattle and San Francisco areas and wrote comments. A sample involving a small San Francisco condo: “Forget about having guests over unless they are willing to sit in the oven, in which case you had best order in.” Though the tone was often irreverent, some of the reviews were favorable.

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The current issue of Tierra Granda magazine has a wonderful overview of the history of Texas Property Taxes. It discusses how things used to be, what happened to cause changes, and where we are now. It also explains the protections in place against rising tax burdens for Seniors. Most people don’t know this, but Seniors can simply stop paying property taxes on a homestead, and the unpaid tax bill balance accrues interest at 8% per year and becomes due upon death. The heirs might not like that option (since they’ll have to pay the bill to keep the home, or sell the home to pay the bill), but it’s one available nonetheless and is intended to make sure Seniors can remain in their homes for the remainder of their lives.

I’ve posted the entire article below or you can go here to read it.

by Dr. Gilliland, research economist with the Real Estate Center at Texas A&M University.

Much has been written about the substantial growth in property tax rates over the past 20 years. And with the first large cohort of baby boomers reaching 65 in five years, a new concern has arisen. Will rising property taxes force Texas retirees from their homes?

Property Taxes Before Reform
Before 1978, the Texas Constitution required all property owners to pay property taxes. Exemptions were few. Government property, along with that belonging to churches, schools, and other properties exempted by federal law, were excused from taxation. Agricultural land could qualify for lower valuation based on agricultural use if the owner could meet stringent income tests.

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