Texas Realty Blog

Buyers Beware: Read Builder Contracts Carefully

I took a potential buyer to one of their subdivisions Monday to put a deposit on a lot. During the contract-signing, she was handed a 50-page "disclosure statement" and was told to "sign here agreeing that you received it". As I read the front page of the packet, which said that, by intialing the referring section on the contract, you are agreeing to the conditions outlined in the disclosure packet. When asked if my buyer could get her earnest money back if she disagreed with any of the information in the packet, we were told that she could not.

This seemed unfair that someone was handed a 50-page document that outlines terms and conditions, but they cannot have 1) time to read it thoroughly and 2) cannot have their money back if they completed the section of the contract that only stated that she'd received the packet. The builder agreed that she could receive her money back if she did not like the statements in the disclosure packet, but this was another instance where the buyer could unknowlingly agree to something that they would disagree with.

I think buyers should be granted sufficient time to have their lawyer read over the conents. Buyers often think they should not use agents when purchasing from a new home builder, but they do not realize that they are essentially unrepresented. In some new home subdivisions, the price and terms of the contract can be negotiated.

KB Homes Builder Forced to Remove Illegal Contract Clauses

Many investors in our area, especially those from other states (California and Arizona in particular), are attracted to new home subdivisions by high-volume, low-cost builders such as KB Homes. KB Homes is arguably one of the largest and most profitable builders in Central Texas. Their prices range from the sub-100s to the half-millon dollar "luxury" home subdvisions. The builder has recently seen a few news stories on issues that unhappy homeowners have with their company.

KVUE recently reported on the inclusion of a "binding arbitration" agreement into KB contracts, which had previously been ruled unlawful. Some disatisfied KB home owners are also speaking out against clauses in their contracts that force residents to go to binding arbitration in lieu of having the right to sue. News 8 Austin aired a KB story this past week due to the large  number of homeowners in Round Rock who are facing foreclosure due to insufficient information about property taxes when buyers are give their payment amounts.

When I spoke to some of the builder representatives, they noted that many of the foreclosures are occuring with out-of-state buyers because they simply do not pay attention to the fine print. Many are often unaware of the higher tax rates in our state, so do not properly calculate their payment based on the improved value. I've often seen brand new agents get a call from a buyer from another state who "knows what they want" and would just like the agent to facilitate their purchase. The inexperienced agents are often unaware of the issues that arise when working with builders.

Of course, some new agents are well-informed and do excellent jobs, but purchasers from other states may want to make sure they're working with an expert who can help identify potential issues before they come back to hurt the buyer.

What's the Difference Between a Dealer and Investor?

Bankrate.com recently wrote an article on how to distinguish whether you are a dealer or real estate investor for tax purposes. This is an important topic because the IRS dealer status means a real estate investor will pay taxes at their ordinary income rate. Otherwise, a real estate investor is only taxes at capital gains tax. Currently, the individual rate is 15% and corporate is 35%.

The issue with determining whether your transactions will fall under the dealer status is that there are no black-and-white rules.

The gray area is where you have to decide what is right and wait for the IRS to disagree with hindsight. Since both you and the IRS want to hang on to more of your money, the courts have come up with the following factors in determining whether a taxpayer is an investor, versus a dealer:

1. the nature of the taxpayer's business.
2. the taxpayer's purpose in acquiring and holding the property.
3. subdivision, platting and other improvements tending to make the property more marketable.
4. the frequency, number and continuity of sales.
5. the extent to which the taxpayer engaged in the sales activity.
6. the length of time the property was held.
7. the substantiality of income derived from the sales and what percentage such income was of the taxpayer's total income.
8. the extent of advertising and other promotional activities.
9. whether the property was listed directly or through brokers.

Read the full article from Bankrate.

How the Internet Changed Home Buying

I've heard stories about real estate agents' reactions to the internet during the early part of the millennium. Some say they thought the internet was a fad and would not be a huge impact on the industry. Others later felt that it would make real estate agents non-essential to the purchase of a home. In the 80's, real estate agents were the gatekeepers to listings of homes. As listings became available online, this put the power back into the hands of the consumer. The lingering question at the time was how this new sharing of data would affect real estate agents, buyers, sellers, and other related industries.

We can now comfortably say that yes, the sharing of data via the internet had a substantial impact on the way we do business, but it has not replaced the necessity of a good buyer or seller's agent. In fact, it has made agents step up the way they do business. Now, we must help point our clients to resources, decipher information, and stay on top of the transaction even more. Since buyers and sellers are more informed, they can validate the information you are giving them by simply logging on. Since sellers can now sell their homes online, this also makes agents justify  their commission and earn it.

Many of us are forward-thinking when it comes to technology since there are many new tools that help us create a smooth, efficient transaction for our clients. As we move forward, many real estate agents realize that they need to adapt or become extinct.

Read the Inman News article on internet use by home buyers. The survey was sponsored by the National Association of REALTORS®.

Second Home Investment Strategies

Your second home is a material asset, a source of tax benefits and a means of generating cash flow.  The following strategies will keep your investment primed for ongoing appreciation.

• Use all tax exclusions allowed by the government.  If you sell one property, try to make a tax deferred exchange and re-invest your money in another property. Claiming depreciation on each rental property reduces your taxable income. Consult with a tax attorney to maximize your yearly deductions. 
• Look for ways to reduce your operating costs by increasing the energy efficiency of the building. Keeping your property well maintained preserves its value and ensures that you can attract more tenants at a higher rent. 
• Create a schedule for incremental rent increases that keep pace with market standards. 
• Build up equity by making additional yearly payments to principal.
• Reduce the amount of interest you pay over the term of the loan by refinancing to a shorter-term mortgage.

These strategies will insure a greater long-term return.

Gotcha Guide™: Limit Contingencies to Win Offers

NOTE: This information is part of a forthcoming book, the Gotcha Guide™ to Buying and Investing in Real Estate.  
by DeeinAustin™

In a competitive real estate market, people who linger over their home buying decisions often lose the home to another buyer.  The best homes are often presented with multiple offers in areas where there are more buyers than homes.

• One way to increase your advantage is to present an offer that is free of contingencies, such as the common one of making your offer contingent upon the sale of your current residence. Even if your offer is terrific, a seller may not be able to wait for your home to sell.
• You gain leverage as a buyer by establishing a line of home equity credit that allows you to make an immediate offer on the home of your dreams, using the credit line for down payment and closing costs. 
• Contact your mortgage lender for advice about how to set up a home equity line of credit, so you don’t have to wait for your home to sell before financing your new property. 

Baby Boomers Fueling Investment Boom

The Baby Boomer generation affects much of the U.S economy. As one of the largest generations in the history of our nation, our industries grow as they mature. When they were young, baby food and diapers were industries of choice. As they get older, you will notice more retirement and health-related commercials.

I've attended many classes on the effect of the Baby Boomer generation on real estate. At this moment, they are entering retirement age although many are not retiring. Baby Boomers will affect the job market because many have not saved enough to retire. They will also affect the second home market since many are cashing out on the equity in their current homes and buying second or third homes in other areas.

Inman News published an interesting article on the topic. The article covered one of their strategies of avoiding capital gains by performing 1031 exchanges.

Four out of 10 respondents who own a vacation home or seasonal property intend to eventually make that property a primary residence. Historically, other NAR survey data shows only one in five vacation-home buyers had such intentions when they first purchased the property.

Lereah said this has emerged as an investment strategy. "Some boomers will take advantage of generous capital gains exclusions from their taxes when they sell their primary residence, and then place themselves in the position of being able to convert a vacation home into their new primary residence, which would later become eligible for the same tax treatment," he said.

"Then, if their needs change in the future, they'll be able to take the capital gains tax break after they have lived in that home as their primary residence for two out the five previous years. It becomes a great way to build and protect a nest egg."

Read more at TopProducer.com

How to Win Against Multiple Offers

The key to winning multiple offers is often as simple as a lender approval letter. Lenders pre-approve buyers for loans before they begin house hunting.  Make sure you give the loan officer complete information about your assets, income, and debts, so they can tell you what price range to consider so you can be sure that you can afford the home in the first place.
    Pre-approval will make your offer much more attractive to the seller when they see your offer.  Conditional loan approval is even better.  Check with your loan officer to get a commitment letter while you are searching for homes and before you make offers.  Such approval may be subject to appraisal of the home, title search, and other issues that will arise during escrow.
    When you are one of multiple offers, you may feel yourself competing with other buyers. You offer will be more appealing if you include your signed pre-approval letter because the seller can feel more sure that you are able to obtain financing. Ask your agent to also limit your “financing contingency” to no more than 14-21 days.

"Millionaire Investor" Calls Helpful to New Investors

New agents and investors enter the real estate market every day. Most are looking for a way to get good training on how to be successful. One success-making tool are are series of coaching calls called Millionaire Mondays, provided by the creators of the "Millionaire Real Estate Agent" and "Millionaire Real Estate Investor" books.

I listened to both recordings every week my first year as a real estate agent. You can choose to call into the recording or log onto the site during the week for a free dowload of the MP3.Topics for investors include how to find deals, how to structure your deal, financing, creative techniques, and other common issues.

This tool is a great price (free!), so I suggest it to anyone who would like to hear how other investors became millionaires by buying, selling, or holding real estate.

Call schedules are every Monday:
At 2 PM Central we feature a call for Investors.
At 3 PM Central we feature a call for Realtors.

Katrina Hurrican Said to Be Cause of Boost in Texas' Economy

Texas has been booming and will continue to grow. Job growth, appreciation, and the shortened inventory of inexpensive housing stock are said to be the causes.

According to the Austin American Statesman, "Texas added 274,000 jobs in the year that ended March 31, the fastest growth rate since 2000, according to the Texas Workforce Commission. The state estimated that its budget surplus will almost double to $8.2 billion for the two years ending in August 2007."

The story goes on to give credit to the influx of Katrina victims, many of them who decided to make Texas their permanent residence. "Their  presence is being given partial credit for an increase of $1.7 billion, or 4.8 percent, in state sales-tax revenue, which funds half of Texas' budget. The influx of people after Katrina brought spending power with them, and that's had a positive effect on the economy," said Milton Holloway, president of Resource Economics Inc., a research firm in Austin. "

As previously mentioned, our economy seems to be staying on the upswing. Many of the residents of Houston, Austin, and San Antonio opened their wallets, arms, and homes to Katrina evacuees and did not think of being repaid. Many feel that, although we did not realize it would happen at the time, we have been thanked by growing our economy.