All Forum Posts by: Tom C.

I agree that this isn't ethical... and I would never do it. Having said that, it does seem like it would get you a list.... although I am not sure how valuable those contacts would be.

Rates have been dropping for many years. Banks won't want to enforce the sales clause to trigger a refinance. That effectively takes higher-yeilding dollars and putting them back to work in a lower rate environment. We should be good until rates begin to rise... that rise will prompt banks to start coming county records looking for properties that have sold.

I think you can even trigger a sales clause if you personally buy an asset (and finance it) and subsequently quit claim the property into a company or partnership for liability purposes.

Just don't put yourself into a position where you have a lot of these loans with sales clauses having new deeds filed.... when it is in the banks interest to call the loan, they may.

Townsend,

I was mistaken regarding options... you may have noted my hesitation on in that regard. An option expiring would not result in a commission as the client did not fail to perform under the contract (as no performance is required from a holder of an option). My comment was primarily regarding failure to close a transaction (HUD or other). I was also clear that this was when you have an agreement with an agent. If you have such agreements in place, as promulgated in the State of Texas, a broker or agent has the right to their commission in certain situations (even without a transaction closing).

Having said that (and as I said in my earlier comment), I would think it odd for an agent to often pursue clients in this manner as the client is likely still on the hunt for a property and the agent likely prefers to keep the client happy and have potential on the next deal while avoiding the courts. As such, your ignorance of the contract you are signing likely hasn't changed your response to the

To further clarify, in Texas, agents use a standard TREC promulgated agreement to contract to represent buyers. It is called "RESIDENTIAL BUYER/TENANT REPRESENTATION AGREEMENT." Under Section 1 "BROKER'S FEES," paragraph C you will note the conditions under which your commission is "earned and payable."

Although based on your comments, I would encourage you to read the contract again, I was referencing the language "A person is not obligated to pay Broker a commission until such time as Broker’s commission is earned and payable." It continues to state that the commission is earned when ... (1) client enters into a contract to buy in the market area or (2) at client breach of broker's agreement. A contract is "payable" (1) at closing, (2) at client's breach of the contract to buy or (3) Client breach of broker's agreement.

As you can see from this language that legally, the commission becomes earned when a contract to buy is signed by both parties and become payable when the client does not perform under the contract to buy. So if you don't "close an excecuted HUD contract" you are legally obligated to pay your broker out of pocket presuming (as noted in my comment) that you signed the boilerplay buyer rep agreement.

Also, depending on the state, you don't need to close to owe your Realtor their commission. In Texas, if you engage a Realtor and sign a contract their commission is earned upon signing (I believe this goes for options too). If you subsequently back out, they can come after you for their commission. Not sure how many would actually do that if they think there is potential for future fees with you as a client. So don't just think your "option" gets you a "do-over" with your Realtor. Make sure you know when your Agent gets paid... as it isn't always at closing...

How low of offers have we seen HUD accept? What percent of their appasal? Just curious what you are seeing out there

You have to sign your return stating that it is correct (to your knowledge). I would encourage you to be honest in every representation you make, especially to the IRS. Try not to get caught up in the perceived benefit you give the IRS... You ultimtely are doing that to take advantage of a lender... You wouldn't want your tennants doing that to you. You have a long time to make money and the funny thing is that you have to live with yourself that whole time too!

As a side note, I recently was pre-qualified for a loan on an investment property and they also substantiate your sources of income. I provided my two most recent returns (including the most recent year's K1s and W-2), 2 most recent paychecks and then the standard suite of bank statements.

There is some peace of mind you get from not over-extending yourself as well.

I am not sure why you have given yourself these two options. If you have cash, you have more options than even you are currently aware (until you commit your funds to projects). Unless the "package deal" presents you with a steal, then I would just buy one at 20% down. Keep the extra for a few months to do a better deal relative to your last. This is a long term game. Don't rush into anything unless you are really getting a bargain purchase.

I would also make sure you are aware of how the storm has impacted your market as I would imagine it will be one of the most dynamic areas in the country for the next year or two. Clearly I am not from your part of the country, but this is an interesting time to make a big bet either way. Make sure you know won't be buying into a tight market with many families looking for a home and many investors looking to capitalize on the influx of renters.

I would avoid any fixer-upper for a while since most contractors in the area are likely charging "storm-premiums."

I am not sure I would bother although I may not understand the hypothetical... I may take this further into make-believe-land, but here goes... People generally don't "live on their savings" with an objective to "save for retirement." Think about it... I assume you are to the point where you are less concerned about "earning" and more concerned on "positioning" your retirement assets. If my presumption is correct, you should start to plan how you will "use" your retirement funds and non-retirement accounts together. People often forget that certain retirement accounts (i.e. Traditional IRAs) all have to flow through your tax return as income at some point. It all gets taxed. Some retirement funds start to get forced into your earnings through mandatory draws. You should understand all this. You should make sure you know how to appropriately manage all this in your retirement. One way would be to have "after tax" dollars available. I recommend entering retirement with a good deal of liquid assets outside of retirement accounts all together (or at least in after tax retirement accounts). It gives you flexibility to meet your needs and blend the sources of funds in a manner to stay in lower brackets. Hypothetically, if you are making $50K a year on rentals and have $100K in liquid assets (outside retirement accounts) and the typical smattering of retirement accounts.... I would spend some time scheduling your draws from any pre-retirement accounts and understand how you will have to report those earnings. If you have the earned income to move cash to a Roth, then sure; but generally, if you aren't actively pursuing income, you have begun to draw on your nest egg and might ask yourself if you are retired... the time you have deferred income to might be now! You should put some thought toward managing your assets and your taxes through retirement. Consider reporting some income (not deferring it) to convert pre-tax retirement funds to a Roth (or to cash) at least until you fill those precious lower tax brackets.

Remember that your earnings are generally only taxed once (clearly there are the obvious exceptions). Also remember that tax brackets are graduated. That means that your first dollar of income is taxed considerably lower than the incremental dollar you earned when you report $100K. If you are married, your first $71K of taxable income can move through the tax process at 15% or less (Some of that is clearly at a lower rate). When you are nearing retirement, you should want to move pre-tax dollars through the taxation process at the rates you choose (to the extent you can). I would want to take advantage of every bit of that 15% tax bracket, even if I had to take social security early to do it. Above 15%, there may be some value in deferring a couple years, but think about it as tax rates are getting worse. If you are approaching retirement, I would make sure you don't elect to defer more income and burn through your cash only to force yourself to draw a lot of retirement funds the next year only to have some of it taxed at 25% or higher. After all, we spend a lot of time thinking about deferring taxes, but it is likely that at some point your mentality must flip to minimize your taxes (not just deferring them) and sometimes that means if you stop working that you start to move some deferred income through your tax return.

You also have some flexibility to borrow against your properties to smooth out some of your needs in retirements and reduce your payments to Uncle Sam.

I am an Accountant, but not a tax accountant. With that warning --Generally you want to avoid a C-Corp to "hold" capital assets. I don't generally like to give rules of thumb because the structure should fit how you operate your business and reflect some of the stuff that you have going on in your personal tax return.

With that said, consider this... When you leverage (use debt on) a rental you likely reduce your income on the property. One benefit of real estate is that you might make a few thousand in cash flow, but that is substantially sheltered by the depreciation deduction on your property. So you don't generate much taxable income (generally you will have very little taxable to start unless you have little debt). Often you have other business expense that reduce your income below zero (a common thing in real estate). Now the kicker... If you use an S-Corp, or LP or another "flow-through" legal entity this loss actually flows through to your personal return, reducing your taxes. In an C-Corp your tax loss creates an NOL (Net operating loss) and merely roll forward each year until you have taxable income to offset it in future years. Clearly, you would rather reduce your current personal taxes due rather than reduce your future corporate tax liability from future earnings (if your C-Corp ever generates a taxable profit (which sometimes never happens). There are a few other reasons that I can think of, but generally this is one that people consider. One item to consider is how a C-Corp gets taxed when an asset is sold... Talk to your CPA.