General Industry News – There are applications in the law that allow for “partial tax free exchanges”. Under this situation the percentage of cash received under the law is referred to as ‘Boot”. In partial tax free exchanges the proportional percentage of cash received from sale of the property will be subject to the recapture of property depreciation and becomes a taxable event in the year the property is sold. General Industry News

There are companies known as accommodators that can be retained to perform the duties of handling the funds, filing required forms and completing paperwork required to finalize an IRS 1031 tax free exchange. There are companies that only act as accommodators. There are also escrow companies that provide accommodation services in addition to standard escrow services. General Industry News

It is very important that any accommodator you chose to handle your transaction needs to have adequate insurance and fidelity bonds to guard against misappropriation of your money while in their custody. There are many reputable companies that can professionally handle an IRS 1031 tax free exchange.

 

We thought we would again review the Sales & Marketing Loan Origination strategies that every Loan Officer or Mortgage Company should employ to properly compete in the competitive mortgage industry.

First off, it’s been our experience since our company was founded way back in 1986 that the following “2” conditions MUST be satisfied before any Borrower will make the decision to apply for real estate financing with any Bank, Mortgage Company or Loan Officer…….they are as follows:

  1. A Borrower MUST have “Confidence” in the Loan Officer or Mortgage Company
  1. A Borrower MUST have “Trust” in the Loan Officer or Mortgage Company 

If a potential Borrower does not have both “Confidence and Trust” in the Loan Officer or Mortgage Company…………………. then they’ll take their business elsewhere.

With above in mind, Loan Officers that originate Real Estate Loans MUST always present themselves in a professional business manner and impress upon all Borrower Clients that they are there to help the Borrower achieve their goals.

During the Origination and Processing timeframe, always make sure to keep your Client/Borrower fully updated as to the “Status” of their pending loan.

Make sure that your Client/Borrowers are provided all required Loan Disclosures within “3” days following the signing of the 1003 Loan Application, and always follow up to see if your client has any questions or concerns relating to the Disclosed Interest Rate or Closing Costs.

If a Borrower does have an issue with anything, immediately address their concerns to their satisfaction …………no one expects perfection, but a client will very much appreciate the attention to their concerns.

Make sure that the Borrower’s contact information is entered into your CRM (Client Relationship Management) system so the Borrower can receive E-Mailed information regarding informative information and any available “Specials” and updates on possible alternative loan programs that the Borrower might be interested in obtaining.

Following the closing of the Borrower’s Loan, always make sure to follow up with them within a month or so to check in to see if they’re satisfied with the loan provided, and if there was a specific purpose as to why they obtained the loan………. then check to see if everything went well with their intended plans for any Cash Out.

It just can’t be emphasized enough…………………always stay in contact with your past Borrowers, so they’ll keep you in mind when the time comes when they need real Estate financing again or wishes to refer a family or friend.

Following are a number “Sales and Marketing Actions” that can be implemented that will help you or your company originate more clients:

 Professionally Designed Website

Every Loan Officer or Mortgage Company MUST have a professionally designed website, that provides the information that potential Borrowers are looking to obtain when searching for a loan program……………… and a loan officer or company to arrange the requested loan.

E-Mail Marketing Campaigns

 This can be a limited or large endeavor, from just staying in contact with past clients up and to a wide-reaching campaign directed at many contact categories.

Some of the possible actions are as follows:

 E-Mail Contact with ALL “Past Clients”

 We covered this above…………. but we just can’t emphasize enough how important it is to be vigilant in staying in contact with all past clients.

E-Mail “Referral Sources”

 Realtors

 Depending on the type of real estate financing provided this can range from FNMA/FHLMC financing for their Buyers to Sub-Prime and Private Equity Financing available to their Buyers who are having trouble obtaining financing.

Builders

 This can range from traditional FMNA/FHLMC to Sub-Prime & Private Equity Financing.

Typically, Builders align themselves with one primary lender, so if a Builder enters into an Exclusive Agreement, then most available opportunities to originate financing would be by “Saving the Deal” with alternative financing options.

CPA’s, Accountants & Financial Planners

People that employ a CPA, Accountant or Financial Planner typically have above average net worth and income.

Most of these people have good to great credit and are very busy in their daily lives, so if a relationship can be established with a CPA, Accountant or Financial Planner which have the trust of their clients can be a great opportunity for them to introduce their clients that are in need of real estate financing.

Direct Mail Campaigns

While direct mail has fallen a little out of favor due to the costs and logistics involved when compared to E-Mail marketing………………it can still be an effective avenue for new clients.

 Mail to “Past Clients”

This can be in addition to an E-Mail Marketing Program………. believe it or not, but not everyone has an E-Mail account.

 Mail to people that only “Contacted” you or your company in the past

All good Loan Officers should keep a “List of all Contacts”, this should include the person’s name, phone number and E-Mail address.  Just because the Borrower made the prior choice to obtain financing elsewhere, or was Not qualified at the time of contact, doesn’t mean you should overlook the opportunity to assist the person in the future.

 Mail to Identified potential Borrowers

This can range from FNMA/FHLMC Borrowers to Borrowers who have been identified to have “Credit Issues” that might benefit from Sub-Prime or Private Equity Financing.

 Mail to Identified Property Types

This is usually done to identify properties that are “Outside the Box” for traditional financing sources, such as Small Commercial Properties, Light Industrial or Vacant Properties.

 Online Advertising

 Facebook and Other PPC Marketing Venues

 This can be set up on a limited basis at first, most of this type of advertising is based on PPC (Pay Per Click), where there is a charge “Every Time” people “Click” an Online Add that takes the interested people to the associated website.  This can make the phone ring or additional E-Mal contacts, but extreme care must be taken when setting up the Online Add to limit “Clicks” from the most relevant and interested parties.

Online Directory Listings, Internet Ads & Craigslist Postings

Most online directory listing sites offer an opportunity to add you or your company to their directory listing………most are 100% free.

Many potential clients will often visit online directory listing sites as part of their quest to locate a loan officer or mortgage company to assist them with needed real estate financing.

Additionally, Google and the other search engines will become aware of the various directory listing of you, or your company and it will help in search results when potential clients are searching online.

Internet ads can be set up as Display Only Ads where a set price is established prior to placing the online display advertising, as opposed to PPC (Pay Per Click) ads.

This can be a good way to get your message in front of many potential clients for a reasonable price.

Placing ads on Craigslist and their other competitors is very inexpensive and could lead to new clients.  The advertising prices for most categories cost only $5.00 per month……. don’t overlook this inexpensive and possible profitable marketing opportunity.

Print Advertising

Full Color Flyers

We’re aware that we now live in a “Digital World”, but we’re all still people and just about everyone appreciates the personal touch that’s outside the Digital World.  Full color flyers that have that “Wow Factor” and contain helpful and informative information for a prospective Borrower…………………… in addition to information to contact you or your company can make a great impression.

Full color flyers can be mailed as part of a Mailing Campaign, or personally handed out to prospective clients at trade shows.

 

Newspaper Advertising

This can take several forms, from simple and small Classified Ads to ROP (Run of Press) display ads in the general section of the newspaper.  The draw back to this type of advertising is that it can be expensive, and the “Window of Opportunity” for your message to reach a perspective client is very short, because by the end of the day most newspapers are tossed out along with any classified or display ad you or your company paid to have in the newspaper.

The Big Banks that are Household Names use this type of advertising to promote Brand Awareness and to compete against each other.  This type of advertising might not be the best way for a Loan Officer or Mortgage Company to invest their advertising budget.

Magazines

This type of advertising is typically directed to publications that are real estate related, as opposed to general circulation magazines……publication such as Homes & Land Magazine might be a good choice to place an ad about you or your company and the purchase financing that your company offers.

 Relationship/Partnership Marketing

  • Realtors

There are many different ways that a “Relationship” can be established with Realtors, the best is getting to be the Realtor’s Primary referral lender for their Buyers.

If the Realtor already has a Primary Lender relationship, but is open to working with another lender, then there are many ways to establish a Relationship with a Realtor that is open to working with other lenders, but most of the time it involves “Saving a Deal”.

Building relationships with Realtors can take time.

  • Builders

Most builders typically establish a Primary Lender relationship with one of the big banks, but it never hurts to beat the big banks and contact a builder early on in the development stage, in an attempt to show then “What You Got”, and if it’s good enough, then maybe you or your company can be the builder’s Primary Referral Lender.

The government is required to make public all “Pending” development projects and the companies that have submitted their development plans, obtaining information on the development companies and contacting them early, might provide an opportunity to become their Preferred Referral Lender.

But most of the time the best opportunity for a Loan Officer is to establish themselves or their company as a Backup Lender, for when a Borrower is not able to obtain a FNMA/FHLMC loan from the builders Primary Lender but might be able to be approved for a Non-Prime or Sub-Prime Loan.  The Builder would then be able to complete the sale of another property, the Buyer is able to close escrow on their new home………..everyone wins!!!!!!!

  • CPAs, Accountants & Financial Planners

Establishing a Relationship with one of the above Trusted Advisors has long been a reliable way Loan Officers have originated new clients.  As always, anytime a Trusted Advisor refers a Loan Officer or Mortgage Company to one of their client’s they need to have both “Trust & Confidence” in who they are referring to their client.  They don’t want to end up looking bad and further regretting the referral.  When considering taking the time and hard work to establish a Relationship, always make sure to be 100% professional and “Know Your Stuff”……………………Trusted Advisors always appreciate referral sources that exhibit professionalism and product knowledge.

 Business Organization Involvement

 Mortgage Trade Organizations

Every Loan Officer or Mortgage Company should have a membership in one of the Mortgage Trade Organizations, and to further take advantage of all the support and educational services available.  If you or your company become a member………. make sure to get involved.

Trade organizations provide educational and new law of regulation updates to their members, and further have experts that can address and assist members with specific clients matters and regulatory compliance.

While this is not necessarily a “Sales & Marketing Action” that is directed at potential clients, always remember, no one does everything, so the opportunity might present itself where another member needs help with a specific loan transaction.

General Business Organizations & Chamber of Commerce Membership

Becoming a member in a general business organization or Chamber of Commerce is always a good idea, it’s a great way to be a positive force in the business community and provides an opportunity to meet and get to know other business owners and active community leaders in the community.

So often the general membership is comprised of Trusted Advisors and possible client referral sources.  But don’t just make membership a hustle opportunity, other members will take notice.

Just know every other member is also looking for new clients and opportunities……………get involved and active………….others will notice.

Charitable Organizational Involvement

 

 Local Charities, Schools and Police & Fire Departments

This can take the form of many different types of involvement, from participating in events, such as being a sponsor, where there are typically different levels of sponsorship to assisting in a support capacity.

Situations such as providing financial support, where you or your company is Mentioned as a sponsor or “Thanked” by the Charity for you or your company’s support, to “Purchasing a Table” and “Comping” the event’s to deserving people to attend the event can build good will.

Many schools provide opportunities for people or companies to participate in Sponsoring sporting events or “Other” school sanctioned events.  If you or your company participate as a “Sponsor” in a local Baseball League, the opportunity is available to have Banners or “Other” ways to inform the Community of you or your company’s support of a worthy event.  People in the community always like to work with people or companies that support worthy causes and the overall community.

Government agencies are always wanting for “More Money”, and the Police and Fire Departments have many ways to both support them and in turn receive credit for you or your company’s support with the community.

Both the Police and Fire Departments have Annual Open Houses, which provides an opportunity to show you or your company’s support.  In today’s world most people like the Police, but everyone loves the Firemen………. you’ll never go wrong supporting your local Fire Department.

But, even past the benefits that such support might bring to you or your company………………it’s just the right thing to do!

Well, that about covers the “Sales and Marketing Action” list.

We hope that something we mentioned above can be implemented and put into action by you or your company and will lead to many future happy clients.

If anyone notices a missing “Sales and Marketing Action” that we’ve left out, then please take a moment to point it out to us………………. we would be most appreciative!

 

Our company funds Private Equity/Hard Money Loans, and if anyone has a “Problem Loan”, and just can’t seem to get it past the finish line with traditional Institutional sources, then please give our company the opportunity to assist you and your client in obtaining real estate financing.  We’re very competitive with interest rates and we’re very broker friendly!!!

 

 

Our general E-Mail address is:            info@westarlending.com

Our toll-free phone number is:          (888) 797-7970

Over the past decade several “Government Sponsored Financing Programs” were set up to provide property owners an alternative way to pay for necessary or desired property upgrades.

Since last March many of us have been impacted by the Covid19 Pandemic in one way or another, be it health problems or government compelled Shutdowns.

It’s now November 17, 2020 and again the “Government” is threatening another round of Shutdowns.  The Governor or the Mayors never seem to shut themselves down, or deem themselves “Non Essential” nor quarantine their government paychecks, yet they just keep saying……………………….. “We’re all in this together”.

Those of us in the real world are compelled by the “Iron Fisted Government” to shut down our businesses.  Where everyone associated with the business suffers, and if rental property is owned, then the government is also there ordering what property owners can and can’t do with their rental property.

Many of the available “Government Programs” that we’ve all heard so much about are just not there for Business or Property Owners…………..I wonder why????? During these difficult times it seems that one of the only ways to get through to the other side is to raise additional funds to keep our businesses open or at least on life support and our investment properties afloat.

Currently the Big Banks seem to also be in with the Government in trying to crush both Business and Property Owners.  Unbelievably difficult and time-consuming Underwriting and Loan Approval Process.  We’ve heard recently from a number of Borrowers who never before had trouble obtaining Traditional Bank Financing state that “If I can’t get a Bank Loan then who can?”

Since our company is licensed to only fund real estate loans, we would need to arrange any loan we might fund against property owned by the business owner, whether is be where the business is located or any other owned real estate.

Our company specializes in providing Private Equity Financing, often times referred to a Hard Money Financing that is outside of the stringent Lending and Underwriting Guidelines employed by the Big Banks.  We’re not constrained by traditional Credit and Income Approval Guidelines or Subject Property condition requirements

But, before deciding to obtain any type of real estate financing, the age old adage must be considered………………..“You need to look before you leap”.

What we mean by this statement here is just like Sir Isaac Newton’s, 3rd Law of Motion that states that “For every action there’re an equal and opposite reaction”, in other words, life has consequences!!!!

Getting a real estate loan to offset the negative Covid19 restrictions could be the solution, which would be a good thing. The costs and expenses related to obtaining financing MUST be weighed against the benefits provided, which can be done by preforming a “Cost Benefit Analysis.”

We always advise our “Client/Borrowers” to look at the “Big Picture” when considering obtaining a Real Estate Loan, which includes “How do I get in, but furthermore how do I later get out”.

Whenever a financial obligation is obtained provisions must be arranged to provide for the Monthly Mortgage Payments, but possibly more important, how do I later pay off the loan.  Any Private Equity Loan should only be considered to be a short-term fix, and not a long-term play.

Our company can assess a client’s available lending options and further perform a Cost Benefit Analysis as to the effects in obtaining a real estate loan.

If anyone would like additional assistance or information, then please contact our company by phone at (888) 797-7970 or by E-Mail at info@westarlending.com.

1031 Tax Free Exchange will Save You Money

1031 Tax Free Exchange – Since property values are going up some of you might be considering selling and taking profits on your properties. If the property you are considering selling is NOT your personal residence and qualifies as an investment property then the option is available to sell by taking advantage of IRS tax code section 1031. This is the tax code that allows investors to defer paying capital gains taxes when selling investment properties. This procedure is referred to as a “1031 tax free exchange”.

Under current tax laws the capital gains tax rate for selling investment property is taxed at a rate of 15%. The tax rate for capital gains is lower than most marginal tax rates, so it would be beneficial to take advantage of selling using a 1031 tax free exchange to get immediate tax savings.

There is a catch as there so often is with tax laws exceptions. The catch is that you can’t get your profits in cash, but you are allowed to roll over your profits into another investment property that you MUST purchase within 180 days.

If you don’t “need the money now” then rolling your profits into a replacement property will add to your net worth by saving taxes now and should allow for greater appreciation of the property purchased.

One other reason to do a 1031 tax free exchange is that the IRS calculates a 3% depreciation amount for every year an investment property is owned. This amount is “re-captured” at the time of sale by being added back into the property’s cost basis and taxed at the taxpayer’s marginal tax rate. Taking advantage of selling using a 1031 tax free exchange will also allow for the taxation of IRS depreciation to be rolled into the replacement property.

Under IRS tax code 1031 a tax fee exchange is treated as an exchange and not as a sale. This is an important distinction since selling is always treated as a “taxable event”.

It is this unique distinction that allows for any profits also known as capital gains to be transferred into the replacement property. It is VERY important that each requirement of tax code 1031 be followed very carefully as the devil is in the details, since if all requirements are not followed the exchange can be rejected and the “sale” will then be subject to capital gains taxes in the year of sale.

A few things need to be explained or defined prior to going any further:

Capital Gains: Taxable profits from an investment property

Like Kind Property: Property qualifying to be included in a 1031 tax free exchange must be considered like kind. In the world of real estate all real estate is considered like kind.

Replacement Property: This is the property that is purchased.

Accommodator: Company or third party that accepts and controls the net money from the sale of the property sold while the 1031 tax free exchange is in process.

Boot: Any sum of money received by the seller of a property in a 1031 tax free exchange. The amount of money received is taxable at the taxpayer’s marginal tax rate.

Recaptured depreciation: This is the taxable event that is triggered upon the sale of investment property when depreciation is added back to the cost basis of the property. The IRS 3% annual depreciation calculation is added back at the time of sale and taxed at the tax payer’s marginal tax rate.

“3” Property Rule: This is the rule that states that no more than 3 potential replacement properties can be identified to the IRS in any 1031 tax free exchange.

The general requirements of an IRS 1031 tax free exchange are:

  • The property must be an investment property
  • The replacement property much be like kind
  • The replacement property much be of equal or greater value
  • The seller is prevented from receiving the net cash proceeds
  • The funds much be handled by a third party, known as an accommodator
  • The replacement property much be identified within 45 days
  • The purchase of the replacement property must close within 180 days

There are applications in the law that allow for “partial tax free exchanges”. Under this situation the percentage of cash received under the law is referred to as ‘Boot”. In partial tax free exchanges the proportional percentage of cash received from sale of the property will be subject to the recapture of property depreciation and becomes a taxable event in the year the property is sold.

There are companies known as accommodators that can be retained to perform the duties of handling the funds, filing required forms and completing paperwork required to finalize an IRS 1031 tax free exchange. There are companies that only act as accommodators. There are also escrow companies that provide accommodation services in addition to standard escrow services.

It is very important that any accommodator you chose to handle your transaction needs to have adequate insurance and fidelity bonds to guard against misappropriation of your money while in their custody. There are many reputable companies that can professionally handle an IRS 1031 tax free exchange.

There are reasons other than tax deferment to consider when selling by way of an IRS 1031 tax free exchange. Some things to also consider are:

  • Relinquishment of management duties: The options exists to exchange into a managed real estate investment where monthly management duties are handed by a management company or by a general partner or some other management arrangement.
  • Exchange into a triple net property: Where management duties, costs and expenses relating to property ownership are transferred to the tenant occupying the property.
  • Exchanging multiple properties: It is permissible to exchange numerous properties into one replacement property thus reducing multiple management duties required when owning more than one property.

With tax rates high and possibly going higher in the near future it only makes sense if you are considering selling to take advantage of IRS 1031 and defer taxes now. In a future Blog we will be discussing tax advantages available when selling a personal residence.

Mortgage vs. A Deed of Trust – What’s in a Name?

Mortgage vs Deed of Trust – Have you ever heard the term “I need a mortgage” or “I just refinanced my mortgage” or another other statement that contains the word mortgage? Was the person making that statement talking about a property in California? Was that person you?

The public has a huge misconception when referring to the legal document used in California known as a mortgage when discussing real estate financing. This is due to the fact that there is no such thing as a mortgage in California. Our country is comprised of 50 states with each state having its own unique laws and customs. States are free to adopt whatever type and form of legal real estate documents.

California is known as a “Trust Deed State” which refers to California legislation requiring that for promissory note to be used as a lien on a property it must be secured with a deed of trust.

The word “mortgage” has simply been adopted by California society as the normal and customary way of referring to a deed of trust, whether knowingly or unknowingly. In fact, there is a mortgage company or bank on just about every corner that advertises low rates on mortgages. So even the lenders and banks who lend money to purchase or refinance real estate in California are using the wrong word. There are many other such misconceptions often used customarily in society.

The main differences between a mortgage and a deed of trust are listed as follows:

 

Mortgage Deed of Trust
2 party instrument 3 party instrument
Borrower: Mortgagor Borrower: Trustor
Lender, Mortgagee Lender, Beneficiary
Trustee: Has Power of Sale
Reconveyance by Mortgagee Reconveyance by Trustee
Foreclosure by Judicial Action Foreclosure by Trustee Sale

 

As you can see the title of the parties to each respective document is referred to differently, but in each document there is a borrower and there is a lender. It’s just the deed of trust that has the 3rd party that a mortgage doesn’t have. The 3rd party to a deed of trust is the trustee. This is the main difference between the two documents.

The trustee has authority “authorized” by the borrower when they signed the deed of trust. A trustee can be a person, a Title Company or even the beneficiary as it is acceptable for the lender to also be the trustee. The trustee handles reconveying the deed of trust when the loan is paid off or processing a foreclosure sale.

The other main distinction between the two documents is in the way a foreclosure is processed. A mortgage requires that a lawsuit is filed in court and the process is handled in a court of law. The process of foreclosing on a deed of trust is by way of a non judicial process known as a trustee sale. This is processed and conducted by the trustee. A trustee sale is processed outside of court. After simply recording several documents, mailing out notices by certified mail and advertizing in the newspaper for 3 weeks a trustee sale can be held on a street corner or on the courthouse steps. The process is fast and simple.

After a foreclosure sale of a mortgage there is a Right of Redemption period for 1 year allowing the borrower the opportunity under certain circumstances to redeem their property. With a deed of trust that is foreclosed on by way of a trustee sale there is no Right of Redemption. Once the property is sold the borrower has no right to redeem their property. Mortgage vs Deed of Trust.

A deed of trust does allow the lender the option to either foreclose judicially or hold a trustee sale. A judicial sale will take about 1 year to complete and a trustee sale only takes 4 months. A judicial sale does provide for a deficiency judgment which allows the lender the option to foreclose on the property and also get a judgment against the borrower. Lenders almost always though choose the trustee sales route since the timeframe is so much shorter and there is no right of redemption.

The trustee to a deed of trust holds “Naked Title with Power of Sale” for the entire term of the loan. If a borrower has a 30 year mortgage the trustee possesses the power of sale for the entire term of the loan. The power of sale provision only becomes effective if the borrower defaults on their payments. The trustee’s power of sale is only removed when the borrower pays off their loan. The trustee will then issue a deed of reconveyance to the borrower. This action releases the deed of trust against the borrower’s property. It is at this point the trustee’s power ceases to exist.

If the borrower makes the monthly payments and eventually pays off their loan then the differences between the documents will have little to no effect on the borrower. Most borrowers will never even realize the differences. Mortgage vs Deed of Trust.

So, in the future, if someone in California tells you they’re getting a mortgage you can let them know what they really mean is they’re getting a deed of trust.

Proposition 13 – The Homeowner’s Best Friend

Proposition 13 – Many things in life are movable, such as planes, trains and automobiles, to quote a movie title from years past. Or personal items such as TV’s, golf clubs or a suit case, can all be moved from here to there, down the street or even across state lines. But when it comes to moving real estate a stark reality is immediately apparent: real estate is just not movable and the politicians are keenly aware of this fact.

As such, the political powers have always treated real estate as a target of taxation to fund general government services, special government needs or a politician’s pet project. Since real estate is not movable and can’t be transferred to cities or states where taxes might be lower, owners of real estate have historically been the target of high property taxes. They had simply been subject to whatever tax rate was imposed upon them.

By the mid 1980’s property taxes had increased so dramatically that many older homeowners who had owned their properties for many years could no longer afford to pay the property taxes that were expected by the tax authority. Many were on fixed incomes, pensions or were only receiving social security. Their income had not increased as fast as or in proportion to the increase in property tax rates. There were a lot of people who were property rich but cash poor.

In the early eighties Howard Jarvis literally became a one man driving force in advancing the movement that eventually placed Proposition 13 on the California state ballot in 1987. He had experienced the financial burden of his property taxes going through the roof on real estate he owned. In addition he was involved in a tax organization where he became aware of many others who were experiencing the same situation. So he went out and did the logical thing and started soliciting support from others to rally behind his property tax reduction movement. It developed over time to be one of the biggest tax revolutions in the history of California. He was successful in gathering enough registered voter’s signatures to get what was then becoming known as Proposition 13 on the California statewide ballot.

The voters overwhelming passed Proposition 13 on June 6, 1978 by a 2/3 majority vote and immediately the California Constitution was amended (since Proposition 13 was intended to be a constitutional amendment).

Prior to the passage of Proposition 13, properties in California were subject to the following:

  • No limit on the overall rate of tax
  • No annual tax increase limit
  • No remedy available to homeowners

 

Following the passage of Proposition 13, homeowners and property owners throughout all of California were entitled to:

  • Taxes based on 1% of the assessed property value
  • 2% maximum annual increase in total taxes owed
  • Reassessment only upon the sale of the property at 1% of the assessed market value

 

Property tax rates were immediately rolled back to 1976 levels with many homeowners experiencing a 57% decrease in their annual property taxes.

The only time now that properties can be reassessed is when a buyer purchases a property and the assessed value is then calculated at 1% of the price paid which is determined to be the fair market value of the property. For example, if a buyer pays $100,000.00 for a property the annual property taxes would be $1,000.00 (1% of the assessed value) which is payable in 2 installments of $500.00 each. The first installment would be due on November 1st and (delinquent after December 10th) and the second installment would be due February 1st (delinquent after April 10th).

In addition Proposition 13 provides for ¼ of 1% for bonded indebtedness to be assessed and secured by both General Obligation and Special Obligation bonds as passed by government bodies or by the voters.

Most governmental entitles make it a practice to always increase property taxes by the maximum annual 2% allowable under the law.

Currently there are movements by those that think Proposition 13 was the worst thing that ever happened to California. They believe that the government is being starved for money that would, in turn, provide services and payments to those involved in the governmental process. The reality is that ever since Proposition 13 passed 35 years ago government’s tax revenue has had annual increases that have been far above the rate if inflation. The government is doing better than just about every person and company in California. The claims back in 1987 that government services were going to be put in a desperate situation just never materialized.

The people behind this current movement want to begin chipping away at the protections to homeowners against taxation from their government. All homeowners should take very seriously the current movement by those who always want more government services and are now looking to property owners as a funding source for the money for their pet social programs. Many of the people behind the current movement are not property owners but are from the side of society that believes that if someone owns real estate they are by nature rich and as such should be taxed more because they have it and others need it. Since all levels of government throughout California are broke and spending like crazy there are politicians would like nothing more than to get more money to do more things.

Home ownership is a pivotal component that is very important in the economy. Repealing Proposition 13 or placing additional property taxation on real estate not only affects current owners now but will add additional impediments to prospective buyers desiring to own real estate. This one action could have a very negative effect not only in the real estate world but to the economy at large.

It would be highly advisable for everyone who reads our blog to get involved in preventing property taxes from going back to the confiscatory level that existed prior to the passage of Proposition 13.

The Los Angeles Real Estate Market in 2013: Is it Time to Buy or Sell?

 

How many times have you heard a Los Angeles Realtor tell you that it’s “time to sell”? Most Realtor’s spout that term and the other famous term “time to buy” quite frequently – especially in today’s market. The irony with these statements is that there just might be a time to buy or a time to sell. Even a broken clock is right twice a day.

Today, we want to concentrate on the term “time to sell”, which can be motivated by a number of events or factors, such as finding another house that you “just have to have” or a job opportunity that requires moving. Another possible motivator in selling your home might be determining that a high water mark might have been reached in the value of your house and selling now will provide the opportunity to obtain your equity from the sales proceeds.

Determining when it’s time to sell your home in Los Angeles requires knowledge about the real estate market which requires that you know everything you can about selling homes (values of competing and available homes on the market) and buying (number of buyers in the market). It goes back to the supply/demand ratio and the balance or imbalance of homes and buyers in the market. Currently, there are more home buyers in the Los Angeles market than sellers of homes. Prices are up over the last 12 months, but are they topping out or still have a long way up to go?

This situation can best be explained by an event that took place back in the 1920’s, when Joseph Kennedy was having his shoes shined by a man at a shoe shine stand. While the man was shining his shoes Mr. Kennedy was listening to the man tell him about the stocks that he was buying with the money he was earning from shining shoes. Mr. Kennedy listened intensely to what the man was saying. When the man was done shining his shoes and Mr. Kennedy was walking away Mr. Kennedy said to himself “When the man who shines my shoes is also buying the same stocks I’m buying, it’s time to get out”. Later Mr. Kennedy credited this event with his decision to sell most of his stockholdings prior to the stock market crash in 1929 and thus avoided the terrible losses that so many others suffered on that fateful day in October.

The moral of this story (to consider) is that it’s possible that the “time to sell is when everyone else is buying”.

Our Assessment of The Fed’s Monetary Policies for 2013

Federal Reserve – There is probably no agency or government department at the State or Federal level that has more effect on our daily lives than The Federal Reserve Bank which is responsible for setting Federal monetary policy.

Monetary policy is set by the Federal Reserve Bank in several ways:

  • The Fed increases and decreases interest rates
  • The Fed also increases or decreases the money supply

Currently the Chairman of the Federal Reserve Bank is Ben Bernanke and he oversees the Federal Open Market Committee which is the division of Federal Reserve Bank that sets monetary policy. Currently the Federal Reserve Bank’s monetary policy is focused on lowering interest rates and expanding the money supply.

A short explanation is in order here.

Lower Interest Rates

Lower interest rates are easy to understand as lower rates lead to additional buying power for products that normally require financing, such as cars and houses. Lower rates equate to lower monthly payments. When people have “additional” buying power due to lower rates they are empowered with added purchasing power which leads to a possible imbalance in the supply/demand ratio, which normally leads to an increase in prices, which is currently happening to the price of houses.

With interest rate at historically low levels, more people are able to qualify for real estate mortgages and are able to buy higher priced homoes than if interest rates were at higher levels. Also when interest rates are at such low levels potential buyers develop the attitude that “they don’t want to miss-out” on the low mortgage rates so even if they were not intending to purchase a home for a year or more in the future they often move up their buying plans to get in on the low rates. The effect of this psychological mindset contributes to additional supply/demand imbalance.

Expansion of Money Supply

The second way that the Federal Reserve Bank sets Monetary Policy is through the expansion and/or contraction of the money supply. Currently the policy is to expand the money supply by many of billions of dollars per month. This is often termed “printing money” and is accomplished by contracts the Federal Reserve Bank sets up with the United State Treasury Department through the buying and selling of bonds, where money is really created out of thin air. This monetary policy can lead to inflation as has happened many times in the past. The main reason that consumer prices have not currently increased is due to the continuing effects of the recession and the anemic economic recovery that the economy is experiencing.

In the near future interest rates will begin to rise from their historic lows and the demand for real estate will decrease which will put downward pressure on home prices. If money supply policy continues unabated (The Fed continues to pour billions into the economy), inflation could rear its ugly head which historically leads to higher real estate prices. When the two opposite forces are compared, the drop off in demand due to increased interest rates should more than offset the inflationary pressure on real estate prices.

Our conclusion is that while real estate prices are currently going up there appears to be a ceiling that will be determined on any increase in mortgage interest rates.

Caution is advised in over optimism about the current increase in real estate prices.