DEAN GRAZIOSI: DEAN GRAZIOSI REVIEW – REAL ESTATE FEED BY DEAN GRAZIOSI

The lax credit policies during the Bush Administration have come close to sinking the American Dream.  10.7 million Americans live in homes whose mortgage now exceeds the value of the real estate.  Another 2.3% or 2.3 million homeowners are within 5% of going underwater, or having an upside down mortgage.  That constitutes 28% of all American homeowners.

The five states with the most underwater mortgages are no surprise.  The ratio of upside down mortgages in these five states is staggering.

          *        Nevada        65%

*        Arizona        48%

          *        Florida         45%

          *        Michigan      37%

          *        California     35%

In all these states, many of the prime loans have gone bad.  The option-adjustable rate mortgages, where minimum down payments were used to purchase high-end homes, is as high as the lower priced mortgage failures.  In states where home values have begun to stabilize, the number of upside down mortgages is dramatically lower. 

If home equity credit lines are factored into the equation, it is estimated that 33.8% of mortgages would have been underwater in the third quarter compared to 32.2% in the second quarter.

Careful real estate investors read these trends and see opportunity.  Supply definitely outweighs demand.  Many investors have become familiar with foreclosure sales and short sales.

In fact the National Association of Realtors has begun to instruct agents in the procedures to transact short sales.  Thus far, in 2009, short sales account for approximately one-third of all the NAR’s pending sales.  Unfortunately, many of these transactions fail to close, a fact the NAR guards closely. 

By learning all the necessary steps, investors are able to capitalize on bulk transactions at a fraction of the value.  Banks do not like to take over real estate.  They often will take a loss rather than bear the expense of carrying costs, but investors must present a viable, convincing argument.  Sharpen up your short sales presentations and negotiate your way to profits.

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If you correctly use the 1031 exchange, you can own a property with a cash transaction as low as nothing. This is known as a ‘zero cash flow transaction’. The only cost would be that the rent checks that would have normally come to you would now go the third party. A zero cash flow transaction will almost be like a bond, where in the bank will invest the majority - almost 90 percent of the value of the property. In return, the bank has to be paid with the checks of rent. However, there are some preconditions to these transactions, like the qualification of the property and the value of the transaction.

There are rules of the 1031 exchange transaction laid down by the US tax code and treasury transactions. If these are met, the owner can avail deferment taxes as well. The first part says that the properties involved should be of the same kind in terms of value and should be used for business, trade or investments. The second part of this law stipulates that the proceeds of the sale should go to buying a new property which should be similar in kind. If not used for buying the same value of property, the net savings that are made will qualify for the taxes.

This option should be looked at as a replacement method when one is selling the primary dwelling and taking a replacement which is almost equivalent in value. Otherwise, any net gains from the transaction would be liable to be taxed under the head of capital taxation.

There are some timelines associated with the 1031 transactions as well. Specifically, there are two timelines that one has to be aware of. One is the identification period and the other is the exchange period. The identification period refers to the period of identifying the right property for replacement and is around 45 days. The exchange period is the time between relinquishing the property and getting the replacement. This period should be within 180 days.

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