Austin Real Estate Blog

Taxes may be going up for real estate investments

Real estate investment providers could be adversely affected by a bill that recently passed the U.S. House of Representatives that would tax real estate assets at the higher “ordinary income” rate rather than the existing capital gains rate. The bill, referred to as the Tax Extenders Act of 2009, would exempt owners of real estate held for investment purposes, including rental properties; however, advisors, managers, finance experts, and other consultants and support staff would be taxed at the higher rate.

The bill specifies that gains derived from real estate investment would no longer be classified as capital gains; interest earned would be taxed at the higher rate, and investors who use their own capital will be exempt from the legislation. Investors who use other entities in order to finance their real estate investments, however, will be affected by the legislation, which is seen as a crushing blow not only to speculative investors but also to publicly traded partnerships and real estate portfolio providers.

Existing real estate corporations that directly fund and build their own projects will not be affected by the legislation. Service providers, fund advisors and real estate management companies are expected to be hardest hit, since they depend heavily on a narrow margin of profit to continue operations.

The bill specifies that earnings derived from an “investment services partnership interest” will be taxed at the higher rate. An investment services partnership interest is defined by the legislation as the interest held by an individual or corporate entity that:

• Advises the partnership regarding buying and selling of real assets
• Manages, acquires and disposes of real assets
• Arranges financing for purchasing real assets
• Engages in other activities in support of management, acquisition and disposition of real assets

If you oppose this bill you can send a letter to your congressman and/or senator.

Real assets include securities, commodities, certain options and derivatives, and real estate promotes held for investment purposes. Property managers and real estate investment companies will want to watch the progress of this bill closely as it moves from the House of Representatives to the U.S. Senate for consideration.

Watch the whole thing. You’ll be glad that you did.

The number 107 doesn’t seem like a big number when you are talking home sales. But when existing home sales increase; it can be a good sign. In Austin, that 107 totals 6%. That’s a 6% increase in sales from last September, and it does make the economy seem a little more rosy than it was.

The median price increased, too, on a single family home in the Austin area. It is small, but noticeable. A 2% increase can only mean good for the sellers, and since the prices are on the way up, it means that someone has a little more to spend. Total quarterly sales from last year are still down, but hard times for the housing sales may finally be over.

We must remember, however: we are approaching the end date of the $8000 tax credit for first-time home buyers. In order to qualify for that credit, a home buyer must close on the property by November 30, 2009. It can be a slow process, anywhere from 14 days to 2 months. We could see a spurt in the growth of sales until November 30th, and then a drop. Currently congress is reviewing several bills that would extend the tax credit, but to date, none have passed. Keeping an eye on congress will help gauge the next phase in housing development.  There are still a lot of possibilities. If the recession is finally coming to an end, it will be good news for everyone.

Hold on to your hats, Austin. The wild ride may not be over.

In every business and industry there is a concern for deceitful behavior. Real Estate is not an exception to this, unfortunately. Should you encounter something that concerns you, the best place to start is the Federal Trade Commission site. The site can provide critical information that can protect you and help you steer clear of hidden snares used by unscrupulous real estate investors, or to simply clarify contract misnomers.

When focusing on the purchase of an investment property, there is no shame in nit-picking for clarity in every section of your contract. Typically this is a very large investment. Contracts tend to have terminology that we do not use on a daily basis. A slight misnomer in a contract can make a huge impact on whether or not you will be making a good investment or an expensive blunder. Make sure to contact your real estate agent or attorney to answer any questions and provide any options that may be available to you, before making any commitments.

Taking a logical pragmatic approach to making your investment is vital to making your investment a good one. There are common downfalls to resisting this pragmatic approach. The most common downfall is fixating on the “perfect property”. Once you put yourself in that position, you lose perspective on the fundamental issues that must be addressed. In addition, you may overlook or simply ignore problems or imperfections in the property or contract. It is essential for negotiations to stay focused.

Making an investment in the right property and making sure you understand the contract, can be tricky, but following a few worthy tips and consulting with a trusted real estate agency or attorney are highly recommended.

Once you have established you are the owner of the foreclosure property, have reviewed it with your agent and lawyer you are faced with a significant choice. Should you evict the current tenants or should you continue with the lease they have already? Do you want to initiate a new lease with the current tenants? Those are crucial choices that must be made.

Rental properties purchased through the foreclosure auction process are often one wrought with choices. Typically, a foreclosure purchased rental does not require the current lease be honored, like when it is sold prior to foreclosure. Generally speaking, the new owner has the opportunity to evict the current tenants. This also allows for the new owner to establish a new lease with the current tenants.

Should you chose to accept even one rental payment while still under the previous agreement; you are, in effect, honoring the lease they are in. This means that you, as the new owner, would be bound by those terms until the lease expires and a new one is drawn up. Eviction after such an accepted payment would be difficult if they do not violate the rules of that lease.

By taking some time to understand the rules of the process, you are protecting yourself and the tenant. Should you desire to purchase a property like this, it is prudent to discuss all of your options with a real estate attorney and a real estate agent prior to purchase.

A new law means there are some caveats! Here is a summary from the Legal Aid Society of Cleveland

Upon a Foreclosure Sale of Residential Rental Property,
the Lease or Tenancy Continues with the New Owner

1. Issue. Upon a foreclosure sale of residential rental property, what is the effect of the sale on the tenant’s lease or month-to-month tenancy?

2. New federal law. Protecting Tenants at Foreclosure Act of 2009. S. 896, Pub. L. No. 111-22, §§ 701-704.

3. Effective date. May 21, 2009 (or, more precisely, May 20, 2009, at the time that the
President signed the bill).

4. Application of effective date. The federal law applies to any existing bona fide lease
or tenancy for residing in a property when the property is sold at a foreclosure sale, if
the sale occurs on or after the law’s effective date.

5. Bona fide lease or tenancy. The federal law applies only to bona fide leases and
tenancies, which means:
• The tenant is not the child, spouse, or parent of the mortgagor (former landlord);
• The lease or tenancy was the result of an arms-length transaction; and
• The rent is not substantially less than the fair market rent (or the rent is reduced
or subsidized due to a Federal, State, or local subsidy).

6. Tenants with a bona fide lease. Upon a foreclosure sale, the lease continues with
the new owner as the landlord and, absent cause for termination, it continues until
either (i) the end of the lease term or (ii) the new owner elects to use the property as
a primary residence and provides the tenant with a 90-day notice of termination.

7. Tenants with a bona fide month-to-month tenancy. Upon a foreclosure sale, the
tenancy continues with the new owner as the landlord and, absent cause for
termination, it continues until either (i) the new owner provides the tenant with a
90-day notice of termination or (ii) the tenant provides the owner with a state law
30-day notice of termination.

8. Tenants with a Housing Choice Voucher (aka Section 8) lease. Upon a
a foreclosure sale, the voucher lease (which may be a written month-to-month
tenancy after the first year) is treated the same as other leases (see item 6, above) and
other month-to-month tenancies (see item 7, above). In addition, upon a foreclosure
sale, the housing assistance payments (“HAP”) contract continues, with the new
owner subject to the terms of the HAP contract. The new owner may not terminate
the voucher lease on the “other good cause” business ground that it will assist in the
sale of the property.

If you’ve conducted meticulous investigations on a foreclosure home and effectively placed the winning offer at public auction, it may still take time to be able to move in or start making repairs. There’s a possibility the previous owners of the newly purchased property may yet be living there, making it complicated to take possession. If you’re not equipped for that possibility, you may possibly be in for an arduous as well as messy eviction. Properties arrive on public foreclosure auction platforms at the conclusion of a pre-foreclosure phase, after property owner’s failure to pay the monthly mortgage expenses.

A hectic eviction procedure can be avoided with careful research in addition to effective planning. Though regulations and procedures differ from state to state, these procedures can be of assistance in learning the eviction process and how to avoid a lengthy eviction process.

First – establishing ownership

At the conclusion of the auction, make sure you are given every one of the essential documents from the auctioneer to prove you have made the purchase and are the new owner. At that time speak with the auctioneer and a real estate attorney concerning further steps that have to be taken before taking custody of the property. In several states the auctioned sale is confirmed by the court within a specified period of time, potentially up to 3 months. Verify as soon as the auction is completed.

For some locations and states there is a redemption period. This is designed to allow the original owners to purchase the property from you for the price paid at auction, plus applicable fees. In some states this period is as brief as one month or as long as one year. Review your state here: Applicable State Laws to identify if and how your state fits into this. This is often a reason given by the previous owners for not vacating the property..

Understanding the eviction process

Every state, and at times every county has a different eviction law and process. It is vital that before you enter the auction, you contact a local real estate attorney or the county sheriff. They are best equipped to prepare you for the eviction process in the location you are reviewing for purchase. By doing this you will be protecting everyone involved with the sale and purchase of the home, every step of the way.

The court process often takes months, so knowing your rights and the rights of the previous owner are vital. Contacting the court system for the eviction process should occur at the soonest possible moment, to assure everything is handled correctly and fairly. As the case comes to an end, the judge will give you are writ of possession and order the local sheriff to evict the occupant. AT this time the sheriff will serve the notice and remove the occupant 24 hours later.

Obviously this is general, so verify locally to make sure you are aware exactly what the process is.

This message is to alert you to changes in the federal Truth-in-Lending Act regulations, which will have an impact to every mortgage provider.  It will require a fundamental change to how we finalize loan terms for the borrower prior to closing. Changes at the closing table could require the borrower to reschedule the closing date if a revised Truth-In-Lending (TIL) is needed.

The rules for the Mortgage Disclosure Improvement Act were finalized Friday, May 8^th, and it is applicable to all mortgage lenders (federally chartered or state licensed).  For applications taken as of July 30, 2009, new requirements about the delivery and the accuracy of disclosures will apply.  One of the new requirements is that the borrower must be provided with an accurate APR disclosure at least three business days prior to closing.

Remember the new rule with “3/7/3”

3 days after application – An initial Truth-In-Lending (TIL) statement must be provided no later than 3 business days after receipt of the loan application.  Our current process generates an auto-compliance package that complies with this requirement, so no changes are needed.

7 business days after initial application – Waiting period – the borrower is not permitted to close until at least seven business days have passed since the TIL was placed in the mail or provided to the borrower.

3 business days prior to closing – Waiting period – the borrower must receive an accurate APR on their TIL at least 3 business days prior to closing. If it was provided before that period of time, because the loan terms were locked in earlier in the process, no new TIL is required if there is no change to the APR or the change is less than 1/8th of a percent.

If the final loan terms cause the TIL / APR to be understated by more than 1/8th of a percent, a revised TIL with an accurate APR must be provided to the borrower so that they receive it at least three business days prior to closing. It must be in their hands at that time, and they may close on the 3rd business day after that day.

What this means to you? All Realtors and buyers need to be advised of these new timing requirements, which will limit rush closings and could even delay closings.

Ok. So I know that lawmakers need to feel important and thus create tons of rules, lingo, processes, etc so that no layman can figure out what the hell is going on without actually getting elected, but I was trying to figure this out today and thought maybe someone out there could enlighten me.

I’ll run it in sort of a time-line style.

1) Austin passes Mandatory Energy Audit Ordinance
Austin Ordinance

2) Texas Legislature inserts a statement into SB 546 making it illegal for a municipality to impose a criminal penalty (fine in the case of Austin’s Energy Rule) on the seller of a piece of real property (real estate) for failure to perform an energy audit.
Bill Info

3) SB 546 passes both houses by 5/18/09
SB 546 Bill progress

4) The Texas Governor is next up on the SB 546 path to resolution
Governor’s Action

5) The 81st Legislative session ends June 1, 2009 and the Governor has until June 21, 2009 to veto or approve the bill
Important Dates

So as I read it…

Outcome 1: Governor approves SB 546 and the bill becomes law. I assume that this would then become law immediately, but not sure.

Outcome 2: Governor vetoes SB 546. In this case, the bill goes back to the legislature and needs 2/3rds to override the veto.

Outcome 3: Governor does nothing. Then on June 22nd, 2009 the bill becomes law. Of course that is if the bill could not become law immediately for some reason (read some of those crazy rules the government makes to keep itself feeling important and noted above) then it would become law 91 days after the session ended on September 1, 2009.

Man, I’m confused. Can anyone add some lucidity to this whole deal for me?
Joe

An amendment attached to a solar bill that’s steaming through the Legislature could torpedo a City of Austin energy efficiency program.

The Austin rule taking effect June 1 requires Austin homes receiving electricity from Austin Energy to have an energy audit before being sold. (Homes can be exempted for a number of reasons, such as if they’re less than 10 years old at time of sale or have received energy-efficiency improvements through Austin energy.) The goal of the plan is to make old building stock more efficient, by encouraging buyers and sellers to learn ways they can cut energy use by doing things like adding insulation.

Violating the ordinance is a Class C misdemeanor, and violators can be fined up to $500.

Read the rest at Latest on Austin’s Energy Audit Ordinance

My comment…

If you want to get an energy audit, no one is stopping you. Go and upgrade your home as you see fit. Be ready when the buyer decides to give you exactly what you’d get for a home without the audit or upgrades, but do it because it’s right and you can afford it. If you want to keep your house at 60 degrees, go ahead, but be ready for the bill.

Many people struggle to pay their mortgage and don’t make a ton of money when they sell so the audits can amount to a monthly payment to them. There is no way anyone should face criminal charges and fines for failure to comply with an unfair law anyway.

If you want to list with a real estate agent who charges $500, do it. If you want full service, pay for it. That’s the beauty of choice and freedom.

Why people think it’s ok to turn Austin from a group of laid back folks who want to coexist with others of differing viewpoints to psycho, militant, legislate everything ya do nut-balls, I’ll never know. But it isn’t cool. It isn’t Austin. At least not the Austin I love and enjoy calling home.

Joe

As an aside, I do feel sorry for all the people who rushed out to corner the mandatory energy audit market and are now potentially sitting on a goose egg. That’s kinda rough.

June first is just days away, are you ready for the energy efficiency ordinance? The city of Austin’s Energy Efficiency Ordinance requires energy audits are conducted and disclosed for a vast majority of properties listed with in Austin City Limits. If you are wondering about your home, or the ordinance, you can review the details here: Energy Efficiency Ordinance and homes not effected fall into this exemption list.

Building green homes, and green construction overall is changing how people purchase homes and make renovations. Energy efficiency is one of the primary ways consumers measure a green factor to home or construction. For many it is a vital aspect of planning a home’s affordability. By developing a solid energy efficient home, a new home owner will better be able to maintain payments and keep their home.

As people become more aware of energy and its effect on the environment and their wallet, green building continues to grow. Many homeowners have taken the time to review and evaluate their home based on energy efficiency, and many Austin area companies are offering resources to improve. If you take a moment you will find many resources and suggestions on this and other websites that focus on Austin. It is well worth it to reach for and achieve the ordinance goals for every home.