U.S. is top 2012 commercial real estate investment pick

January 2nd, 2012

U.S. is top 2012 property investment pick

ReutersBy Ilaina Jonas | Reuters – 14 hrs ago

NEW YORK (Reuters) – The United States will remain the top choice of most global commercial real estate investors in 2012, but the country has lost ground to Brazil which ranked No. 2 this year, according to a survey released Sunday.

While the United States offers the most stable and secure option in commercial real estate, investors said improvement in rent and occupancy growth and the repeal of a 1980 foreign investment tax would have the strongest impact on their investment decisions, according to the 20th annual survey of Association of Foreign Investors in Real Estate (AFIRE) members.

For about the past year or so, investors in U.S. commercial real estate have focused on gateway cities such as New York, Washington, Boston, San Francisco and Los Angeles, driving prices up and yields down.

Meanwhile commercial property in Brazil, with its bubbling economy and safer investmentenvironment, has become a hot spot for global investors. Sao Paulo, Brazil’s largest city, jumped to the fourth best city for real estate investment dollars in 2012, up from 26th place last year.

The United States is still very desirable and was second behind the UK in attracting cross border investment in 2011, according to Real Capital Analytics preliminary figures.

“The negative is it doesn’t promise a whole lot of capital appreciation because the prime markets are already fully priced,” AFIRE Chief Executive Officer James Fetgatter said. “By no means will Brazil replace the U.S., at least not in the forseeable future. Brazil is considered now a much safer place to invest and a place where you can get capital appreciation and good yield.”

AFIRE’S survey respondents hold more than $874 billion of real estate globally, including $338 billion in the United States.

Sixty 60 percent of respondents said they plan to increase their investment in U.S. real estate in 2012, down from a record 72 percent last year, according to the 20th annual survey.

Some 42.2 percent said they believed the United States in 2012 would offer the best opportunity for the price of their commercial real estate investments to increase, down from 64.7 percent last year’s survey.

The United States lost ground to Brazil, with 18.6 percent saying Brazil’s property market offered the best growth opportunity for their investment dollars. That’s up 14.2 percentage points, moving Brazil up to second place from fourth, and pushing China down to No. 3, according to the AFIRE survey.

Seventy percent of respondents picked one of the three countries as their favorite, while the remaining 30 percent had top choices from 13 other countries on five continents.

Respondents said they would invest more in U.S. commercial property if the fundamentals of rent and occupancy growth were stronger.

Another U.S. barrier respondents cited was the Foreign Investment in Real Property Tax Act (FIRPTA). The 1980 act, originally designed to protect farm property from foreign ownership, subjects foreign buyers to both their domestic and U.S. taxes when they sell their investment, unless their home country has a taxation treaty with the United States.

FIRPTA opponents have argued that the act unfairly penalizes foreign investors of real estate. Such double taxation does not apply if they buy U.S. stocks or bonds.

As for the top cities for foreign investment in 2012, New York remained No. 1. London moved up to No. 2 from No. 3, swapping ranks with Washington. Sao Paulo was fourth, and San Francisco moved up to No. 5 from No. 10 last year.

Europe’s sovereign debt problems and looming recession pushed most of the countries there – except for a few such as Switzerland and Poland – off the map for real estate investors. Germany lost about half its support among respondents in terms of stability and price appreciation, according to the survey.

Emerging markets also seem to be getting more popular among potential investors. Respondents identified 25 countries they would consider for investment, up from 18 last year. Brazil topped the list, with China in second place, as each did last year. Turkey moved up to No. 3 from No. 7 last year. India and Vietnam each dropped down one spot, to No. 3 and No. 4 respectively. Appearing for the first time were Colombia, at No. 10, Hungary at No. 12, and Qatar at No. 17.

As for U.S. commercial real estate, respondents said that this year they would most likely invest in apartment buildings, the fourth consecutive year multifamily topped the list. Of all the types of U.S. commercial real estate, the multifamily sector has not only recovered from the post-2007 real estate slump but rents and occupancy are even stronger than before.

Warehouse and distribution centers ranked second, up from No. 5 last year. Office properties were third, up a notch from No. 4. Retail properties – shopping centers and malls – slipped to No. 4 from No. 2. Hotels ranked No. 5, down from No. 3 last year.

The survey was conducted in the fourth quarter by the James A. Graaskamp Center for Real Estate, Wisconsin School of Business.

(Reporting By Ilaina Jonas; Editing by Richard Chang)

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Home Owners Have a Good Reason to Hide: Uncle Sam Wants More

December 4th, 2011

Home Owners Have a Good Reason to Hide: Uncle Sam Wants More

Former Senator Russell B. Long famously described the concept of tax reform as “Don’t tax you, don’t tax me, tax that fellow behind the tree!” Assuming Long’s analogy accurately describes America’s take on taxes, one can’t help but wonder: Who is that poor sap hiding in the bushes?

 

The answer is simple—he’s an American home owner, hiding for good reason:

Did you know U.S. home owners already pay 80% to 90% of all federal income tax collected? And now the government wants more. Rather than curbing wasteful spending, some policymakers want Americans to part with deductions like property taxes and mortgage interest—a perk of home ownership for more than 80 years.

During an April 13, 2011, speech on deficit reduction, President Obama said, “The tax code is also loaded up with spending on things like itemized deductions. And while I agree with the goals of many of these deductions, like home ownership or charitable giving, we cannot ignore the fact that they provide millionaires an average tax break of $75,000 while doing nothing for the typical middle-class family that doesn’t itemize.”

What the president’s carefully-worded statement ignores is the huge number of typical middle-class families who do itemize their tax returns. The reason most taxpayers itemize is because they are home owners—91% of families currently claiming the mortgage interest deduction (MID) earn less than $200,000 annually and 65% earn less than $100,000 per year. Not only would a repeal of the MID hit middle-class families square in their wallets, experts say it would be a devastating blow to the housing market—dropping home values by up to 15%. The notion that deductions for home ownership do nothing for the middle class is wildly inaccurate.

With Tax Day right around the corner, now’s the perfect time to determine just what the MID means to your family. Take a look at your federal tax form Schedule A (if you are filing tax form 1040) and see line 10.  That line shows the deduction for your home mortgage interest—$12,200 on average, translating to a total savings of $3,050 for the typical U.S. home owner.

No small chunk of change. Loss of the MID would have serious implications for American families. Saving the average household over $3,000 per year, the MID means:

  • A year’s worth of groceries for two people: $2,694 on average.*
  • Household utilities for a year (heating, cooling, fuels and public services): $3,477 on average.*
  • 12 months of car payments for the average family: $3,269.*
  • The average family’s annual entertainment expenses: $2,698.*
  • Your family’s health care for a year: average expense of $2,853.*

*Figures based on a 2009 U.S. Department of Labor 2009 Labor Statistics Report

If you’re like me, you’re frustrated by the government’s runaway spending and discouraged by the deficit. But taking away the few perks enjoyed by the people already paying most of this country’s taxes is an unfair and unacceptable way of confronting the national debt.

Read more: http://www.houselogic.com/blog/mortgage-interest-deduction/home-owners-have-good-reason-hide-uncle-sam-wants-more/?nicmp=outbrain&nichn=cpc&niseg=hlblog##ixzz1fcx7Bjwx

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How to Figure the Fuzzy Math of Internet Home Values

November 13th, 2011
  • The Wall Street Journal

How to Figure the Fuzzy Math of Internet Home Values

By ALYSSA ABKOWITZ

Jason Gonsalves worked hard to turn his 6,500-square-foot stucco-and-stone home in the suburbs of Sacramento into the ultimate grown-up party pad, complete with game room, custom wine cellar and an infinity-edge pool overlooking Folsom Lake. When interest rates fell recently, Mr. Gonsalves, who runs a lobbying firm, looked into refinancing his $750,000 mortgage. That’s when he got startling news—the home had dropped more than $200,000 in value while he was renovating.

Or at least, that’s what one real-estate website told him. Another valued the house at only $640,500. And these online estimates left him all the more confused when a real-life appraiser, assessing the house for the refinancing loan, pinned its value at $1.5 million. “I have no idea how those numbers could be so different,” Mr. Gonsalves says.

Right or wrong, they’re the numbers millions of consumers are clamoring for. After years of real-estate pros holding all the informational cards in the home-sale game, Web-driven companies like Zillow, Homes.com and Realtor.com are reshuffling the deck, giving home shoppers and owners estimates of what almost any home is worth. People have flocked to the data in startling numbers: Together, four of the biggest sites that offer home-value estimates get 100 million visits a month, with web surfers using them to determine what to ask or bid for a home, or whether to refinance.

But for figures that can carry such weight, critics say, the estimates can be far rougher than most people realize. Valuations that are 20% or even 50% higher or lower than a property’s eventual sale price are not uncommon, as the sites themselves acknowledge. The estimates frequently change, too—sometimes by hundreds of thousands of dollars—as sites plug new data into their algorithms.

All of the competitors make it clear their numbers are guesstimates, not gospel. “A Trulia estimate is just that—an estimate,” says a disclaimer on that site’s new home-value tool. Zillow goes a step further, publishing precise numbers about how imprecise its estimates can be. And every major site urges home-price hunters to consult appraisers or real-estate agents to refine their results.

But despite the disclaimers, homeowners and real-estate agents say, many Web surfers put enough faith in the estimates to sway the way they shop and sell.

After Frank and Sue Parks put their manor-style house in Louisville, Ky., on the market, they watched as Zillow put a $331,000 value on the dwelling in May; by July it had climbed to $1.5 million. (Zillow says the lower estimate reflected errors in its statistical model.) The couple got potential buyer referrals from the site, but they fended off a stream of lowball offers before they sold this fall. Mrs. Parks says the estimate roller coaster “really affected our ability to move the place.”

Determining a home’s value has traditionally been the job of an appraiser, who gathers data on recently sold homes and compares them with the “subject property” to arrive at an estimate.

In the late 1980s, economists started developing automated valuation models, or AVMs, computer models that could analyze data about comparable sales, square footage, number of bedrooms and the like, in a matter of seconds. For years, these tools were mostly reserved for in-house analysts at lending banks.

It wasn’t until 2006 that Zillow took them to the masses, with its Zestimates, which now offer values for more than 100 million homes based on the company’s own algorithms. “Humans don’t make these decisions,” says Stan Humphries, chief economist at Zillow.

Numbers like these have become weapons in the arsenal of consumers like Simms Jenkins, an Atlanta marketing executive, who has recently relied on online estimates to help him both buy and sell homes. “I can’t imagine 25 years ago, when people would just go out and spend their entire Saturday looking at homes,” he says. “You don’t have to do that now.”

But appraisers and real-estate consultants say the online models can veer off target with alarming frequency. Most data for the models come from two sources: records from tax assessors and listing data for recent sales. Collection is a challenge, however, because not every county tracks properties the same way—some calculate home size by number of bedrooms, others by overall square footage. And automated models aren’t designed to account for the unique construction details that often make or break a deal, or for intangible factors like a neighborhood’s gentrification. “You cannot use a computer model in certain areas and expect the value to come out right,” says John May, the former assessor of Jefferson County, Ky., which includes the state’s largest city, Louisville.

For all these reasons, models that banks use often add a “confidence score” to their estimates. Consumer-oriented sites, meanwhile, rely on disclaimers, some of which are eye-opening. Zillow surfers who read the “About Zestimates” page find out that the site’s overall error rate—the amount its estimates vary from a homes’ actual value—is 8.5%, and that about one-fourth of the estimates are at least 20% off the eventual sale price. In some places, the numbers are far more dramatic: In Hamilton County, Ohio, which includes Cincinnati, it’s 82%.

The sites argue that, over time, edits and corrections will help them perfect their numbers—with many fixes coming from their customers.

On Homes.com, anyone who knows a homeowner’s surname and the year the home was last purchased, can edit the details of a property listing in ways that can eventually change the estimated value.

Zillow has accepted revisions on 25 million homes—perhaps the strongest testament to how seriously consumers take its estimates. Today, the site says its figures are accurate enough to give consumers a good sense of any home’s value. In the meantime, says Mr. Humphries, its economist, “We’re always tweaking the algorithm or building a new one.”

—Email: editors@smartmoney.comPrinted in The Wall Street Journal, page WSJ1

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

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Are You Ready to Be a Landlord?

November 13th, 2011

 

  • The Wall Street Journal
  • WEEKEND INVESTOR
  • NOVEMBER 12, 2011

Are You Ready to Be a Landlord?

Buying Investment Properties Can Be Risky. Here’s How to Do It Smartly

By JESSICA SILVER-GREENBERG

The pitch is compelling: Buy a vacant house or apartment building and rent it out to some of the throngs of Americans who have lost their homes to foreclosure. With interest rates near record lows and property values still slumping, getting into the landlord business is cheaper than it has been in years.

Investors turned off by paltry bond yields and the mercurial stock market are intrigued. Kimberly Foss, president of Empyrion Wealth Management in Roseville, Calif., says she has seen a surge of clients looking to purchase distressed homes and apartment buildings. Her clients have an average net worth of about $4 million, she says.

“Many of my clients are looking to use part of their portfolios to scoop up properties,” she says. “They see it as an alternative retirement plan.”

But aspiring property owners need to watch out for a slew of traps. Among them: prolonged vacancies, surprise costs, deadbeat tenants, difficulty refinancing and overestimating the rental potential.

It is easy to overlook those risks when the market conditions appear so ripe. Home prices have fallen to 2002 levels nationwide, according to the latest data from the S&P/Case-Shiller index, and financing remains cheap. For the week ending Nov. 10, the average rate on a 30-year fixed-rate loan was 3.99%, not far from the Oct. 6 record low of 3.94%, according to Freddie Mac data going back to 1971.

Rents are improving, too. The average monthly rent for all categories, including apartments and single-family homes, was $846 nationwide in the third quarter, up 2.5% from the same period a year earlier, according to Local Market Monitor, a Cary, N.C., firm that analyzes real-estate trends. That is lower than the long-term average gain of 3.5% a year, but better than the 3% decline in calendar year 2009.

[12rentmareJ]photo illustration byJeffery Mangiat

Even the Obama administration is considering getting involved in the rental markets. Government officials have been soliciting ideas for how to convert some of the foreclosed homes owned by Fannie Mae and Freddie Mac into rentals, in order to cut the mortgage giants’ losses on those homes.

All of this is attracting interest among investors. Brian Davis, who runs ezLandlordForms.com, a website for property investors, says traffic is up 20% this year.

“Most people think I’m crazy to buy now,” says Jason Walker, a marketing director in Washington. But the numbers were too good to pass up, he says. Mr. Walker is closing this week on a town house in Baltimore, for which he paid $275,000. He says he put down 20% of the purchase price, locked in a 4.5% rate on a 30-year fixed mortgage and expects to net $1,000 a month in profit.

Here is what you need to know before taking the plunge.

Cheaper homes aren’t always a good investment. Even if a property is selling for half the price it fetched during the boom, that doesn’t mean it will generate enough income to make the deal pay off, says Wayne Copelin, a financial planner in Sugar Land, Texas.

The key is to figure out how much rental income the property will generate. A good rule of thumb: Make a deal only if you can collect at least 1.25% of the purchase price each year in rental income, says Jason Reed, a real-estate agent in St. Paul, Minn., who works exclusively with investors.

Determining the rental potential can be tricky. Some properties already have been rented out, and the owner can furnish records. Others have no rental history.

One way to examine the rental market is to use websites like FinestExpert.com, which tracks occupancy rates and rents across the country.

In certain sweet spots, rents are rising even as home prices fall. Take Nashville, Tenn., where rents have jumped 6% over the past 18 months, while home prices have dropped 3%, according to Local Market Monitor. Other markets where that is happening: El Paso, Texas; Houston; Omaha, Neb.; Raleigh, N.C.; Pittsburgh; and Washington.

Markets in areas that have been battered by foreclosures, such as Las Vegas and Phoenix, remain unstable. They might have low prices, but they also are suffering from high unemployment. That could leave aspiring landlords with empty homes, which then could fall even further in value, according to Local Market Monitor President Ingo Winzer.

Local Market Monitor cites Austin, Texas; Akron, Ohio; and Dallas as among the most attractive markets overall, and calls Detroit, Las Vegas and West Palm Beach, Fla., “dangerous.”

When looking at properties, act like a renter, says Jeff Cronrod, president of the Boulder, Colo.-based American Apartment Owners Association. Tour the neighborhood to see if landlords seem desperate to lure tenants. Are there lots of vacancies? Are buildings offering deals like living rent free for a couple of months in order to drive up demand? If so, be wary, Mr. Cronrod says.

Carrying costs add up. Another pitfall for real-estate investors: not accounting for unexpected expenses.

Besides closing costs, which generally average between 3% and 6% of the purchase price, general maintenance expenses like taxes, insurance and repairs can be much higher than many investors expect, says Jason Post, president of Los Angeles based Post Investment Group, a boutique real-estate investment firm that buys and operates apartment buildings.

You should allot roughly $2,000 a year for insurance, taxes and any association fees for neighborhood pools and the like, Mr. Reed says. To ensure that a major repair doesn’t break you, set aside at least six months’ worth of expected rent, he says.

“You can’t even fathom some of these strange costs,” says Jerry Garretty, who runs a property-management firm in San Jose, Calif. Six months ago, Mr. Garretty says, he found a nasty surprise after overseeing the eviction of tenants who were three months behind on rent in a Cupertino, Calif., home: They had poured quick-drying cement into the sewer pipes—a $1,000 repair—and defaced the walls with graffiti scrawls, he says.

Jumps in property insurance premiums also can dent your investment profits, says Jason Holtz, a real-estate lawyer with Kevin Jursinski & Associates in Fort Myers, Fla. This is particularly common in states like Florida that are prone to tropical storms.

Kathleen Farmakidis, owner of a three-unit apartment building in Winter Haven, Fla., says she has seen her property insurance jump 50% this year, to $110 a month.

Venturing far from home can be dicey. It is a good idea to buy rental properties only in your immediate geographical area, Mr. Cronrod says. Although it might be tempting to venture far from where you live for better deals, those properties can be difficult to manage.

As an owner, you need to be ready to repair leaky faucets, collapsed roofs and all other middle-of-the-night disasters—or pay someone to do it.

Hiring a local property manager can help. Such managers perform maintenance, collect rent and even screen tenants. But they typically charge 8% to 10% of the annual rent for their services.

And some are much better than others. Michael Epstein bought a single-family home in Pompano Beach, Fla., in 2009 even though he lived more than an hour’s drive away in Jupiter and the house needed work.

Mr. Epstein, a small-business owner, hired a property manager to rehab the house, which he scooped up at a foreclosure sale, and maintain it. But because Mr. Epstein didn’t visit often, it took him months to discover the manager hadn’t been overseeing construction and that the work was botched. He had to spend an additional $40,000 to bring the property up to building codes.

“That was a risk I didn’t even factor in,” Mr. Epstein says.

It pays to plan conservatively. Don’t assume you will be able to attract renters immediately. If a neighborhood is littered with foreclosures, those properties aren’t going to be any more attractive to would-be renters than they are to buyers, says Jim Evans, president of real-estate investment firm Bruce G. Pollack & Associates and president of the nonprofit Institute of Real Estate Management.

The best tactic, say financial advisers, is to build in a cushion. Assume you need at least three months to find a tenant, and keep that much cash in reserve.

John Interdonato wishes he had foreseen the dry spell he would suffer after buying an investment property in Cape Coral, Fla., for $280,000 in 2005. The electrical engineer planned to rent it out for enough to cover the $2,200 mortgage payments. But after the property sat empty for more than a year, starting in 2009, Mr. Interdonato fell behind.

Last December, after having sunk 50% of his savings into the property, he was forced to sell.

“It felt like I was staring down the barrel of a shotgun,” he says.

Refinancing can be difficult. With interest rates so low, many homeowners have been able to refinance their mortgages recently. But lenders are reluctant to take on refinances of investment properties, says Matt Englett, a real-estate lawyer in Orlando, Fla.

Banks view such owners as more of a risk, he says, because they can walk away from the property more easily than owners of primary residences can.

Mark Cheplowitz, the owner of an international event-planning firm in Aurora, Ohio, says he is losing roughly $24,000 a year on two properties in Collier County, Fla. Last week, a lender declined his applications to refinance the mortgages.

Mr. Cheplowitz says he despairs whenever he flies down to check on the properties.

“Here I am, staying in a crappy motel,” he says, “as tenants live in these beautiful carriage houses I am losing money on.”

Screen tenants with care. Renting out your property to unreliable people can be a costly mistake. Eviction proceedings can take months, and owners can’t rent out the property until the eviction is final.

Chris Ourand, a chief marketing officer for a technology company, says he battled for nearly 10 months to evict a tenant who had stopped paying rent in February on a four-bedroom town house in Arnold, Md.

Mr. Ourand, who lives in nearby Severna Park, says he trekked to court three times to get the tenant to pay up. In October, he says, he was able to oust the delinquent tenant, whom he says trashed the place.

Mr. Ourand says the ordeal cost him roughly a third of his annual investment income on the property. “This is the worst experience with investment properties I have ever been through,” he says. “It was a nightmare.”

Even tenants with clean credit can turn out to be unsavory. Attorney Rachell Horbenko says she had to boot tenants from her Chicago building after waking up in the middle of the night to the smell of marijuana. The tenants were consuming so much, she says, that the smoke had seeped into her six-month-old daughter’s room.

“The room was cloudy,” she says. “I could barely see the crib.” The eviction process took more than three months, she says.

Write to Jessica Silver-Greenberg at jessica.silver-greenberg@wsj.com

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

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Scams Target ‘Self-Directed’ IRAs

October 30th, 2011

The Wall Street Journal

Scams Target ‘Self-Directed’ IRAs

By ANNE TERGESEN

As investors are putting their retirement savings into so-called self-directed individual retirement accounts, complaints about fraud in these accounts are on the rise, securities regulators say, and investors should carefully consider the risks.

Many banks and brokerage firms limit IRA investors to stocks, bonds, mutual funds and certificates of deposit. Those who wish to purchase “alternative” investments, such as real estate and precious metals, generally must open a self-directed account at a custodial firm that handles these assets.

Last month, the Securities and Exchange Commission and the North American Securities Administrators Association, which represents state securities regulators, issued an “investor alert,” warning of a growing number of fraudulent schemes tied to investments in self-directed IRAs.

Regulators say the accounts have become targets for fraud because they allow investors to hold unregistered securities—investments that are generally exempt from SEC requirements to publish audited financial statements.

While regulators say they don’t separately track cases involving self-directed IRAs, states “are noticing an increase” in complaints related to the accounts, says Matt Kitzi, Missouri’s securities commissioner and the head of NASAA’s enforcement section.

In Texas, for example, state regulators recently filed a petition against James Warr, chief executive of Warr Investment Group, for allegedly concealing his misuse of some of the approximately $1 million in self-directed accounts at a company under his control.

Mr. Warr allegedly used the money to purchase a car and other personal property, says Joe Rotunda, enforcement director at the state’s securities board.

In an email, Mr. Warr said: “I believe that the notes we bought [for investors] were good notes and everybody will get their money back.” The car, he added, was “a four-year-old used” vehicle purchased and registered by the company and was not for personal use.

Missouri regulators recently ordered Stephen Edward Gwin, a promoter of fraudulent variable annuities, to pay $36,000 in fines for diverting $1 million from older adults’ self-directed IRAs into his own pocket, says Mr. Kitzi. Efforts to locate Mr. Gwin were unsuccessful.

According to the investor alert, self-directed IRAs currently hold approximately $94 billion, or 2% of the $4.7 trillion in all IRAs.

Neither NASAA nor the SEC could say whether the amount in these accounts has grown in recent years.

But Mary Mohr, executive director of the Retirement Industry Trust Association, which represents administrators of self-directed IRAs, says the group’s 25 members “are growing and adding employees.”

Mr. Kitzi says the use of an IRA can “lend credibility” to a fraudulent scheme. “Because IRAs are administered by custodians and sanctioned under the tax code, they can give investors a false sense” that a financial-services firm or the Internal Revenue Service is evaluating the “quality or legitimacy” of their holdings, he adds.

Regulators say investors unable to perform due diligence on investments should hire a financial adviser and use an IRA custodian that’s regulated by state or federal banking authorities.

—Write: next@wsj.com

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

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1031 Exchanges: In Real Estate, Simple Wins

October 29th, 2011
BY JASON ZWEIG

In Real Estate, Simple Wins

  • By JASON ZWEIG

Columnist's name

In the cycle of investment life—boom, bust and aftermath—the lessons only become clear after it’s too late.

So it goes with a once-hot real-estate investment that has left wreckage in its wake and a fresh reminder: When there’s a simple way and a complicated way to solve a problem, the middleman will almost always make more money off the complicated solution—but you might not.

Between 2004 and 2008, investors bought $13 billion worth of securities often called tenancies-in-common, or “TICs,” according to OMNI Real Estate Services of Salt Lake City. Also known as 1031 exchanges after a part of the tax code, TICs are complex deals that enable the sellers of real estate to roll their proceeds over into other properties without incurring capital-gains tax. TICs were tailor-made for a real-estate bubble.

Christophe Vorlet

The deals were structured as privately placed securities that don’t trade; up to 35 investors can own stakes in a TIC, while a newer format can be held by up to 499 investors. The buyers get a stake in the rental income—and potential sale—of one or more commercial, retail or residential properties.

Properly structured, 1031-exchange securities can enable investors to shelter real-estate sales from capital-gains taxes, to obtain regular income and to bequeath the asset to their heirs in a tax-efficient manner.

But Wall Street took an idea that is suitable only for a limited number of specialized, wealthy clients and sold it to ordinary investors—in some cases with disastrous results.

Consider what happened to Mary Boston, 70, of Dunlap, Tenn. In 2007 she and her husband, Lavaughn, sold their local theater for $1.2 million, net of debt. Their tax preparer suggested that a financial adviser might be able to help them arrange a 1031 exchange.

The couple sank the $1.2 million—essentially their entire liquid net worth—into two TICs that gave them a stake in two apartment complexes, one in Georgia and one in Texas. The offering documents projected an annual yield of 6.5%.

The couple had no previous investment experience, and Mrs. Boston says she told the adviser that they had a “conservative and moderate” appetite for risk, with “income” as their investment objective.

Section 1031 exchanges must be executed on a precise, tight schedule. Mrs. Boston says she repeatedly raced back and forth to Chattanooga, Tenn., to send required documents by overnight delivery. But she says her adviser warned that it would “cost a lot of money” to undo the transaction.

After the deals closed, the Bostons, along with other investors, had to pony up more money when one of the properties became entangled in lawsuits. Between the capital they added and legal fees, says Mrs. Boston, the couple has sunk roughly $70,000 more into the property.

Meanwhile, the monthly income on their investment has fallen from about $5,000 to $300—and is projected by the property manager to dry up entirely next month. Vacancy rates have spiked, partly because of negative publicity after a double homicide this summer at one of the apartment complexes.

The Bostons are seeking redress through arbitration with the financial adviser. With the case pending, the adviser’s current firm, ING Financial Partners, declined to comment or to make her available.

Small TICs like the Bostons’ weren’t the only ones that had problems. Two big TIC sponsors, DBSI and Sunwest Management, raised nearly $1 billion, then sought bankruptcy protection in 2008 and 2009 after their deals went bad.

Amid the bad publicity and a drought of bank lending, the industry’s transaction volume fell by 95% from the peak in 2006 to the trough in 2010.

But the few conservative sponsors left are making a minor comeback. Patricia DelRosso, president of Inland Private Capital, estimates that her firm will raise about $160 million in 1031-exchange deals this year, double its levels last year. Bill Winn, president of Passco, another sponsor, reckons that offerings will be up around 20% over 2010.

If you’re considering a 1031 deal, proceed cautiously: It probably makes sense only if you are already planning to sell a property and to reinvest the proceeds into other real estate assets, say tax experts.

Otherwise, it’s hardly worth paying a 7% or greater commission just to avoid a 15% capital-gains tax. Plus, there is no secondary market for these assets, so “you’re toast if you need to sell” before the properties are ultimately resold, says Brandon Balkman, executive director of the Real Estate Investment Securities Association, a trade group.

The next time someone comes calling with a complex, high-fee product, remind yourself—before it’s too late—that there probably is a simpler, cheaper alternative.

— twitter.com/jasonzweigwsjWrite to Jason Zweig at intelligentinvestor@wsj.com

Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved

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WSJ: Foreigners’ Sweetener: Buy House, Get a Visa

October 20th, 2011 
Wall Street Journal
OCTOBER 20, 2011
Foreigners' Sweetener: Buy House, Get a Visa

By NICK TIMIRAOS

The reeling housing market has come to this: To shore it up, two Senators are preparing to introduce a bipartisan bill Thursday that would give residence visas to foreigners who spend at least $500,000 to buy houses in the U.S.

The provision is part of a larger package of immigration measures, co-authored by Sens. Charles Schumer (D., N.Y.) and Mike Lee (R., Utah), designed to spur more foreign investment in the U.S.

Supporters of the bill, co-authored by Sen. Charles Schumer, say it would help make up for American buyers who are holding back.

Foreigners have accounted for a growing share of home purchases in South Florida, Southern California, Arizona and other hard-hit markets. Chinese and Canadian buyers, among others, are taking advantage not only of big declines in U.S. home prices and reduced competition from Americans but also of favorable foreign exchange rates.

To fuel this demand, the proposed measure would offer visas to any foreigner making a cash investment of at least $500,000 on residential real-estate—a single-family house, condo or townhouse. Applicants can spend the entire amount on one house or spend as little as $250,000 on a residence and invest the rest in other residential real estate, which can be rented out.

The measure would complement existing visa programs that allow foreigners to enter the U.S. if they invest in new businesses that create jobs. Backers believe the initiative would help soak up an excess supply of inventory when many would-be American home buyers are holding back because they're concerned about their jobs or because they would have to take a big loss to sell their current house.

"This is a way to create more demand without costing the federal government a nickel," Sen. Schumer said in an interview.

International buyers accounted for around $82 billion in U.S. residential real-estate sales for the year ending in March, up from $66 billion during the previous year period, according to data from the National Association of Realtors. Foreign buyers accounted for at least 5.5% of all home sales in Miami and 4.3% of Phoenix home sales during the month of July, according to MDA DataQuick.

Foreigners immigrating to the U.S. with the new visa wouldn't be able to work here unless they obtained a regular work visa through the normal process. They'd be allowed to bring a spouse and any children under the age of 18 but they wouldn't be able to stay in the country legally on the new visa once they sold their properties.

The provision would create visas that are separate from current programs so as to not displace anyone waiting for other visas. There would be no cap on the home-buyer visa program.

Over the past year, Canadians accounted for one quarter of foreign home buyers, and buyers from China, Mexico, Great Britain, and India accounted for another quarter, according to the National Association of Realtors. For buyers from some countries, restrictive immigration rules are "a deterrent to purchase here, for sure," says Sally Daley, a real-estate agent in Vero Beach, Fla. She estimates that around one-third of her sales this year have gone to foreigners, an all-time high.

"Without them, we would be stagnant," says Ms. Daley. "They're hiring contractors, buying furniture, and they're also helping the market correct by getting inventory whittled down."

In March, Harry Morrison, a Canadian from Lakefield, Ontario, bought a four-bedroom vacation home in a gated community in Vero Beach. "House prices were going down, and the exchange rate was quite favorable," said Mr. Morrison, who first bought a home there from Ms. Daley four years ago.

While a special visa would allow Canadian buyers like Mr. Morrison to spend more time in the U.S., he said he isn't sure "what other benefit a visa would give me."

The idea has some high-profile supporters, including Warren Buffett, who this summer floated the idea of encouraging more "rich immigrants" to buy homes. "If you wanted to change your immigration policy so that you let 500,000 families in but they have to have a significant net worth and everything, you'd solve things very quickly," Mr. Buffett said in an August interview with PBS's Charlie Rose.

The measure could also help turn around buyer psychology, said mortgage-bond pioneer Lewis Ranieri. He said the program represented "triage" for a housing market that needs more fixes, even modest ones.

But other industry executives greeted the proposal with skepticism. Foreign buyers "don't need an incentive" to buy homes, said Richard Smith, chief executive of Realogy Corp., which owns the Coldwell Banker and Century 21 real-estate brands. "We have a lot of Americans who are willing to buy. We just have to fix the economy."

The measure may have a more targeted effect in exclusive markets like San Marino, Calif., that have become popular with foreigners. Easier immigration rules could be "tremendous" because of the difficulty many Chinese buyers have in obtaining visas, says Maggie Navarro, a local real-estate agent.

Ms. Navarro recently sold a home for $1.67 million, around 8% above the asking price, to a Chinese national who works in the mining industry. She says nearly every listing she's put on the market in San Marino "has had at least one full price cash offer from a buyer from mainland China."

Harry Morrison bought a four-bedroom vacation home in Vero Beach in March. He first bought a home there four years ago from Sally Daley, a local real-estate agent. An earlier version of this story incorrectly said Ms. Daley sold the four-bedroom home to Mr. Morrison in March.

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HUD Assistant Secretary comments on Obama plan

October 10th, 2011
THE HILL

Rebuilding America’s economy

By Mercedes Márquez - 10/05/11 06:17 PM ET

Over the last two and a half years, twice as many people have saved their homes than lost them to foreclosure. More than 5 million families have received restructured mortgages since April 2009 —more than double the number of foreclosure completions over that period.

 

But if we are making headway with foreclosures, why aren’t more Americans feeling the improvement? Well, largely because stopping foreclosures is only one piece of the housing challenge. Another is the substantial overhang of foreclosed properties on the market, dragging down property values and harming neighborhoods.

 

That’s why, when President Obama sent the American Jobs Act to Congress to last month, it included Project Rebuild. If enacted by Congress, Project Rebuild will put construction workers to work rehabilitating homes, businesses and communities, leveraging private capital and other public-private collaborations.

 

Existing neighborhood stabilization efforts enacted by Congress since the housing crisis began are on track to create nearly 90,000 jobs and address nearly 95,000 vacant and abandoned properties throughout the country.

These efforts have not only helped families move in to once-foreclosed homes in hard-hit places, they’ve also created jobs in hard-hit industries, helping builders keep construction workers on the job, giving real estate agents the opportunity to show and sell homes once again.

Project Rebuild would create close to 200,000 jobs and build on the bipartisan success of the neighborhood stabilization program with a few important innovations. It would allow for-profit organizations to apply directly for funds, ensuring private-sector institutions who have participated in neighborhood stabilization are full partners in this transformation. It would provide also the spark entrepreneurs need to start small businesses and create jobs by allowing for the rehabilitation of vacant commercial properties.

Across the country, we’ve seen how it’s not just abandoned homes that can drag down an entire neighborhood, but vacant commercial properties as well. That’s why Project Rebuild would allow commercial redevelopment essential to neighborhood revitalization to be funded directly — allowing for more mixed-use development in hard-hit neighborhoods, from retail to grocery stores.

Cities like Santa Ana, Calif., are already seeing the results of targeted investments to address residential foreclosures by leveraging the financial strength of the private sector and creating stronger and smarter public-private partnerships. They have worked with nonprofit developers for its multifamily rental rehab program, and with a private developer for its single-family homeownership program. Add to this revitalizing abandoned commercial property in the same targeted area and you create real momentum.

Project Rebuild is fundamentally an investment not just in hard-hit places but also in the families who have watched their home values plummet on average by $5,000 to $10,000 simply because they live on a block with a foreclosure sign. The Project Rebuild investment will not only help stabilize individual home prices on the block, it also sends neighbors a hopeful message — we believe in you, we are investing in you, stay here and raise your family.

Its inclusion in the American Jobs Act reflects the president’s belief that rebuilding neighborhoods is essential to rebuilding our economy.

Like all the proposals in the American Jobs Act — repairing and modernizing 35,000 schools, or ensuring that no veteran who has fought for this country ever has to fight for a job when they come home ever again, Project Rebuild isn’t a Democratic idea or Republican idea. It’s an American idea — one that will help our economy in a moment of national crisis.

As Obama said, the next election is 14 months away — and the American people don’t have the luxury of waiting 14 months for us to take action.

With the American Jobs Act they won’t have to. With bipartisan, innovative solutions like Project Rebuild, it’s something that Congress can do right now to create more jobs, stabilize home prices and put more money in people’s pockets.

Márquez is assistant secretary at the U.S. Department of Housing and Urban Development.

 

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No Rise in Home Prices Until 2020: Bankers

October 3rd, 2011 
No Rise in Home Prices Until 2020: Bankers

Published: Saturday, 1 Oct 2011 | 8:49 AM ET Text Size
By: Karina Frayter, CNBC Markets Producer

Home prices are unlikely to recover before 2020 and mortgage defaults will persist for years, says a survey of bank risk managers out Friday.

The survey conducted by the Professional Risk Managers’ International Association for FICO, found that 49 percent of respondents do not expect housing prices to rise back to 2007 levels for another nine years. Only 21 percent of respondents said they would.

The findings, which authors called “a decidedly pessimistic outlook”, are a sharp reversal from cautious optimism the survey respondents expressed late last year and in early 2011.

In addition, 73 percent of surveyed bankers say they expect mortgage defaults to remain elevated for at least another five years. And 46 percent believe mortgage delinquencies will increase over the next six months.

Only 15 percent of respondents expect mortgage delinquencies to decline during that period.

“While the housing sector will almost certainly gain strength during the next nine years, many bankers clearly believe prices will remain depressed for half a generation,” said Andrew Jennings, chief analytics officer at FICO.

Bankers concerns spread beyond the housing market.

A large number of respondents says they also expect to see an uptick in delinquencies on auto loans, credit cards and student loans.

Small businesses are expected to continue face a challenging credit environment. More than one-third of respondents forecast an increase in delinquencies on small business loans.

Bankers also appear to be pessimistic about recovery in consumer spending, with 64 percent of respondents expecting credit card usage to remain below pre-recession levels for at least five more years.

Half of the respondents expect credit card balances to increase over the next six months, due to higher spending by some households and smaller monthly payments by others.

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just in: Prices fell in 18 of the cities, with only Detroit and Washington posting annual increases.

September 27th, 2011

The US economy continues to struggle as new data this past Tuesday showed stagnant house prices and very weak consumer confidence, although there is still little sign of a spiral towards recession. House prices were flat from June to July on a seasonally adjusted basis, according to the S&P Case-Shiller home price index, as an overhang of foreclosures and unsold properties weighed on the housing market. Forecasters had expected prices to tick up by 0.1 per cent as summer is traditionally a period of stronger demand in the housing market.

The Case-Shiller index found that prices of single-family homes in the 20 largest US cities fell 4.1 per cent from a year ago – after a revised 4.4 per cent fall in June – which was better than the 4.4 per cent drop expected by economists. Prices fell in 18 of the cities, with only Detroit and Washington posting annual increases.

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