Tough conversations I’ve had
Besides the conversations of “nothing available” I have been having this year regarding the inventory of viable properties for purchase, below is a list of conversations I found myself having with clients.
“I want to sell and pay no taxes.”
It was wishful thinking for my client to be able to sell a rental house and not pay any taxes. I explained that if you had a capital gain in value and took depreciation, you would pay taxes when you sold.
The typical way around not paying taxes is to defer the taxes through a 1031-tax deferred exchange. Some other methods get complex, such as a dual trust, charitable remainder trust, or a Delaware statutory trust. They decided not to sell.
“Get me a return of eight percent or more.”
My hope is at this point, my client is asking me in a “tongue-in-cheek” kind of way for me to find them an investment property with a return of at least eight percent in Napa.
I explained it is difficult to find this type of return or capitalization (CAP) rate on a turnkey Napa property — they are half of this. It might be possible for an added-value investment to stabilize after a year or two. Still, no, they are looking for an immediate return.
I emailed them several good options outside of California. They are still hoping for something in Napa.
“The lender will not loan on this property.”
“It is possible to find a country property with several acres and a nice home for less than $750,000 in the North Bay,” I told my client. I emailed them a few listings in the Vacaville/Winters area, but they did not fit their liking.
They sent me two properties and asked me to research them. One had a very nice, newer, large, modular home with no permanent foundation. The home must be on a permanent foundation for financing. The other property had a modular home built in 1976, which, unfortunately, was too old for most lenders to consider financing. Many country homes in this area and price range have modular, premanufactured homes for some reason.
“How do I buy a property?”
Whether this question is coming from a homebuyer or someone looking to break into the investment market, I usually start with asking how much money they have. The next question for homebuyers is if they have prequalified for financing yet.
In most cases, purchasing a home usually requires at least a five percent down payment for an investment property, generally at least 25 percent. For a house, the buyer must have income and credit qualifications. At the same time, for an investor, the property must meet specific parameters. In both cases, the appraisal must come in at the expected value. Of course, the conversation is entirely different if someone has a wad of cash to spend.
“Why are we not closing escrow yet?”
In the realm of development property, a seller needs to go into the process knowing that it could take a long time to market a property, get into a contract, gather property entitlements, and close escrow.
The entitlement process can take years in some cases, depending on the scale of the project. In my case, it was a little over a year. Still, the buyer finally received the necessary approvals from the city to feel confident they could develop the property as intended.
Though we planned on a 12-month escrow, 18-months was pretty good for the seller to pocket over a million dollars.
Burt M. Polson is the CEO of ACRESinfo.com, a commercial real estate brokerage company, and CEO of StoneMarkerInvestments.com, a private equity real estate fund. Call him at (707) 254–8000 or email burt@acresinfo.com and burt@stonemarkerinvestments.com.
