Real Estate Ownership Issues

Today's guest blog is courtesy of Kevin Hummel of McFerran & Burns

How Are You Vested?

My wife likes watching Project Runway; so I am sure she would take this question the wrong way. What I am asking here is “how do you appear on title?” So often, potential exchangers come in thinking that they have a partnership, simply because they both own the property together. That, in itself does not make a partnership. In order to have a partnership, you would need to create an entity, separate from you as individuals, and file a tax return for this entity.

There is certainly nothing wrong with individuals, siblings, married couples, or entities owning property together. Without an actual partnership, you call them tenants-in-common (T-I-C). The advantages are that each party can do what they would like when they sell. In other words, one could simply sell, while the other does an exchange.

T-I-C Agreement

When you do have this kind of arrangement, especially if family is involved, you really should have a Tenancy-In-Common Agreement in place. Like a Partnership Agreement, it would spell out the ratio of equity and debt of each party. It is so common for family members thinking that they are in agreement about these issues until they go to sell it. You might get a Preliminary Title Report that says that each party owns 50% interest, but after asking questions, it is discovered that one party contributed more cash and another provided more “sweat equity”, or one managed the property with the belief that it would provide them a higher percentage of ownership. By drafting a T-I-C Agreement as early as possible, you will avoid law fees and court appearances between parties who used to be close.

Estate Planning

I might sound like I am repeating myself, but most of these discrepancies happen between family members, especially when parents are involved. You might have clear understanding between a father and son, but upon the death of a parent, you suddenly have other siblings or their spouses asking about their cut of the sale. The more clearly this is spelled out in the TIC Agreement, the less chance of this becoming a family dispute.

Terms of a T-I-C Agreement:

The IRS provided guidelines for the use of this agreement in Rev. Proc. 2002-22 to clarify that it is not operating as a partnership. This is why any kind of partnership or business entity agreement should be drafted by a real estate attorney.

Happy Investing!

Lease for Sweat Equity

Sometimes landlords will consider offering a discount on rent or free rent in exchange for sweat equity on a property. Investors sometimes use this approach to sell "handyman specials" to buyers who promise to put sweat equity into a property, sometimes on lease-to-own terms.

It is absolutely imperative, when considering this option, to have very clear terms and a written agreement. For a free sample of this type of agreement, please contact me at HomeLandInvestment@gmail.com and put "Sweat Equity" into the subject line.

If you are interested in this type of arrangement, please let me know that as well.

Happy investing!

Buying Fixer-Uppers

Looking for bargain properties? Here is another great piece of investor information from my website www.homelandinvesting.com:

Fixer-uppers
The oft heard phrase "Buyer Beware" is never more appropriate than when considering the purchase of a fixer-upper.You really need to know exactly what you’re getting into before buying.

It’s commonly believed that fixer-upper properties represent easy money that is ripe for the taking - that you can buy it, do a little work on it in your spare time, and then resell quickly for a large profit. Usually, this simply isn't the case. Although, with proper planning and foresight, good profits can be made by buying "distressed" properties at less than market value, making appropriate improvements and repairs, and then reselling. And for many first time buyers who intend to live in the house while working on it, buying a fixer-upper can be the very best option. It’s less risky buying a fixer-upper when you can live in the house while fixing it. And of course, by living in the house for at least 24 months you should be able to avoid paying regular income taxes on the profits.

The most important thing to know before making a decision on such a purchase is what needs to be fixed. Any time you are spending money on improving a home with the notion of selling it later, strive to spend your money on things that buyers can easily see. Things like new paint and removing trash from the property cost little but have instant impact on curb appeal. Houses that have only cosmetic problems like peeling paint, a trashy yard, bad carpet or wallpaper are the best bet. This is especially true for the first time buyer looking to live in the house for a while before reselling. Fixing and cleaning cosmetic issues is fairly easy and inexpensive. It virtually always gives gives a good return on investment, particularly when you can do the work yourself. Kitchen and bathroom remodeling usually pays a nice return. Don’t be afraid of buying a fixer-upper in need of this kind of repair. Properties with structural damage, or a floor plan that requires major work to remedy, usually can’t be "fixed up" at a profit.

Always have an inspection for hidden damage performed by a home inspector or construction professional before buying a fixer-upper. Make sure that satisfactory completion of such inspections are a condition of purchase in any contract you sign. Then be sure to negotiate to try and get the seller to pay for all or part of the cost of needed repairs uncovered by the inspection. Often, sellers will be willing to lower the sales price to sell the home "as is" instead of paying for the repairs.

Be careful that you don’t over pay. Especially if you plan to resell quickly, paying too much up front can doom your plans for quick profit. Research the market for reselling and have an exit plan for selling the house in place before making an offer.

If you are looking for fixer-uppers, please go to my website at www.HomeLandSeattle.com to sign up for a free list with photos of bargain properties.