FLORIDA FORECLOSURE 101

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US values have declined 50% since the peak of 2006

Short Sales and Foreclosures sliced this another 50%!!!

That means that there is an opportunity to purchase real estate for 25 cents on the dollar!!

Opportunity

The US dollar has also dropped significantly against many foreign currencies.

Today, in Canadian currency, you are buying at less than 25 cents on the dollar compared to 2006/2007 sales prices !!!

You are now buying property at the equivalent of 1987 prices.

Think of the boom/bust cycle as a pendulum. In 2002, Florida prices started to escalate quickly and peaked in 2006. Prices then started to drop as rapidly as they went up so that by 2008 they were back to 2002 values.

The problem is that the DROP did not stop!!! In 2010, property further decreased from 2002 values all the way

down to 1987 values!!This is unnatural behavior for real estate in the USA and has created

a very lucrative investment opportunity

The Values are now 25 cents or less on the dollar (much further than they should have gone). A simple return to a balanced market offers significant capital gains.

Boom / Bust – Why Now is the Time!

In the last 40 years, Florida has doubled in population and continues to grow. US census records show from 2000-2010 increase in population has been 17.6%.

Florida is not like Michigan, Ohio and other Northwest and Midwest states where population is decreasing due to the declining industrial base

Florida has a broad service/tourism and technology based economy. It is not subject to international manufacturing pressure.

Historical price appreciation of real estate in Florida from 1960-2005 averaged 5-7% per year. This is more than twice the national average.

South Florida has an added advantage over its competitors; ie Vegas and Arizona. Think of South Florida like a Hamburger…. There is water on the East and the Everglades on the West – there is hardly any land left to build!!! As population increases, this will further stimulate demand as supply is naturally limited. Vegas is a prime example where there is too much inventory due to buildings being built outwards away from the core into vast dessert lands that don’t seem to end.

Why Florida???

www.BCPA .net

Tricks of the Trade Lesson #1 – DUE DILIGENCE

www.BCPA.net

* Make sure you check out Broward/Miami Dade Counties tax website available online. You need to check the Tax Records! Remember sales history can take a while to update….

www.MiamiDade.gov/Proptax.com

Florida has NO STATE TAX Florida also has extremely low corporate

taxes, this attracts many businesses throughout the country!

Please note that Florida has no individual income tax[8] but has a corporate income tax of 5%.

Florida is a competitive business state…

The most popular areas in the US for foreign investment are Florida, Texas, California and Arizona

Out of these states, Florida had the highest rate of foreign investment with 23% of the market

Out of all Florida regions, the Miami/Fort Lauderdale region had the highest overall market share with 27% of all purchases in the state

This study also showed Florida as the top choice for Canadian buyers (35.4%), European buyers (32.6%), UK Buyers (46.8%), and Latin America (45%)

Want the article? go to http://www.cheapfloridarealty.com/wp-content/uploads/A_world_of_opportunities.pdf

According to a recent study by Lawrence Yun, PHD Senior V.P. and chief economist for the National

Association of Realtors:

** Notice below that the sales price is $220,000 in 2006! The sales price on this property is now only $40,000!!!

John Smith purchases a Condo at $45,000 all in (repairs, closing, etc).

Rent is $1200 per month Maintenance, taxes and property management = $561 per

month (this include a price reduction on taxes from 2010 in the past slide to $1096 [yes, we appeal taxes too!])

NOI = Income ($1200) – Expenses (561) = $639 $639 per month or $7668 per year Cap Rate (measures purchase price to net operating income).

In South Florida 7-8% is good. Cap rate – $7668/ $45,000 = 17% Cap Rate

Cap Rate

IRR (Internal Rate of Return) is used to calculate the true rate of return over the life of the investment. It starts where NOI and cap rate ends.

Take the NOI of the prior example (7668 pa), now assume we will hold the property for five years and sell for $90,000 . Assume further there is no increase in net operating income (of course there will be).

IRR = the profit from all cash flow streams during the life of the investment. As a simplified example, lets take the following cash flows:

5 years x 7668(NOI) + $90,000 - $45000 = $83,340/5 years = $16668 per year = 16668/45,000 = 37% IRR.

In effect, this means a 37% annual return on your investment in total! By the way, we are being conservative with a sales price of only

$90,000 – remember this sold for $220,000 only a couple years back!

Total Profit

Example in 2010 Inventory in area code 33065 (Coral Springs, FL)

• Chart shows a drop in supply and an increase of demand• Due to a major drop in supply and increase for demand, The market is correcting itself

This is raw data from the previous chart and shows that the supply has dropped from 845 to 404. Furthermore, the months of inventory has dropped from 57 to 10. A balanced market is considered 5-10 months inventory. We are entering this phase and we are seeing price increases as a result.

For lower priced properties (under $100,000), we are already past the point of a balanced market (7 months inventory) and we are seeingmultiple offers. You can also see that there is a much smaller supply of the lower priced condos in this example (100 vs 400).

If you want to acquire highly discounted real estate in good to better areas, it requires fast and timelyexpertise knowledge (it is not uncommon to have 20+ offers the same day of listing in this market.

Let’s compare this date to Sep 2011 as it gets even more interesting…….

Absorption rate has gone from 2% in 2008 to 10% in 2011 with only 2 months inventory left!!It is important to note this is based on present inventory. Also note that Property count wentFrom 800 in 2008 down to 300 in 2011. Remember I said that 5-10 months of inventory is considered a healthy market; this is 2 months inventory – an incredibly healthy market.

• Broker/Listing agent • Single agent• Transaction broker• Consultant

How to use your contacts….

Right now, Sept 12,2011, there are 7176+ active condo listings in Broward County. Of these, I selected only 204 properties that I would be interested in that are under

$80,000 and extremely distressed.

This was done using the following criteria:

1. Communities that accept rentals2. Non retirement communities (55+ year old)3. Reasonable maintenance fees and property taxes (under $250 per month)4. The lowest 5% price of all properties in a given community

* This drops the list to exactly 204 properties. The majority of these properties are bank owned properties. It is not uncommon to have 20+ offers on same day of listing.

Property Search Example

***Please note: I am not a tax advisor and in no way do I represent myself as a tax expert. Below is some common knowledge about taxes in the USA I believe are true but in no way do I warrant its accuracy. Please consult with your tax professional for information that applies to your particular situation.

ITIN = Person

EIN = LLC/Corporation

Taxes for Canadians

Any individual who is not eligible to obtain a Social Security Number (SSN),must furnish an Individual Taxpayer Identification Number. This individual will need to apply for an ITIN on Form W-7

The ITIN is for federal tax purposes only. It does not entitle you to social security benefits and does not change your immigration status or your right to work in the United States.

ITIN – Individual Taxpayer Identification Number

An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity

Having an EIN will allow you LLC/Corporation to open up a bank account, acquire business credit, file a tax return, etc.

Applying for an EIN is a free service offered by the IRS. Beware of web sites on the internet that charge for this free service.

If you apply online, your EIN will be issued immediately! Click here to apply online

EIN – Employment Identification Number

When you sell your property as a Canadian, you will be subject to FIRPTA tax. Also known as Foreign Investment in Real Property Tax, it is required that 10% of gross sales price is withheld for taxes.

You can avoid paying this tax upfront by holding a withholding certificate

Potentially avoid Firpta if you have LLC + EIN You must also report the capital gain, in Canadian

dollars, on your Canadian tax return. Tax credits are usually issued under the Canada/USA tax treaty

Canada/USA Tax Facts

U.S based rental income inccurs 30% withholding tax

To get around this, KPMG recommends to file the U.S return with the election to pay tax on NET rental income

You may be able to get around this with a withholding certificate or if you own a corporation.

Rental Income

The maximum U.S tax rate on capital gains for assets held for more than 12 months is 15%. U.S. tax on the sale of U.S. property will generate a foreign tax credit that can be used to reduce the Canadian tax on the sale.

Property Taxes are based on MARKET VALUE. You can apply for a reduction in taxes if you believe your property is above market value (from experience, Broward county is very fair, Miami/Dade county usually requires you to apply for a reduction).

**** This reduction will PERMANENTLY reduce your tax rate as it will set the clock back and increase tentatively at a lower % increase throughout time.

Capital Gains

Regular capital gain rates will be 15% This does not imply to tax write-offs! SHORT TERM gains (under 12 months) are

taxed at your ordinary income rates. Example: Jason purchases a condo for

$80,000 and sells for $140,000 3 years later. 60,000 Capital gains (c) – 30,000 depreciation (d) = 30,000(0.15 tax rate) + 30,000 (0.25 tax rate) = 4500 + 7500 = 12,000

Investment real-estate gains are tricky since they can be taxed in two different ways……

Own in your name – less fees/paperwork – liability insurance

Own in LLC – separate entity/guard personal assets

I love applying for an LLC and an EIN electronically online. You can literally go to www.sunbiz.org and file your own LLC in Florida and get your EIN number instantaneously!

Own in Syndication/Structured entities – larger investors/economies of scale

Ownership

We are in contract Now we need to avoid the pitfalls……. Your contract is your protection Make sure you use Florida Bar and Florida Board of Realtors approved contracts

ONLY!

There are so many protections for the buyer….

Some of the key provisions include

• Identify the parties and the property (Make sure you use property address, legal name and tax number – I like to identify a legal entity as a trinity!

• Specify price and terms (cash)• Detail all the critical dates (inspection, title commitment, closing, etc).

Due Diligence clauses: protect against unknown risks at time of contracting. Includes such things as lead based paint, mold, condo approval issues, structural and hidden repairs, title defects, protection of your deposit, undisclosed liens on the property and many other potential issues.

Contract Time… be wise

Buyer has the right, and it is the seller’s duty to provide the condominium documents/articles of incorporation/bylaws.

A buyer has 3 days from receipt of these documents to review and cancel without penalty if they do not agree with them.

When a buyer ASKS for these in a contract and the seller does not provide (95%+ sellers usually never do), the seller runs the risk that the buyer can cancel at anytime and the seller will not prevail in any action to keep the deposit. This will keep the possibility open in case of future dispute.

This is an easily achieved advantage to the buyer due to the fast past nature of paperwork in distressed real estate, make sure you put this on your contract!

Many listing agents and Condo Associations will try to tag on fees. Make sure the contract is written properly!

Avoid those fees…

Hello X

Thank you.  However, I must say that the fees charged are not legal.  The maximum for an application fee is $100/person and estoppel fee is $150. This is according to Florida Statutes, Ch. 718, The Statute governing Condominiums. You can consult an attorney who can easily look this up for you.  This will be an issue with my buyer and needs to be resolved.

Hello Jesse, Per the seller's addendum the buyer had a 10 day

inspection period from the acceptance date.  The seller is stating that the inspection period had passed from time of written notice and your buyer will not receive their EMD.

Heartlessly yours,Mrs. Nasty

She tried to keep my deposit…

Dear Ms. X                                                                                                              WITHOUT PREDUJICE

 1.  I will be filing an EDO dispute with FREC if I do not receive a positive response tomorrow on the release of deposit to the buyer.2.  My attorney will be looking at contract for other issues as well.3.  The notice was provided to you , in writing, via email on Monday, May 24, 2011 at 2:27pm. Seller signed on May 19 th, 2011.  This is 5 days, much less than 10.  They are incorrect. We respectfully request the request for cancellation be signed immediately to avoid legal action.  Please remember, that in any legal proceeding on this issue, the prevailing party will be entitled to recover legal costs and damages.  Please also remember that in Florida a broker is responsible for disclosing material defects known to them.  It is clear the mold issue was known to you prior to our contract offer [since in my buyer’s due diligence, he had opportunity to talk to a prior offeror who backed out for the same reason].  An “AS IS” offer, does not relieve you of this duty of reasonable care.  Please do not let this escalate significantly.  It is a certainty that my buyer will sue and not walk away from the deposit as his case is extremely strong. Please have the release signed and returned immediately.

 Respectfully,

Jesse

Little did she know……

300 Palm Circle W #203   Price w/closing cost = $61,000.  Rented at $1,100/mo; taxes $77/mo.;

maintenance dues $215/mo.; property management $110/mo thus NOI = $1,100 – Exp [$402] = $700/mo or $8,400/yr. 

Cap Rate = $8,400/$61,000 = 13.8% [double South Florida average].  IRR = 25%+ projected over five years.

Real examples of properties we have purchased for clients….

This property sold for $237, 900 in 2006!

Jesse Ellis +1-305-791-7078+1-305-791-7078Jesse@CheapFloridaRealty.comwww.CheapFloridaRealty.com