What is your Business Exit Strategy?

There are lots of exit strategies: Wills, Power of Attorneys, Trusts, 1031 Exchange, Eldercare, Sheltering Assets, Leases, Tenancy at Will, Estate Taxes, Property Management and Business Succession Planning.

 Everyone has heard of making a Will, for when you die. The one exit strategy that I hadn’t heard of or really thought about was Business Succession Planning.  What is going to happen to your apartment business?  Is your remaining family going to know how to keep your apartment business running? Would they even want to?   This is where Business Succession Planning comes in.  Business Succession Planning is a detailed plan designed to transfer ownership and control of your business and/or properties to the right people and in the right way for your goals.  The most common tools used in Business Succession Planning are:

• Life Insurance – Pay in to a policy and on death it is paid out to the business or partner(s).
• Buy – Sell Agreements – Provides one party with the option/obligation to purchase another party’s business interest upon certain life events.
• Redemption Agreements - A Buy-Sell Agreement under which the corporation or partnership agrees to buy out the interest of a shareholder or partner.
• IDGT - Intentionally Defective Grantor Trust - is an irrevocable trust in which the grantor retains a controlling interest in trust-owned assets. For example, the asset in the trust may be a minority interest in the grantor's family business and he may own controlling interests in the business.
• GRAT -  Grantor Retained Annuity Trust –Annuity payments come from interest earned on the assets underlying the trust or as a percentage of the total value of the assets. If the individual who establishes the trust dies before the trust expires the assets become part of the taxable estate of the individual, and the beneficiary receives nothing.

Often more than one strategy will be used together to help protect the business asset,  keep the business running or help the owner move into passive retirement.

Everyone's situation is unique and needs to have a strategy tailored to their needs.  Each of these tools are very powerful to help you achieve your goals.  Whenever using any of these tools seek professional advice. Business Succession Planning is a process, it is not a one time event. Include your professional advisers to help with the planning. Don’t wait start planning now. The more you plan now the better off you will be.  

* notes from Nathaniel S Putnam, Esq power point and investopedia.com

If you would like a copy of my 10 pages of notes from the GBAOMA – Legal conference "Exit Strategies" send an e-mail to JamesErnst@kw.com

Taxes and Selling your Real Estate Investment

So you've getting tired of the Landlord business and you want to get out.  Your thinking ok big hunk of cash but  Oh ya I'm going to have to pay taxes on that big chunk of cash... as you start to do the calculation you realize that there is a lot of taxes that you will have to pay.  Poking a few buttons on the calculator All of a sudden that selling of your real estate investment doesn't seem so great!  How can I avoid or defer the taxes when selling?  There are a couple of  solutions  to this problem. 

Holding Paper:
Holding a paper or a mortgage note allows you to finance part or all of the price of the property to the buyer.  This can be very appealing to buyers. Frequently you can get a higher interest rate and get a regual payments over many years. The great thing is that you are paying smaller amouts in taxes every year over many years instead of one big lump of taxes.

1031 Exchange:
A 1031 exchange is transferring the gains from one property to a new property. The great thing about this there is fair amount of flexibility in the property types that you can exchanged into.  In order to qualify for this exchange, certain rules must be followed:

1. Both the relinquished property and the replacement property must be held either for investment or for productive use in a trade or business. A personal residence cannot be exchanged.
2. The asset must be of like-kind. Real property must be exchanged for real property, although a broad definition of real estate applies and includes land, commercial property and residential property. 
3. The proceeds of the sale must be re-invested in a like kind asset within 180 days of the sale. Restrictions are imposed on the number of Replacement Properties which can be identified as potential Replacement Properties. More than one potential replacement property can be identified as long as you satisfy one of these rules:
   • The Three-Property Rule - Up to three properties regardless of their market values. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.
   • The 200% Rule - Any number of properties as long as the aggregate fair market value of all replacement properties does not exceed 200% of the aggregate Fair Market Value (FMV) of all of the relinquished properties as of the initial transfer date. All identified properties are not required to be purchased to satisfy the exchange; only the amount needed to satisfy the value requirement.
   • The 95% Rule - Any number of replacement properties if the fair market value of the properties actually received by the end of the exchange period is at least 95% of the aggregate FMV of all the potential replacement properties identified. In other words, 95% (or all) of the properties identified must be purchased or the entire exchange is invalid.(1)
    

When you decide to get out of your investment take a serous look at your tax options with your CPA when deciding to sell your Investments.  There are ways to avoid or differ your tax bill.



Source:  (1) http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_1031

Portland Real Estate in Rapture

"The rapture is coming!"  "The rapture is coming!"  I can see the town crier running through the streets, in the dark of the night, under the light of the gas lamps.  In our modern world bad news still spreads fast as wild fire.  The fear of loosing everything.  It is amazing how fear sells news.  It is in these moments you too think   "What if you lost every thing?"  What if the city of Portland had a massive earth quake and all of the buildings over one story collapsed. What if a tsunami came in and washed everything away that was 40ft above sea level?  What would your insurance cover?  Would your insurance even cover your mortgage?  Would you rebuild?  Would you just walk away and move to a new city?  What would your plan be?  Should you have a plan?  


If there was a large scale disaster in Portland what would it look like the week later?
First the concern would be for your own safety.  There would be a huge run on basic commodities like food and running water and shelter.  Resources would be supplied by the government and side communities to help Portland.  Then there would be a gradual rebuilding. This would be a very long process.... Like years.  All of the existing contractors would be booked out for months.  During the first month after the event there will be a major flux of tenants leaving the area, hence there would be no rental income. Landlords would not be able to keep there apartments rented. Landlords would start abandoning properties. The banks would start having properties in default and foreclosing. A year out rock bottom prices on abandon properties would start appearing.

I hope this never happens to Portland. But if it does what would you do?  Would you be able to wait out the rapture?   Could you take advantage of such an opportunity?  Would you abandon ship or would you wait it out to cash in for huge returns? 

How can you protect yourself from this type of situation?  Do you have properties that have cash flow?  Do you have reserves in the bank to cover losses?  Can you float your properties expenses for six months? A year?  Not that we expect the rapture to come but how financially stable is your business?  What can you do to improve it?  The strength of you business will determine your future and longevity.  I hope the rapture never comes but it is always good to be prepared.

By James Ernst -  SMLA board member, Manager for Sherwood Properties for 10 years. Real estate broker Sullivan Multi.

How can an investor can speed up the short sale process?

A recent study of home owners nationally shows 28% are in default.  This represents a very large number of  properties.  It can be a great opportunity to buy property at a discount but the length of time to get offers accepted and closed can take six months or longer.  I have met some investors that make cash offers and throw out lots low ball offers to see if the banks will accept them.  A small percentage will be accepted even with all cash offers they can take months to close on a short sale deal.   It becomes a waiting game with the banks.  The biggest challenge is contacting the person at the bank that has the authority to make a decision about the short sale property. The bankers are swamped with hundreds of short sale cases.

When investing in short sales it is helpful to have good understanding of the time line foreclosure process.

1. 35 day acceleration letter from lender (generally at 3 months)
2. Duty Sheriff serves Summons and Complaint (Mediation)(5.5 months)
3. Answer and Request for Mediation (6.0 months)
4. First Mediation Session (9.0 months)
5. Final Mediation (12 months)
6. Discovery period of 90 days (15 months)
7. Motion of Summary Judgment filed (16 months)
8. Opposition file d(by homeowner) (17 months)
9. Summary Judgment Hearing (20 months)
10. Judgment enters and Docket and Appeal expire (21 months)
11. Redemption Period of 90 days runs out (24 months)
12. Auction Date is announced (24.5 months)
13. Auction occurs  (26 months)

If no one buys the property at the auction it becomes and REO.

In this above steps the most important steps to an investor are steps D and E.  The Mediation steps are where the lawyer and seller and banker get together and try to figure out what is going to be done with the property.  It is now a requirement that all forecloses go through a mediation process.  The great thing is that your real estate agent can go to the mediation.  During the mediation that can take several hours the banker has the authority to take offers on the property and negotiate a sale price for the property.   This is a huge opportunity to get a deal finalized so you can close a deal.  This has stream lined a process that would have taken months before.  During the mediation all of the bankers contact information will be given. This makes it so much easier to contact the banker at a later date if a decision is not decided on during the mediation.  Investing in short sales can be a great opportunity when and much sorter when you can take advantage of the mediation. 

By James Ernst  -  SMLA Board member

What is your Money Making System in the Apartment Business?

Everyone likes to save time and money in the the apartment business.  To really make money in this business you need to develop systems of doing things.  If you look at McDonald's they make a hamburger.  Anyone can make a better hamburger but the reason that they are so successful is because they have perfected the systems of making hamburgers.   In the apartment business there are many different systems that make up the business.  Look carefully at the different systems that you have and how can you automate them.   A few of the most common systems are Rent Collection,  Expense Payment, Showing Rentals, and Maintenance.    A great system for Expenses is auto bill pay.  Having your mortgage, electric, gas, oil, insurance, taxes directly deducted from a buildings operating account is a huge time saver and they are always paid on time!   This can be taken a step further by having debit cards for each building. When you are at the hardware store use your card for that building to make the payment.  All of a buildings transactions are then organized for accounting in your monthly card statements.

To really perfect a system list out all of the steps of the process.  Are there extra steps?  How can a step be removed or improved or automated?  

A manual system of showing rentals:

1.       Create a new ad for rental.

2.       List ad on Craig's list.

3.       Applicants call your cell phone.

4.       Schedule time on the spot for later in day

5.       Grab rental applications

6.       Rush over to show apartment

7.       Applicant wants to put down deposit

8.       Hand write receipt for deposit on a scrap piece of paper.

An automated system for showing rentals:

1.       Have prepared ad for rental with apartment details.

2.       List ad on Craigs list.

3.       Applications call answering machine with message about apartment and showing times.

4.       Meet applicants at unit that has applications at and receipts for deposit and blank lease copies stored at the building.

Automate your apartment systems today and improve your business.

Networking in the Apartment Business

When growing your land-lording business it is important to network and connect with other people with similar interests.  This is the Mastermind Principle.  Napoleon Hill described the model behind the Mastermind Alliance as “two or more minds working actively together in perfect harmony toward a common definite object.”   In our modern day world we are frequently constrained for time to meet and network with fellow peers.  It has become common place for people to do networking online. 

In the online networking world there are a great resources.  Facebook is a huge source of social networking on a very personal level. You can find just about anyone on here, even SMLA has a page. Be sure to check it out.  A great professional resource for networking is LinkedIn.  LinkedIn is an opportunity to connect with people on a professional level. Share information and knowledge as well as learn from others.  On LinkedIn there are 4,128 real estate related groups and 138 apartment related groups with thousands of members. Southern Maine Landlord Association has a group on LinkedIn as well. 

These online sites are amazing resources to connect with other people in all aspects of your business.  Use these resources to learn, contribute and network with your peers.  

James Ernst

Manager of Sherwood Properties

http://www.linkedin.com/pub/james-ernst/13/475/821