Category Archives: Real Estate Tips

Denver Real Estate ~ What is a 1031 Exchange?

What is a 1031 ?

For investors, whether they be on-purpose professionals or reluctant owners who had to hold onto a  property as a rental because at the time it wasn’t selling, doing a can save dollars. The 1031 Tax Deferred Exchange is a frequently overlooked section of the code!

In basic terms, Internal Revenue Code, section 1031 allows a real property owner to sell his property and reinvest the proceeds in ownership of a like-kind property and defer the capital gains taxes.

A 1031 Property Exchange is also known as a Tax Deferred Exchange.

Who should consider a 1031 Exchange?

Owners of real property that upon selling will incur a net gain.  Typically this is a property that has been substantially depreciated for tax purposes and/or has appreciated in fair market value), are good candidates for doing a 1031 Exchange.

5 Classifications of Property

The fourth and fifth category and possibly the fifth category are the type property allowed in Section 1031.  The defines “Business Use” as, “To hold property for productive use in trade or business.”  Property retired from previous productive use in business can be qualifying property.  Investment purpose defined as real estate, even if unproductive, held by a non-dealer for future use of increment in value is held for investment and not primarily for sale.  Investment is the passive holding of property, for more than a temporary period, with the expectation that it will appreciate.  Property held for sale in the immediate future is not held for investment.

Why  should you  consider doing a 1031 Exchange?

  1. Relocation to a new area
  2. Diversify.  Perhaps it’s better to own more than one property
  3. Defer paying capital gains taxes
  4. Leverage
  5. Upgrade to a better property
  6. Consolidate multiple properties into a better single property
  7. Differences in growth or income potential
  8. A well-structured exchange can provide the real estate investor the opportunity to defer all of their capital gain taxes. The exchange in essence is an interest-free, no term loan allowed by the government
  9. Change in type of property residential, commercial, retail, etc.

What is “Like-Kind” Property?

An example of “like-kind” property would include commercial, condos, duplexes, raw land, rental homes (depending upon extent of personal use) and apartment buildings.  The real estate needs to be within the United States and it’s possessions.  means “similar in nature” notwithstanding grade or quality differences.

1031 Exchanges Can Be Done in Different Formats

  1. Simultaneous (2-party swap)
  2. Delayed exchange is most commonly done
  3. Multiple sales/acquisitions
  4. Reverse exchange
  5. Improvement exchange

Guidelines to Replacement Property Identification in a 1031 Exchange

  • 3-Property Rule – You may identify up to 3 properties to replace your relinquished property.
  • 200% Rule – The aggregate value of identified properties cannot exceed 200% of the value of your relinquished property.
  • 95% Exemption – You may identify any number of properties to replace your relinquished property as long as the total value you end up purchasing does not exceed 95% of all identified properties.

Like in Life, Timing is Everything!

The time you have to sell your relinquished property and close on a new one is strictly dictated by the IRS Code.

  • You have 45 days from the closing of your sale to list the properties you may want to buy. There are no exceptions to the deadline.  A day counts as a day, even if it is a weekend.
  • From the sale closing date, you have 180 days to close on a purchase of one or more properties from the 45-day list.  Again, no exceptions to this deadline.

Watch Your Tail Feathers!

As one can imagine there are lots of Carpet Baggers out there in the world trying to remove you from your investments.  Arming yourself with not just knowledge of a 1031 Exchange but also a concrete understanding of what your are doing is very important.  There’s lots of info to read and research, but it’s constantly changing.  Thus when it comes time to do your exchange be sure to partner with and expert who follows the changing legislation and monitors new legal developments.

Work with a Professional: Any real estate transaction can be confusing. Dealing with a 1031 Exchange can be mind boggling, to say the least. If you don’t have intricate knowledge or experience in dealing with a 1031, it could be very, very costly for you in the end. I have the experience necessary to make your Colorado 1031 Exchange go smoothly. For any Colorado information regarding Real Estate 1031 Tax Exchanges, please contact me Kristal Kraft at 303-589-2022. I look forward to working with you on any of your real estate transactions in the metro Denver, Colorado, area.

How to Buy A Foreclosed Home

Denver foreclosure

This old place might take a little more than a handyman!

This week I was speaking to a lady who is thinking about purchasing a home on her own.  She’s very handy at fixing up properties and has done it in the past with a spouse.  Now that she’s on her own (no spouse), she’s decided to try to put her creative talents to work by finding a home to fix up on her own.

She’s decided to buy a foreclosure, because she’s well aware that this type of home almost always sells for a lower than market value price and needs work.  She’s correct on both counts.

Most people purchasing a home want to buy one that needs little or no work.  Occasionally a buyer will come along who is looking to earn some “elbow grease equity.”  Buyers who have some spare cash after a closing, the know-how and a lot of patience and time on their hands are perfect candidates for foreclosed homes.

Where do you find a foreclosure?

Buyers often have misconceptions about finding foreclosures.  They think they have to go directly to a bank to find them.  This is not the case.  When a home goes through the foreclosure process they are put on the resale market and listing in the Realtor data base called the MLS.

Types of foreclosures

Depending upon the type of loan that was foreclosed upon, there are different types of foreclosures.  For instance a FHA loan where the seller loses the home will become a HUD Foreclosure.  Fannie Mae and Freddie Mac are also treated differently.

One thing in common with all these Denver Foreclosures is they are all found in the MLS.  This is a good thing because it provides buyers and brokers with one central source to locate a good property.

Finding a Foreclosed Home to Purchase

If you are looking for a good deal and would like to know about foreclosures as they come on the market, you should subscribe to my Denver Home Search Feature on this website.  You can configure a search using your own personal criteria for price, size, location, etc.  My search feature is very easy to use, you just  need to remember to check the “foreclosure box.”

Oddly enough the lady I was chatting with this week had no idea searching for a Foreclosure in Denver could be so easy!  Now I bet she wishes fixing one up would go as smooth!

Your Delinquent Mortgage Affects Your FICO Score

Denver Foreclosure Information

Working with homeowners in distress often brings many questions.  Some questions I can answer with ease, others I have to look to others to find.

When it comes to your FICO score there are certain factors that effect it.  FICO Scores use mathematical models taking into account various factors in each of these five areas to determine credit risk:

  1. payment history
  2. current level of indebtedness
  3. types of credit used
  4. length of credit history

Lenders use your FICO score to assess your credit risk on whether to extend a loan.

A FICO score range is between 300 and 850.  Typically a FICO score above 650 indicates a person who has a very good credit history.  When a score falls below 620 a person will find it increasingly difficult to obtain financing at a favorable rate.

Protecting your FICO score is important

When considering a Short Sale or outright default on a loan, one needs to know the ramifications.  Many persons who have absolutely no choice but to default will have to deal with the consequences regardless, but those planning a “strategic default” might decide otherwise when they know the difficulty in store for them!

A recent post on the FICO Banking Analytics Blog illustrates how Delinquencies affect scores

The FICO study simulated various types of mortgage delinquencies on three representative credit bureau profiles of consumers scoring 680, 720 and 780, respectively. I say “representative profiles” because we focused on consumers whose credit characteristics (e.g., utilization, delinquency history, age of file) were typical of the three score points considered. All consumers had an active currently-paid-as-agreed mortgage on file.

Results are shown below. The first chart shows the impact on the score for each stage of delinquency, and the second shows how long it takes the score to fully “recover” after the fact.

Chart of Delinquency Effect on FICO Score Results of the this study:

  • Higher FICO scores fall the lowest
  • There isn’t much of a difference in the type of default.  Short sales, foreclosures all suffer about the same amount of fall
  • It takes about 7-10 years to recover
  • The higher the beginning score was the longer it will take to recover

The author also noted in this particular study they only used select consumer credit profiles.  There are many credit profiles so in the end your results may vary.

It is interesting to note lenders are on the watch for homeowners who are planning their strategic defaults.  It only makes sense as defaults cost the banks money. Not only that, home values in the neighborhood decline causing the economic mess we are in to linger longer.

Speaking of one who has seen more than one real estate decline, this to will pass.

If you are having a hard time making the payments on your home due to job loss, health issues, death in the family or any of the reasonable excuses, doing a short sale or foreclosure might be your only choice.

If you are not suffering from any of these issues but are just spooked by the constant negativity in the media, remember to look at the positive side.  95% of Americans ARE making their house payments!

Yes, neighborhood values might be down, but that is now. Values will eventually start rising again.  The real estate market is a market that fluctuates.  Builders have reduced their building but we haven’t stopped having babies.  Nor are people stopping their American dream of immigrating to the U.S.

This real estate market shall turn a corner and we will see values rise, just be virtue of supply and demand.  We need housing.  People want to OWN a home. We are not a nation of renters, we never have been we never will.

If you are searching for the answer of what to do and need more information, maybe I can help.  Call me, let’s talk about your situation.  Perhaps I can bring clarity to what you need to do.

I welcome your call.


2 Big Time Lenders Get Loose ~ With Lending

Wells Fargo and Quicken Loans have come public saying they will lend to borrowers with a 580 FICO score or better.

This may not be so surprising to many as this has been the guidelines all along.  Well supposedly, in reality the banks CAN lend at 580 FICO or above, but don’t. HUH?  Sound contradictory, well you are right.

But now according to these big Lenders, they have revised their lending plans and are loosening up their requirements, at least on the FICO score side.  Borrowers will still be required to come up with the 3.5% down payment, that must come from the borrower’s own funds.  Yes, the borrower will need to jump through hoops to prove this, but then that is a good thing.

The banks want to make sure they aren’t lending to a borrower with a poor credit history.   FHA has seen enough defaults of late and certainly we don’t need anymore!

In order to prevent additional mortgage defaults, the requirements get more difficult to match for buyers who’s FICO Score is below 580, they may be able to find mortgage money, but not without additional scrutiny to their budget and a down payment from their own funds in an amount of 10% or greater.

This is really good news for home buyers who have been trying to repair their credit, have a savings, are employed and want to purchase a home.

I’m glad to hear Wells Fargo is setting the example to expand lending practices in a time when so many lenders have retracted.  We need to make financing available to those who can prove they are worthy and will be responsible home owners.

Let common sense prevail, on both sides.

[mortgage title=”How Much Can You Afford?” mortgage_term=”30″]

Denver Real Estate Talking Points

We’ve all be anxiously awaiting the Denver real estate statistics to see how sales went after the tax rebate was over.  The results are in and frankly we are a little surprised.  The numbers are better than we expected.

July 8, 2010

  1. The average sales price jumped 10% in June over the month of May, and 6% over June 2009.  Best reason why: an increase in non-tax credit supported contracts written in May.  The months of May and June are traditionally the spring transferring months for the corporate buyer, and that seems to holding true in 2010.  By advancing the first time buyer market to March and April, the average sale price increased because the transferring buyer is in the $400,000 price range this year, and there were simply less low price buyers in play in June.
  2. 2. Average prices up, total sales down, but not out. The decrease in total closed sales was only 319 from May and 140 less than June of 2009.  Important consideration: The first half year to date sales totaled 20,990 compared to 19,363 units sold YTD 2009, an increase of 8%.
  3. The Total Available Inventory is creeping up. (an increase of 8.8% over June of 2009) This is a concern.  It is reasonable to assume that homes owners buoyed by the good sales numbers of April are trying to take advantage of the market and sell their present home.  While we are some ways away from a flood of inventory, it will take very little excess inventory to drive the prices down below the last two years low levels in the latter half of 2010.  While the much discussed “shadow inventory” seems to be barely visible in the Denver area market, the overall economy is still very fragile.  (Positive sign: RTD letting contract to build the commuter rail to DIA, etc. will pump 2 billion plus $$ into the local economy and add 3000 jobs.)
  4. Postscript to the above note: it is all about employment!!
  5. 5. The Average Days on Market (DOM) for May was the lowest in a long time. That number increased to 82 days in June, a factor of increased inventory and less total sales. 82 average days on market is still very good.
  6. 6. 3885 = the total number of contracts written in June, 2010.  5,664 = the total number of contracts written in May of 2010.  That is 1779 less units of inventory contracted for sale, which negatively affects the work load of REALTORs, Title Companies and their Escrow departments, mortgage lenders, home inspectors, appraisers, etc.
  7. Freddie and Fannie national mortgage rates are 4.57% today. Those low rates are providing some boost to the housing market, at least for those that can take advantage of the moment.

Pretty graphs to follow tomorrow!