I’m going to be starting an on-going series of blogs on real estate investment and I welcome any questions, experiences or concerns anyone out there in the blogosphere might have. Bring it on!
PS: I’d like to thank in advance all the people that I’ve been getting information, thoughts and experiences from already, your experience is invaluable.
photo credit: sunshinecity
I recently had the opportunity to spend some time with Julie Tumbaga, a Vice-President of OREXCO, which is a qualified 1031 exchange intermediary company. It was a great learning experience and I thought I’d share some Q&A with her to the readers of the blog. If you would like to reach Julie, she and her associates can be reached at (877) 591-1031 (toll-free from the neighbor islands) or 524-6737 on O’ahu.
Q: A 1031 exchange seems simple on the surface, but in learning more about them with you, I found that there was a lot more to them (and a lot more options for investors) than I had previously thought. In principle the idea is simple, but there are a lot of nuances to the process and legalities of a 1031 exchange. In your experience, what are several of the biggest areas of confusion for people considering or executing a 1031 exchange?
A: There are a number of things…
1. They have to reinvest both their basis and their gain, not the net proceeds. So, if they sell something for 500K, the replacement property needs to be equal to or greater than 500K for 100% deferral.
2. They need to be selling and purchasing like-kind property. Like-Kind is any combination of real property to include single family homes, condominiums, vacant land, commercial, industrial, golf courses and leasehold property with more that 30 years remaining on the lease. All properties need to be used for investment or for productive use in a business or trade.
Q: In continuing in the same general area of question, what is the single largest mistake you see people make (that could risk their tax-deferral) when doing a 1031 exchange?
A: A couple of things…..
1. They don’t identify property timely
2. They don’t use all of their money because they got a mortgage that is too high.
3. Don’t consult with their CPA or tax advisor.
Q: I know that depending on the type of exchange, the duties and responsibilities of a Qualified Intermediary (QI) can vary greatly but can you give us a description of some of the duties of a Qualified Intermediary (QI) in most tax-deferred 1031 exchanges?
A: Some of the duties include:
Q: One of the things I learned from you is that there are no established standards or guidelines for someone to call themself a QI. No national licensing, no experience or financial requirements and no genuine oversight. Since a QI is often handling significant amounts of money and/or titles to real estate, this is a serious risk to consumers and investors. What questions should someone considering a 1031 exchange ask of their Qualified Intermediary to be sure that their money and property are safe?
A: Some things to ask would be:
Q: In most real estate transactions, we already have buyers, sellers, buyer’s agent, seller’s agent and the escrow officer involved. When its a 1031 tax-deferred exchange, we also have the Qualified Intermediary company and its representatives involved to make sure that the IRS deadlines and requirements are met to ensure a legal exchange. What would your advice be to these other parties so that the transaction can move ahead quickly efficiently and legally?
A: Whenever there is an exchange, everyone needs to talk to each other. Agents, Lenders and Escrow….we all have our own specialties, however, when there is an exchange involved, some of the normal everyday practices don’t suit the exchange. So constant communication is vital so there are no surprises at the end.
Recently I was asked “why should I pay for a surveyor, if I or a pinfinder can locate the pins at the corners of my property?” This was my response.
I just think its smarter to get it redone rather than trusting that the pins that were placed there many years ago are the ones you’re finding now. I’d also like to think that survey accuracy has improved since the 1960’s.
There’s pins clearly visible on an older property that I own. Imagine my surprise when a modern survey was done and it was discovered that part of my wall (that’s been there 40 years) is partially on the other property. Thankfully for me, it falls under what is known as “de minimus structure position discrepency” and nothing has to be done.
To quote from a well-respected Hawaiian real estate book, “1997 amendments to our statutes attempted to limit probems arising from encroachments of improvements that were the subject of older, less accurate surveys”. (emphasis mine)
On agricultural land (like nearly all of Puna), regardless of lot size, the de minimus structure position discrepency is only 9 inches. So if those 40 year old pins are off by 2 feet on a standard Hawaiian Acres lot and you build against that setback (based on the pins), you could have to move a house.
I’ve also heard from a knowledgable source that in some area, pins were placed by stretching a mile-long rope between two poles, with paint on the rope marking off each lot boundary. Not exactly scientific and definitely not up to current survey standards.
I’ve also heard horror stories where the pinning crews accidentally started measuring from the wrong end of a block and each lot may be off by as much as 6 feet. Having a licensed survey will uncover these errors and give you a true and accurate picture of the lot’s location and dimension. Plus they are licensed, bonded and insured to give you recourse if an error should occur. A pinfinder has none of those protections for you.Recently, I was asked a couple of questions about “packaged” homes. For those that may not be familiar with the term as its used here on the Big Island, a packaged home is one where a company has a pre-designed home, an architect ready to approve them in preparation for permits issued, as well as materials lists and other materials to make it easy to get construction started quickly and relatively cheaply.The question(s) posed to me were:
Here’s some of my thoughts on those issues.
Often “packaged homes” are cheaper because of several factors:
1) the pre-packaged designs are often arranged to keep construction costs low — by doing things like centralizing the plumbing to one area of the house (i.e. bathrooms back up to each other and one bathroom is just a wall away from the kitchen, etc). Easy to build = cheaper.
2) the pre-packaged homes have detailed materials lists already made for them. Changing the design will require the contractor or materials supplier to recalculate the materials list and, of course, can change the cost of materials or construction cost significantly.
3) even seemingly minor changes can be significant. People think that “I just want the bathroom on this side of the room instead of the other side” is not a big change, but that can have HUGE implications on cost. I’ve seen cases where something like “lets put this exact house up on post-and-pier rather than slab so I can park underneath” was a $50,000 change. In that case, the rules for fire-retardant materials necessary, beam changes for proper support and addition of a staircase from the carport to the main house dramatically affected the plans and cost. In this example, beams shorted by the addition of the “hole” for the staircase were important load-bearing beams and when shortened, had to be of greater thickness and strength. Higher cost, too.
4) Very forget that one of the reasons that packaged homes have standardized a lot of the preliminary work, materials and off-site labor involved in getting things ready to the construction phase. Those costs are shared by all the people using the same design. In addition, if a building supply outfit has 3 or 4 of the same design in process at the same time, with no modifications, they are in a better position to order common materials in larger quantity and can potentially give a better discount on the materials. [Big thanks to Bob O. for reminding me of this factor to consider]
Changing a “packaged home” plans can have a lot of costs beyond just new draftsman plans and a new review/approval by an architect.
All that being said, “yes, of course you have input and can make changes.” Just be sure that as you discuss the changes, you are working with someone REALLY knowledgeable about the implications of the changes and how it can affect your costs. I would recommend discussing them with your contractor or experienced architect/draftsperson before you commit to the changes.
Sometimes the architect is expensive and a draftsperson could answer your questions and advise you on the implications of a change for far less cost — the architect will still have to review and approve it in the end, though.
