All Forum Posts by: Kevin Suksi

Thanks everyone for the replies.

I thought about stalling but it's a non-FHA offer near ask price - we'd be holding out for a cash offer. I don't think showing the appraiser multiple offers would help, but I'm wrong in that assumption I'd like to hear.

Here are the actual comps they reference in the report:

1 - Our flip, another ranch 0.5 miles away sold in February for 111K

2 - A bungalow (again, ours is a ranch) sold 11 months ago .34 miles away for 100K.

3 - A ranch 0.95 miles away sold in August 2010 (10 months ago) for 105K

4 - A ranch 0.90 miles away sold in April 2011 for 95K. This home had original 1950 kitchen and bath - in acknowledgement of our updates, value was adjusted a whopping $3,000 to 98K.

The report goes on to say that most weight is given to comp #4 as it is most recent at 60 days. It also says that 2,3, and 4 are similar homes (they are not - one is even a bungalow), and then in mentions #1 almost as an afterthought. There were recent sales which supported our value which were 1.1 miles away; these were thrown out due to distance.

Again I would note that the appraisal intitally came back at value of 113K. The file was pulled for review and 3 comps were thrown out due to distance, ranging from 1.02 miles to 1.10 miles from the subject property. These were of course recent and at our value as well.

So here's a crazy story.

We picked up n REO to rehab. This home is a half mile away from another one that we sold in February for $111,000. The two homes are identical for all intents & purposes - 3/2 brick ranches, 1100 square feet.

We rehabbed house #2 (subject property) identically to house #1 (february sale of 111k). Updated everything, granite, ceramic tile, wet bar in basement, etc.

We put house #2 on the market and got it under contract literally in 12 HOURS for $113,000.

The appraiser comes in and says we're all good.

Then the file gets flagged for review - we're told this is a formality.

Then, they come in and throw out all the comps that had any value, and tell us the only legitimate comp is a house a MILE away that sold for $95K. They mark it up by $3K because the $95K house had ORIGINAL kitchen and bath (we're talking about 1950 houses).

Appraiser comes back and says our house is worth $100K - completely disregards the house WE SOLD a half mile away 4 months ago for 111K!!

I'm totally convinced that it is these folks who are killing the market.

Hi Casey, sorry for the delay; I just saw your post. We are currently wrapping up our 9th house. We live in Dearborn and have been focusing on the nearby suburbs. I see that you are a Detroit area investor as well?

This is a great post! We have had the unfortunate experience of contractors who show up at noon and later - they do decent work but it gets old not knowing when they'll show up!! Love the idea of going to home depot at 7AM on a saturday to find the contractors who have a sense of urgency. Very clever.

@Financexaminer - she certainly isn't planning to take the property back, but that possibility certainly exists, or else we wouldn't have to lien land contracts, right? If banks thought these people were good credit risks, they wouldn't need land contracts, therefore we must at least acknowledge it as a worst-case scenario possibility. As far as the improvements go - she made the improvements, not the buyer, so we are correctly calculating the basis.

The deal isn't actually all that bad considering all of the circumstances - most notably that the loss would have been even worse had the property been sold to, say, an FHA buyer, with their nasty little concession requirements and brutal appraisals.

After much consideration, the truth really is that my client is a part-time real estate investor, even though she actively manages the activity. If she were to be audited, it would be an uphill battle to classify this as ordinary versus capital loss. We're going to eat up all of her capital gains this year plus $3,000, which results in a $35K carry-forward.

The smile on her face won't be as big as it would have been had we taken the whole loss at once, but she'll sleep better knowing that the IRS can't challenge anything on the return. It's a bit of a bummer that she still has to claim income on the interest from the LC though.

She also is one of our deal partners on flips - at least we can give her good news that the next couple of deals will be tax free because of the carryover.

Thanks in advance for any insight on this item.

I am preparing a tax return for another investor who converted her tenant to land contract.

This property was purchased in 2005 for $106,000. The investor is tired of landlording, and wanted out despite the decline in value. The tenant came up with some EMD money and is paying a higher land contract amount than they were paying in rent, so the investor feels that in the short term the deal has improved for her. The amount on the land contract is $60,000. The improvements she's made on the property happen to amount to about the same amount of depreciation which has been taken, so the basis is materially the same as it was when the property was placed in service. It's a $46K loss!

So the IRS basically says that with installment sales, with a gain, you realize it over the life of the contract; with a loss, you must recognize it all at once:

http://www.irs.gov/publications/p537/ar02.html

She actively manages the property. At this point we're taking the whole chunk to line 14 and wiping out $46K in taxable income.

It seems really aggressive to me given the nature of land contracts but I don't see how else to report it. Our plan at this point is to report it this way and see if the IRS challenges it. If the land contract fails and she takes the house back, then I expect that a pro-rata of the loss would be picked back up as income.

Any insight would be appreciated from anyone who has encountered this situation.

In response to this:

We flip houses in a working class area. 100% REO flips. For one thing, FNMA properties have a 10 day period where ONLY owner occupants can bid - investors aren't even ALLOWED to submit offers!!! And if a property is priced low and is move-in ready, "lower income people", as you describe, always bid higher than it makes sense for us to bid in order to flip the property. The only properties we get a shot at anymore are ones that have issues that a homeowner would never deal with, such as a missing kitchen, or other very expensive repair. We then acquire the property, intelligently plan a rehab, execute said rehab, and convert the worst house on the block to the best house on the block. The neighbors thank us for it, believe me. And then we do EARN - I know this is an evil word - a reasonable and fair PROFIT. Heaven forbid.

Flipping is work. Do any of you go to work for free?

We were going back and forth about this issue in our flips - recent experience tells us beyond a shadow of a doubt, always go with stainless.

We listed a house at 116K and did not include appliances because on our last one, we did include them, but weren't credited in the appraisal for appliances. We had many showings, zero offers, and consistent feedback of "too much money for the area", "nice but too much money", etc.

We then put stainless appliances in, and bam - 4 offers!! We are closing on a cash offer of $111K tomorrow.

I say everyone should get the same returns unless they are family - I'll give my mom a better return than a friend who wants to invest :-)

When you are successful with flips, friends often want to become investors. When you meet new people as investors, if you bring them good returns, they often become your friends as well, right?! We all like people who help us make money, right? So at that point do they get a "friend premium" on their return?

Bill it sounds like a good opportunity - as a cash flow property it looks like you'll tie up about $10,000 and cash-flow $300-$350 per month, is that about right? Did you pull comparable sales to see ARV?

I think the magic question might be what city this is in. If it's Dearborn or Detroit for example, the city might be too much hassle. The city might make you smash out the existing rehab and start over - which would be a good reason for this person to take a loss - it might be more expensive to make the place right.