Chapter 12Investing and Other Broker-Related Fields

I. Why Invest in Real Estate?

A. Objectives Some investors may be seeking additional income

through well-chosen properties while others use it as a tax shelter to help reduce the bite on otherwise taxable income

The number one objective for investing in real estate is to make money

B. Capacity

The investor in real estate should have the financial ability to handle the carrying costs of the investment

The costs of operating expenses continue to escalate

C. Soundness The investment should be sound from an economic

point of view, that is, investors ought to look beyond projected figures

Projected figures should reflect financial reality

II. Benefits of Investing

A. Tax Shelter Investors in high income tax brackets may benefit from

“sheltering” or conserving part of their ordinary income through wise planning, selection, and operation of an income producing property

B. Other Tax Benefits Capital gains can be largely deferred through one

of several devices:

A tax-free exchange A deferred sale An installment sale

C. Appreciation Potential

Growth through appreciation is a function of supply and demand, economic conditions, influx of population, inflation, and scarcity

D. Hedge Against Inflation California’s real estate usually rebounds eventually

and continues to appreciate in value over the long run

Real estate tends to keep abreast with the fluctuations of the purchasing power of the U.S. Dollar

During inflationary periods, the cost of everything rises, including real estate and during recessionary times, prices may dip

E. Income

“Cash flow” is the difference between the income generated from a property and the expenses associated with it, including taxes, mortgage payments, and operating expenses

Many investors purchase property with the objective of providing an annuity for themselves

F. Interim Use

Real property ownership offers the purchaser of a ranch, farm, or other investment the opportunity to use the property to make some income while waiting for appreciation of value to take place

G. Stability

Many types of real estate, especially commercial and industrial, enjoy long-term leases with top corporations, producing a dependable, stable investment for as long as twenty years or more

H. Control and Use

As a real estate professional, you can assist your investors by helping them:

Thoroughly study the environment and economic background By analyzing the investments for tax benefits Hedge against inflation Explore financing opportunities Analyze cash flow, income and stability

I. Refinancing

Some clients who have investment properties with large equities may choose to refinance their property to take out more cash to buy another property

J. Amenities

Other benefits to the investor included pride of ownership, security, status, achievement, estate building, and the opportunity to improve profits

III. Financing Income Properties

A. Sources of Financing

Miscellaneous sources of funds for investment properties include: Savings Banks –specialize in housing

Commercial Banks – active in the urban mortgage market

Life Insurance Companies – invest in large commercial projects like shopping malls, etc

IV. Your Role in the Investment Process

A. Apartment Prospecting and Marketing

• Sources of prospects for listing and buying investment properties include many of the same as those for residential properties

• Don’t overlook the current tenants as potential buyers

1. Getting the Listing Listing an apartment complex is like listing a house You meet the owner, ask searching questions, come

prepared with valuation data, and create opportunities for the sellers by showing them how the proceeds can be reinvested, and so on

When gathering info, you’ll also need to get detailed facts about the property, such as: Needed repairs Condition of units Quality of tenants Rent schedules Lease terms Vacancy factors Evaluation of income and expenses

B. Investment Planning and Counseling

To earn the respect and confidence of your clients, you will need a thorough understanding of your client’s total financial and family picture

A confidential file should be maintained for each of your clients

Conferring with your client’s attorney, accountant, or business advisor may be advisable somewhere along the way

V. Residential Income Properties

A. Property Analysis

To understand the analysis of an income producing property, an Income Property Residential Statement can be utilized

Potential Gross Income Vacancy Factor Effective Gross Income Net Operating Income Operating Expenses Fixed Expenses Variable Expenses Reserves

Times Gross TIMES GROSS is simply the proposed selling price

divided by the scheduled gross income, with the multiple used as a ballpark figure to weigh the prospective value of the investment

Capitalization of Net Income

The net operating income is divided by the selling price to determine the appropriate capitalization rate

or

B. Characteristics of the Rental Market

Income characteristics

Rent-to-Income Relationships

Current Rental Ranges

Current Vacancy Rates

Rent Control

Desirable Distribution of Units by Type and Price Class

VI. Syndication

Purchase Group Syndications are based on complex legal concepts, so

advise your clients to seek advice from an attorney

A SYNDICATION is an association of two or more people who combine their financial resources for the purpose of achieving one or more investment objectives

B. Brokerage Opportunities

Creating a real estate syndication can be creative, challenging, and profitable for the enterprising broker

Benefits include: Commissions earned from selling properties Management fees Percentage of ownership Resale commissions Option to acquire one or more interests

C. Forms of Legal Organization

Limited Partnership

General Partnership

Corporation

REIT

VII. Small Business Opportunities

Small Business Opportunities

As a broker, you may wish to engage in a variety of activities that complement your basic real estate brokerage operation

Each activity can supplement your income as well as provide you with additional sources of prospects

You should be aware of the value of informing all your clients about other services offered by your company, such as property management

VIII. Details of Selling A Business

Selling a Business Section 10030 of the Real Estate Law defines a

BUSINESS OPPORTUNITY as a “sale or lease of the business and goodwill of an existing business enterprise or opportunity”

GOODWILL is defined as the expectation of continued public patronage

A. Listing Agreement

In this first step, an agency relationship is created by securing a listing on the business

B. Uniform Commercial Code The UNIFORM COMMERCIAL CODE (UCC) is a

body of law adopted throughout the United States that standardizes a number of practices commonly found in commerce and business

Article 6 covers the subject of bulk transfers

In real estate talk, the expression “bulk transfer” means the same thing as a business opportunity- an extraordinary sale of more than half of a seller’s inventory and equipment

Notice

Whenever a bulk sale or transfer is made, the transferee must give public notice to the transferor’s creditors by recording a Notice to Creditors of Bulk Sale at least twelve days before the bulk transfer is consummated

C. Security Agreement & Financing Statement

Under Article 9 of the UCC, a filing system is established as additional protection for creditors and for purchasers

D. Sales and Use Taxes

Whenever a merchant engages in a business where sales of personal property at retail are made, he or she must secure a seller’s permit from the State Board of Equalization

E. Bill of Sale

The BILL OF SALE serves the same function in the transfer of personal property as the grant deed does for real property

F. Assignment of Lease

The reason why most businesses sell for comparatively less in contrast to real property is because it is only personal property that is being purchased, a lease is generally assumed on the building

Not all leases are assignable, make sure it is before negotiating to buy a business

IX. Valuation of Business Opportunities

Valuation You should learn how to determine the value of a

business-before you embark on your first listing

The value of goodwill is the most difficult to measure

You should visit the establishment on different days and at various times to determine business activities

One way to try to value a business is to use a NET MULTIPLIER, which multiplies net income by some standardized number or multiplier

In real estate a GROSS MULTIPLIER is often used for income-producing real estate

X. Tax Consequences on the Sale of Business Opportunities

Tax Consequences Tax implications on a sale of a business are different

from those in the sale of real property

The method of allocation of various business assets has tax consequences to both seller and buyer

The amount paid for leasehold improvement is deductible by the buyer

The amount paid for goodwill is not deductible by the buyer and is a capital item to the seller

XI. Alcoholic Beverage Control Act

Alcoholic Beverage Control

• The CALIFORNIA DEPARTMENT OF ALCOHOLIC BEVERAGE CONTROL (ABC) is charged with administration and enforcement of the Alcoholic Beverage Control Act, which regulates liquor licenses

XII. Ancillary Activities and Specialty Roles

A. Real Property Securities Dealer

A REAL PROPERTY SECURITIES DEALER is engaged in the secondary money market, in addition to a host of activities that come under the definition of real property securities

Before selling real property securities to the public, the broker must obtain a permit from the Real Estate Commissioner

B. Notary Public Services

As a notary public, you can notarize your clients’ documents, but many successful brokers rely on assistants to take care of this detail

XIII. Property Management Activities

Property Management

Managing properties is a natural adjunct to your general practice as a broker

This is usually done on the basis of a percentage of gross rentals or for a flat fee

Specific duties and functions will be discussed in our next chapter 13

XIV. Escrow Activities

Escrow Another supporting service, which a large number of

brokers offer, is that of escrow

Remember, that only the seller and buyer may select the escrow company they wish to use

The escrow holder is a dual agent for both the buyer and seller

XV. Loan Brokerage Activities – Mortgage Loan Originator License

The SAFE Act

A MORTGAGE LOAN ORIGINATOR (MLO) is an individual who, for compensation or gain, or in the expectation of compensation or gain, takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan

XVI. Probate Sales

Probate Sales An executor possessing a power of sale under the

terms of a will may sell directly or through one or more brokers

Brokers wishing to work in probate sales must publish legal notice advising that the property is to be sold on specified terms and conditions, and that offers from interested parties are invited

Precise procedures must take place to properly complete a probate sale, brokers need to know and understand them well to complete the process

XVII. State of California Sales Opportunities

A. Subdivision Sales Opportunities

Intrastate Sales

Interstate Sales

B. Real Estate Investment Counselor

For brokers with considerable experience and knowledge, you can become a real estate investment counselor

A REAL ESTATE INVESTMENT COUNSELOR is the broker’s broker or consultant, doing for other brokers what those brokers cannot do for themselves, until their own knowledge and experience is of such magnitude as to qualify them for similar status

XVIII. Real Estate Brokerage – General vs. Specialization

General vs. Specialization

The sale of residential property accounts for about ¾ of the sales made by the typical realty office

As a brokers you may then choose to specialize in : A defined geographical section A certain price range Certain types of properties Exchanges Appraisals Property management

XIX. Manufactured Housing and the Licensee

A. Mobile Home Dealer vs Real Estate Broker

New manufactured homes cannot be sold by real estate licensees

Real estate licensees are not allowed to act as agents in the sale of mobile homes that can be used as vehicles on the highway

B. Marketing

Brokers may sell manufactured home that have been registered with the Department of Motor Vehicles for at least one year and are larger than 8 feet in width and 40 feet in length

Manufactured homes create greater title problems than ordinary real estate transactions

Chapter Summary• Why Invest in Real Estate?• Objectives• Capacity• Soundness

• Benefits of Investing• Tax Shelter• Appreciation• Hedge Against Inflation• Income• Interim Use• Stability• Control and Use• Refinancing• Amenities

• Financing Income Properties• Sources of Financing• Available Funds

• Your Role in the Investment Process• Apartment Prospecting and Marketing• Investment Planning and Counseling

Chapter Summary

• Residential Income Properties• Property Analysis• Analyzing the Rental Market• Study Area Characteristics• Characteristics of the Rental Market

• Syndication• Purchase Group• Brokerage Opportunities• Forms of Legal Organization

• Small Business Opportunities

• Selling a Business• Listing Agreement• UCC• Security Agreement and Financing

Statement• Sales and Use Tax• Assignment of Lease

• Valuation of Business Opportunities

• Tax Consequences

• Alcoholic Beverage Control Act

Chapter Summary• Ancillary Activities and

Specialty Roles• Real Property Securities Dealer• Notary Public Services

• Property Management Activities

• Escrow Activities

• Loan Brokerage Activities

• Probate Sales

• State of California Sales Opportunities• Subdivision Sales Opportunities• Real Estate Investment Counselor

• Manufactured Housing and the Licensee• Mobile Home Dealer• Marketing