Lenders catching up on loan fraud backlog?

In the heyday of the 100% financing investment real estate market, fraud was really running rampant. One of the more common tricks was getting owner-occupant financing on a building, which the buyer had no intention of ever occupying. Nobody was getting called out on it, so more and more people started doing it.

Today is a different story. With all the checks and balances in the system, you’d be hard pressed to get away with that now. Some of these cash-strapped lenders are even getting so picky that they are looking back at old loans to figure out if any fraud was taking place.

I actually got a heads up on this issue from one of the tenants in a building I have ownership-interest in. The owner of the neighboring property did a rehab a couple of years ago and somehow got away with a non-historical porch and windows in the front of the project. We’ve been none too happy with his work and even less happy with the tenants he put in the building. I must confess that I wasn’t all that upset when I heard from our tenant that this guy was in trouble.

Apparently he financed his substandard rehab project with an owner-occupied loan despite the fact that this was a pure investment. I’m sketchy on the exact implications of this, but he now has this property for sale on the MLS. It’s way overpriced, so I’ll be curious to track what happens when he can’t sell this thing. Will they go so far as to foreclose on him or will they just renegotiate his loan?

The main question this situation raises is whether this is an isolated incident or if this is a sign of things to come? I suppose only time will tell. If you’re among those who financed this way, I would suggest you don’t wait to find out which way the wind is blowing.

Refinancing rates and terms are starting to open up again so it might be a good time to start thinking about making your loan legit. Under situations such as these, a lender has a right to call in a loan in full at any time. If that happens, the lendee (hopefully not you) might find themselves among the ranks of the recently foreclosed. Be careful out there.

How credit scores work

*NOTE - This article was originally written in September of 2006 for the newsletter.

All investors realize sooner or later that their credit score can have a major impact on what type of financing can be acquired when purchasing new properties. It happens all too frequently: the perfect property has been identified, an offer has been made, but the financing terms aren’t agreeable because the credit score hasn’t allowed for a lower rate or flexibility in terms. An investor’s credit score can greatly affect the type of financing options available.

Just what makes up a credit score? There are basically five categories that determine what one’s score will be: Payment history, Amounts Owed, Length of Credit History, New Credit, and Types of Credit Used. These five categories are weighted to compile an average credit score for a consumer, ranging from a low of 300 to a high of 850 (depending on the source, the average credit score is 678). The most heavily weighted categories are payment history and amounts owed, making up 35% and 30% respectively. Following payment history and amounts owed are length of credit history (15%), new credit (10%) and types of credit used (10%).

Since a credit score is a snapshot of one’s credit risk at a particular point in time, it figures that if there have been any recent late payments or there are many credit cards that are maxed out, one’s credit score will be affected negatively. It can be a slow process to improve negative credit, even though the scores themselves are quick to worsen when a late payment or bankruptcy is reported. In other words, it’s easy to lower a credit score, but not so easy to improve it.

Before putting a bid on a contract, it is best to have an idea as to what one’s credit score and overall financial profile will yield in terms of financing options. Contrary to common belief, credit scores are not affected by requests made by a lender in order to provide a prequalification. In fact, a borrower can have a number of lenders run their credit within a 14-day period, but it only counts against the credit score as one inquiry.

*Thanks to Alysa McLaughlin of Doering Mortgage on putting together this article. Give her a call at (636) 734-8396 or visit her on the web at loanmomma.net.

Raising your credit score

*NOTE - This article was originally written in August of 2006 for the newsletter.

According to myfico.com, “in a given three-month time period, only about one in four people has a 20-point change in their credit score.” Most credit experts agree that there is no such thing as a quick fix for bad credit. The best strategy is to manage credit responsibly over time. Here are some tips for raising credit scores:

• Pay your bills on time - Late payments, collections, etc., can have a major impact on a credit score.
• Get current and stay current on your payments - A higher score will be reflected when bills are paid on time over a longer period of time.
• Keep credit card and other revolving lines of credit low - Keeping the balances on credit cards and revolving lines under 50% of the balance can give a score a big boost.
• Pay off debt, don’t move it around - If debt can’t be paid off or paid down, don’t consolidate it onto one account where the balance is close to or at the limit. This can have a negative impact on your credit score. Keep a balance of 50% or less of the limit to keep credit scores higher.
• Closing an account doesn’t make it go away - Even though an account is closed, the payment history of that account will still report for years. The more time between the last late payment and when a credit report is run, the less it affects the score.

*Thanks to Alysa McLaughlin of Doering Mortgage on putting together this article. Give her a call at (636) 734-8396 or visit her on the web at loanmomma.net.

1031 Exchange: The when, the why and the how

*NOTE - This article was originally written in July of 2006 for the newsletter. This article was actually provided by Greg Schowe of Asset Preservation, Inc. (www.apiexchange.com)

The burden of capital gains taxes can take a bite out of your profits, when it comes time to sell your investment property. When an investment property is sold, any unsheltered capital gains will be subject to significant taxation. One method you can employ to avoid this problem, is to utilize a §1031 tax deferred exchange. If used properly, this method is capable of indefinitely deferring the payment of capital gains taxes.

WHAT IS IRC SECTION 1031?
Section 1031 of the Internal Revenue Code allows an owner of investment property to exchange property and defer paying federal and state capital gain taxes (up to
15% Federal, 25% depreciation recapture and applicable state taxes) if they purchase a “like-kind” property following the rules and regulations of the Internal Revenue Code. This allows investors to use all of the sale proceeds to leverage into more valuable real estate, increase cash flow, diversify into other properties, reduce management or consolidate holdings.

WHAT IS “LIKE-KIND” PROPERTY?
There is some confusion regarding what type of property qualifies for a §1031 tax deferred exchange. The Internal Revenue Code Section 1031 states that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” “Like-kind” property can include, but is not limited to, any of the following, provided it is held for investment:

• Single Family Rental
• Duplex
• Apartment
• Commercial Property
• Raw Land

For example, raw land can be exchanged for a single family rental, or apartments or a commercial building. Properties can be exchanged anywhere within the United States.

DOES AN EXCHANGE NEED TO BE SIMULTANEOUS?
No, contrary to what some property owners envision, a §1031 tax deferred exchange is rarely a two-party swap. Most exchanges are delayed exchanges, whereby the Exchanger has 180 days between the sale of the relinquished property and the closing of the replacement property. They must identify the potential replacement property (or properties) within 45 calendar days from closing on the relinquished property.

WHEN IS A §1031 EXCHANGE APPLICABLE?
It is applicable whenever a property owner intends to sell any property that is not their primary residence (and falls under the definition of “like-kind”) and plans to buy another “like-kind” property within 180 calendar days following the closing of the relinquished property.

Paramount to any exchange is a competent and experienced Qualified Intermediary. Greg Schowe of Asset Preservation can provide this experienced guidance to ensure your transaction runs smoothly from beginning to end. Contact Greg at 314.369.8766 or greg@apiexchange.com for more on how you can make the §1031 exchange work for you.

Asset Preservation, Inc. does not give tax or legal advice. The information on this page should not be relied upon as a substitute for tax or legal advice obtained from a competent tax and/or legal advisor.

Federal & State Historic Tax Credits in St. Louis

Don’t forget to consider utilizing Historic Tax Credits when remodeling your home or investment property. Federal and State credits could allow you to have a much as 45% of your construction costs reimbursed after project completion.

When applying for Historic Tax Credits a lot of paperwork and record keeping is involved. However, if you do not wish to do this yourself, this work can be outsourced. There are a growing number of Tax Credit Consultants in the St. Louis area that will handle this work for you. Their fees generally begin at around $1,700 depending on the size and length of the projects.

These credits are available in a growing number of South City neighborhoods including parts of Benton Park, Benton Park West, Soulard, Gravois Park, Dutchtown, McKinley Heights, Lafayette Square, Forest Park Southeast among many others. If your property is not in a National Historic District you may also petition to for your property be listed as individually historic.

For more information on tax credits check out the links below or contact the St. Louis Cultural Resources office at (314) 622-3400.

Federal Tax Credit Website
Missouri Tax Credit Website
Rehabber’s Club Tax Credit Website