Buying a Home Foreclosures Insight

Real estate foreclosure can be tactic, not tragedy

Sunday, June 05, 2005

By Elwin Green, Pittsburgh Post-Gazette

Foreclosure. For most people, the word is emotionally charged, layered with implications of the fear, despair and shame that can accompany the loss of one's home. Foreclosure represents the end of the line, the bottom of the barrel, the point at which things could scarcely get any worse.

So when a Downtown office building goes up for sheriff's sale as a result of foreclosure, and then a second, and then a third -- as is happening tomorrow with the U.S. Steel Tower, on the heels of Dominion Tower and Warner Centre earlier this year -- the conclusion seems obvious: Downtown is in shambles.

Well, not necessarily. In fact, for the commercial real estate investor, foreclosure may simply be a strategy for gaining title to a property, one of several that investors use to maximize profits and privacy, and to minimize taxes and risk.

In such instances, foreclosure is merely the final step in a process that may have begun years before, with an agreement between a property owner who wants to be rid of a property and an investor who wants to acquire it.

The process basically works like this: Instead of buying the property outright, the investor will buy the mortgage attached to the property. No cash goes to the property owner; rather, it goes to the lender that had been holding the mortgage. Now the investor owns the mortgage, and is entitled to receive the mortgage payments from the property owner.

The property owner then skips a mortgage payment, or several, giving the investor the right to foreclose. Upon foreclosure, the property goes up for auction at the sheriff's sale, where the investor places a bid for the amount of the mortgage plus costs.

Because the investor already owns the mortgage, the only out-of-pocket costs would be the processing and related legal costs associated with the sheriff's sale. If no one outbids the investor, then he or she -- or more likely the investment group -- takes possession of the property.

For the investor, the primary advantage of this process is that a sheriff's sale generally discharges any liens against a property (other than municipal tax liens). A second benefit is that the transaction is exempt from real estate transfer taxes, an exemption that was originally created as a concession for mortgage lenders.

"The concept is that the lender typically did not want to own the property, and that if they foreclose, they would at some point turn around and sell it, at which point there would be a transfer tax payable," said attorney Jack Barbour of Klett Rooney Lieber & Schorling.

In Pittsburgh, realty transfer taxes total 4 percent of the purchase price, so the exemption can save investors millions of dollars.

For instance, local real estate professionals peg the value of the U.S. Steel Tower from $200 million to $250 million. If it were sold for $200 million in the traditional way, the realty transfer tax would be $8 million. When the building goes up for sheriff's sale tomorrow, the holder of the mortgage, 600 GS Prop LP LLC, expects to take possession of it while avoiding the need to pay that tax.

If the parties want to avoid the publicity that a sheriff's sale can generate, the owner can grant the investor a deed in lieu of foreclosure. With this approach, as before, the investor buys the mortgage, and the owner skips one or more mortgage payments, giving the investor the right to foreclose.

But instead of going through foreclosure, the owner simply surrenders ownership of the property, handing over the deed to the investor in a transaction that is much quicker and simpler than foreclosure. It can be done "as quick as a lender and a borrower can agree to do it," Barbour said, while "a sheriff's sale is probably a minimum of six months."

Like foreclosure, this approach avoids the need to pay realty transfer taxes. On the downside, it does create more risk that other creditors may require the new owners to settle liens they have against the property.

For the property owner, these approaches have the disadvantage of not putting any cash into his pocket. But if a straightforward sale would not have generated enough cash to do more than pay off the mortgage anyway, they leave the former owner no worse off.

However, if there is a profit to be gained, the owner and the investor may agree on a different approach: Instead of the investor buying the property directly, he may buy the legal entity -- typically a partnership of some kind -- that owns the property. Control of the property changes hands, but the property itself doesn't, and therefore the transaction can be free of the realty transfer tax.

But it is not automatically so. In 1997, the Simon DeBartolo Group avoided paying nearly $2 million in transfer taxes when it took control of South Hills Village shopping center by buying out the mall interests of the New York State Teacher's Association. But in 2000, Allegheny County Common Please Judge Max Baer ruled that the transfer was subject to the tax. In 2001, Simon DeBartolo and the municipalities of Bethel Park and Upper St. Clair agreed to settle out of court.

The sale of CNG Tower (now Dominion Tower) in 2000 also was scrutinized because the investor group, led by Oxford Development Co., technically bought the partnership that owned the building rather than the building itself, thus avoiding $2.7 million in transfer taxes on the $82 million transaction.

Ira Weiss, solicitor for the Pittsburgh Public Schools, was among those doing the scrutiny. In the end, he said, "We decided that this transaction wasn't of a type and nature that was subject to real estate transfer tax." The state and county also reached the same conclusion, he added.

"Both the state and most municipalities have said that if more than a certain percentage of the entity's assets consists of real estate, then that transfer is taxable," Barbour said. The percentage that triggers the transfer tax varies by location.

Even so, he added, "The sale of entities can still provide opportunities for legitimately avoiding the tax."

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(Elwin Green can be reached at egreen@post-gazette.com or 412-263-1969.)

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Buying a Home Foreclosures- Buying a home foreclosures makes you generate quick profit. Step-by-step process in buying a home foreclosures for quick cash.

High Risk and High Reward in Buying a Home Foreclosures

Flipping high-risk, high-reward

Published by news-press.com on May 29, 2005

Last week I participated as one of several guests on a WGCU Radio talk show hosted by Ryan Warner, and the subject was about flipping real estate in Southwest Florida. The term "flipping" is a common name used by real estate investors who buy real estate with the intention of immediately selling the property and earning a fast profit. Some of the questions posed by listeners who called into the program were: How do you flip a property? Is flipping real estate profitable? Is now a good time to flip real estate?

Handling these questions was a diverse group of people with a wide range of real estate knowledge. The talk show program's guest panel included Dr. Shelton Weeks, professor of finance at Florida Gulf Coast University and director of the Lucas Institute for Real Estate Development and Finance; J.B. Novelli, real estate broker of Century 21; Terry Wayland of Progressive Realty Group; and me. Frankly, I was surprised at the number of listeners who called in with questions about flipping. So, I thought it would be a good time to talk about the concept in this column.

First, let me say that flipping real estate in a rapidly appreciating market can certainly be profitable but also risky. Do not confuse it with investing in real estate. In my opinion, it can be compared to day trading on Wall Street versus the Warren Buffett-style of long-term stock market investing. Neither style is right or wrong, but, they are very different in discipline and in risk versus reward tolerance.

One method of flipping real estate is buying at a pre-construction price, then selling at a build-out price, or purchasing building lots in a rapidly appreciating area. Some prefer to search for foreclosures or distressed seller situations that may offer properties at under market values and then resell them for fast profits.

The strong demand for property in Southwest Florida offers ample opportunity for flipping, and, over the past three years, this market has seen more flip transactions than ever before. The process is profitable because of the short hold period. So, the annualized rate of return can run extremely high. Some flippers never take title to the subject property and simply assign the contract to another buyer for a profit.

In a rapidly rising market, flipping can work well to generate high rates of return, but, buyers must realize that a marketplace cannot rise at double-digit rates forever. Most markets need a period of time when moderate appreciation or even a leveling off of values occurs to allow other segments of the local economy to catch up to real estate values.

The best advice I can give regarding flipping property is this — real estate is generally a long-term investment. And, time has proven that the prudent and patient investor is most likely to make money in real estate with the least exposure to risk. A flipper should be prepared to hold the subject property for an extended period of time, in case their original short-term plan does not pan out.

— Frank D'Alessandro is a real estate broker with D'Alessandro & Woodyard Inc. — Commercial Realtors. Readers may contact him via e-mail at fdalessandro@dw-cr.com or by calling 425-6000.
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Buying a Home Foreclosures- Buying a home foreclosures makes you generate quick profit. Step-by-step process in buying a home foreclosures for quick cash.