Let’s take a look at some of the conditions that have created this perfect storm.

State of the National Real Estate Market

Home affordability is a valid indicator as to whether investing in real estate is a good idea. Opinions are mixed on this one. Housing affordability has remained high over the past four years, according to the National Association of Home Builders chairman Rick Judson. “The HOI [Housing Affordability Index] has not slipped below 70 since the end of 2008,” he claims.

All well and good, but what does the future hold? “That said, from a builder’s perspective, it should be noted that rising costs for building materials, lots and labor are making it somewhat more expensive to construct new homes in today’s market,” Judson cautions.

Seattle Bubble’s Tim Ellis, on the other hand, sees affordability “tanking” in 2013, at least in his corner of the Washington state housing market.

“We’re definitely on an unsustainable trajectory right now, and the affordability index is only good thanks to still-crazy-low interest rates,” he writes on his blog. “Hopefully prices will level off before things get really out of hand.”

Finally, Lawrence Yun, chief economist for the National Association of Realtors® warns that “Inventory conditions are expected to remain fairly constrained this year, so overall price increases should be well above the historic gain of 1 to 2 percentage points above the rate of inflation.”

The takeaway? Watch interest rates. If they remain low, house payments as a percentage of income will remain low. If you’re a flipper, you’ll have customers.

Shadow Inventory

Hey, how about that shadow inventory that never showed up? It’s still out there, according to many experts, but none of them expect it to hurt the housing market. In fact, listing agents nationwide would be thrilled to have the extra inventory.

As of January 2013 the shadow inventory contained 2.2 million units, according to CoreLogic. That number represents an 18 percent drop over the previous year’s figure.

Las Vegas, once the poster child of foreclosures, has seen a 30 percent rise in home prices over the past year, and the foreclosure rate is now at 14.1 percent. Fewer homeowners are underwater, and banks are more willing to work with those who are “living in shadow inventory homes,” says Luis Lopez with the Lied Institute for Real Estate Studies at the University of Nevada at Las Vegas.

In March of this year, California was home to 69,000 bank-owned homes. While that may seem high to some, it represents 28 percent fewer REOs than seen in March of last year, according to Daren Blomquist, vice president of RealtyTrac. To put it in even more perspective, Blomquist claims that in November of 2008, there were 245,000 bank-owned properties in California.

In the Sacramento area, there were 5,816 bank-owned homes at the end of March. Banks are selling an average of 2,381 such homes a quarter – or roughly every three months.

Florida, another area to watch, has a 19-month inventory of bank-owned homes, but they’re being sold off to investors – especially the international variety – at a rapid pace.

Just as experts foretold when the term “shadow inventory” was being heavily bandied about a few years ago, banks are releasing the homes in drips – about 25,000 homes per quarter, according to Blomquist.

For the Buy-and-Hold Investor

The best news for the buy-and-hold investor is a hot rental market that shows no sign of cooling off. At the end of last year, nationwide vacancies were at 4.5 percent.

In some cities, such as San Francisco, rentals are at a premium and folks line up hours in advance of a showing. Development-crazy Miami saw a rent increase of 10.8 percent year-over-year and a 4 percent vacancy rate.

Finally, according to a study by Demand Institute, a consumer research organization, 50 percent of people planning to move within the next two years report that they won’t be buying a home, but will rent instead.

Why the Economy/Real Estate Market is Good for Investors:

• As long as interest rates remain low, investors can buy and sell to consumers who are still able to afford homes.
• The average number of days it takes to sell a home has dropped dramatically. In April of this year homes remained on the market 46 days, on average, down from 62 days in March and 20 percent since last year.
• Sellers are receiving offers closer to (if not greater than) the list price.
• Conditions are ideal for purchasing homes with multiple financing options available, including FHA and VA loans.
• Mortgage insurance regulations imposed in 2003 to prevent the practice of flipping properties that will be financed with FHA-insured mortgages have been waived through the end of 2014.

It’s every investor’s hope that steadily rising home prices at the national level means that all types of real estate investors – from flippers to the buy- and-hold variety – will see their properties appreciate in value in the coming years. Although it’s too early to know for sure, it appears their hopes will be the reality for the 2013 real estate investor.

“I’ve been doing this a long time, and I’ve never seen a market like this,” said Tom Pool, spokesman for the California Department of Real Estate.

AOL’s Hot Markets for Investors:

• Atlanta: Home prices are 20 percent below historic norm and 50 percent get multiple offers.
• Chicago: Prices are 17 percent below historic norm, with 51 percent receiving multiple offers.
• Las Vegas: Sin City homes are priced 14 percent below historic norm, multiple offers are not yet common but homes are selling for 101 percent of list price.

MarketWatch claims that those cities that have demonstrated sustained economic growth typically offer a lucrative housing market. Some of their favorites include:

• Austin, Texas
• Boston, Mass.
• Houston, Texas
• San Jose, Calif.
• Portland, Ore.
• Washington, D.C.
• San Francisco, Calif.
• Bridgeport, Conn.
• Salt Lake City, Utah
• Raleigh, N.C.

This guest post was written by Shannon O’Brien, a staff writer for Market Leader. Her first love was real estate and she has over a decade of residential listing and sales experience.

You may be paying too much in property taxes. Property taxes are based on an appraisal the tax assessor provides on every piece of real property in its jurisdiction. The higher your tax appraisal is, the more your property taxes will be. Too often, in political circles, the focus is on tax rates. When it comes to property taxes, there are two parts to the equation; tax rate AND tax appraisal. The quieter, less politically disruptive approach to raising property taxes is to raise tax appraisals. And sadly, many property owners get excited when they see a higher tax appraisal because they think their property is worth more. One’s reaction to a higher tax appraisal should be the exact opposite because it signifies an increase in property taxes. In fact, what you’re about to discover is how local governments have been fleecing property owners and what you can do to stop paying too much in property taxes.

How Government Spending Works

As you may be aware, governments handle their finances in a very peculiar way. They base their money matters on budgeting, and more specifically, on how much each department spends each year. If a particular department spends their entire budget, they will typically get that same amount the following year. Then, as new initiatives and programs arise, budgets increase. And so long as those new programs spend their entire allotment (which, it turns out, people are quite adept at spending money), typically they get at least that same amount the next year. My mother worked in local government for a short time and she couldn’t understand why the local government demanded she spend all the money that her department was allotted when she didn’t need to spend it all. Her superiors would tell her that it was the way government worked and if she wanted her full budget next year, she needed to spend all the money allotted to her that year, even if it was wasteful.

That’s what is so interesting about how governments spend money. Rarely do they spend less because the way the system has been established is to encourage wasteful spending. In most cases, government budgets grow and grow, year after year, regardless of economic conditions, population changes or market adjustments. But what if the economy shrinks dramatically? Much like a business that has to tighten its belt when times get lean, shouldn’t a government do the same? Ahhh, good question.

Why You May Be Paying Too Much in Property Taxes

The real estate bubble of the past decade has created an interesting phenomenon in property tax assessment. As the property values rose dramatically in the mid 2000s, tax appraisals went up accordingly. Local governments boomed. Money was flowing in for new projects and new initiatives. Cut backs turned into budget increases. Life was good. But as we now know, their was a big storm brewing. Then, like a freak thunderstorm, the real estate bubble burst and property values began to plunge.
Local governments had meanwhile become quite accustomed to the larger income streams coming from the higher tax appraisals. When the real estate market began to tank, surprisingly, tax assessment offices didn’t jump to re-assess property values. Rather, they made no sudden moves and perhaps hoped it was just a temporary adjustment and not a sign of things to come. But it was just the beginning. In some areas, property values dropped as much as 50% or more over the course of the next 5 years. It turned out to be the biggest “correction” in real estate values in American history. All the while, local governments didn’t bring down the tax appraisal amounts to match the drop in market values.

Today, there are property owners paying way too much in property taxes because their tax appraisal is far higher than the actual market value. I spoke with a seller yesterday who was adamant about selling his property for the tax appraisal amount but the problem was that the tax appraisal was $45,000 more than the market value of his property. I showed him comparable sales to prove it. When it finally dawned on him that he had been paying too much in property taxes for the past several years, boy was he mad! Are you in the same boat as him? Is the tax appraisal on your property MORE than the market value?

How to Lower Your Property Taxes

If you have the unfortunate situation of having a higher tax appraisal than the current market value of your property, there is a way to avoid being the victim of overpaying in property taxes. You will need to make an appeal to your tax assessor for a re-assessment of your property’s tax appraisal. Provide comparable sales to prove your point. Each county handles re-assessments differently. In many cases, you have a very short window each year in which to appeal. But even if you can’t take advantage of this strategy today, set a reminder for yourself for when you can. And hopefully in the near future, by following this, it will help prevent you from paying too much in property taxes.

You’re about to discover the WORST Way to invest in real estate. Rather than focus on what to do, you’ll going to learn what NOT to do. Oftentimes, bad real estate deals turn into fabulous learning lessons. For example, if you bought properties the traditional way in the mid 2000s, you may have discovered that real property doesn’t always go up in value. But even better is when you don’t have to go through the heartache and trouble yourself. Instead, by observing the mistakes of others, you can drew valuable lessons from others experiences with investing in real estate.

Before the worse way to invest is revealed, perhaps its helpful to point out why I am uniquely qualified to share this message. Three reasons. One, I am a full time real estate mentor, coach and trainer, having worked with thousands of real estate investors on thousands of deals. From videos, blog posts, podcasts and even my book, you can probably recognize that this ain’t my first rodeo. Two, I field hundreds of questions from people with real estate problems weekly. I’m a huge magnet for helping people with their sticky real estate investing deals. Three, I buy real estate from distressed real estate owners. People who really want to get rid of their property usually have a story to tell. So when you combine all this, it becomes clear that I have been exposed to a TON of real world real estate situations. And oh, the stories I have heard…. I have been very fortunate to have been exposed to what works and what doesn’t at a level most people will never have the opportunity to experience in an entire lifetime.
The WORST Way to invest in real estate is….

To Get Involved in Deals You Don’t Fully Understand

Real estate is unlike many other common investments. For example, stocks. If you invest in stocks, what’s the worst case scenario? You lose all your money, right? What is the worst case scenario with certain real estate deals? With real estate, not only can you lose all the money you put into the deal, but you can also sustain additional loses if you borrowed money and some of that borrowed money was lost. Plus, real estate is more hands on and requires more ongoing effort on your part. With stocks, once you buy it, your management role is done. Sure, you may want to keep tabs on the company to make sure you should hold on to the stock, but with real estate, you have to manage the property (or manage the property manager). So a bad real estate investment can cost you more than just your original investment. It can take up a ton of your time too.
NOTE: This training is not meant to scare you, but to better inform you how to invest in real estate wisely.

“To Get Involved in Deals”

My definition of getting involved in a deal is when you put your own money or credit, or both, into a deal. If you creatively invest, and avoid putting cash or your credit into the deal, technically, if the deal goes sour, you have little downside risk (time being the only thing lost). For beginners (and even seasoned professionals), creative, low risk investing is a great way to avoid getting too involved in any one deal. Most people are not educated on how to creatively invest so they put their own money, their own credit, or both, on the line when they invest in real estate. And that is what it means “To Get Involved in Deals”.

“Deals You Don’t Fully Understand”

If you don’t know the absolute worst case scenario, if you can’t answer with certainty “What’s the worse that can happen?”, you don’t fully understand a deal. The list of investors who have fallen victim to this, is long and distinguished. Developers who have strayed from their normal development projects in search of greener pastures or simply out of greed, have learned this lesson the hard way, some having lost their entire fortune, going from the penthouse straight to the poorhouse. Turn key property buyers who have purchased pre-rented, already managed rental properties half way across the country sometimes come to regret buying “already cashflowing” property. Landlords who are barely hanging on financially who get a bad tenant who lives for free for several months become fully aware of the worse case scenario. Rehab projects that end up half way done because a contractor walked out on them, or a building inspector required work be ripped down and done over, are a dime a dozen. Tax lien investors who discovered that getting the property back at tax deed sale was not all that it was cracked up to be and now they are stuck with a basically unsellable property that they now have to pay property taxes on. And that is just the beginning of such a list of situations where the investor didn’t truly understand what the worst case scenario was when they got involved in the deal.

The Danger of Getting Lucky

Some investors jump in with both feet, get involved in deals that they don’t fully understand, and they still manage to end up on top. Have you ever experienced that yourself or know someone who did? That’s called “getting lucky”. And it can be quite dangerous because it gives the investor a false sense of reality. Chances are, they will go bigger on the next deal and that’s when things can come crashing down. Many investors in the mid 2000s ran into this situation. They may not have been aware that they were in the midst of the biggest real estate bubble in history. Like musical chairs, they dance around, buying properties then re-selling them for much more money, and real estate investing seemed almost too easy. Then, they re-invested their earnings and wham, the market collapsed and they not only lost their original investment, but their properties either went to foreclosure or short sale and may have created deficiency judgments. If you are one of those people, my heart goes out to you and I hope that it doesn’t scar you for life because that is a great experience to grow from. There is a right way to invest in real estate too.

How to Invest in Real Estate the Right Way

Get involved in deals that you fully understand. That requires education. Or, don’t get fully involved in deals by avoiding using your own cash or credit, even if you don’t fully understand the deal. That requires education too. No matter how you slice it, if you truly want to succeed as a real estate investor, you have to educate yourself. For those who have absolutely no desire to learn anything new, you can still invest in real estate by buying shares of a publicly traded Real Estate Investment Trust (REIT), but don’t expect gigantic returns either. If you’ve read this far though, you probably don’t fit into that category because obviously you want to educate yourself. And the best way to learn anything is with a mentor. You can’t learn to ride a bike by reading the manual. The short cut to truly educating yourself in real estate investing is to work with a mentor, or team of mentors. To learn more about how you may qualify to work with my team, apply to be my next apprentice.

And I have a small favor to ask you as well. Could you share with me any examples of real estate deals that have gone really bad? We can all gain from hearing the war stories, the horror stories, the how NOT to invest in real estate.

Goal setting for real estate investors is critical for achieving what you hope to accomplish in real estate. Several studies have proven the effectiveness of goal setting. When you have your destination in mind, you’re just, flat out, far more likely to actually get there. But are you setting goals correctly? And if you are setting goals, is there anything you’re missing that could take you to the next level? What you’re about to discover is how real estate investors should set goals.

Setting Real Estate Goals Correctly

Although there are far more exhaustive descriptions of how to properly set goals, here is how to set real estate goals correctly. Picture goal setting like performing a Google search. The more detailed and descriptive you are, the more accurate your results will be. However, if you are overly detailed, Google may return no results. There is a balance of the degree of description to hit the sweet spot.

A common real estate goal some new investors make can sound like this, “I want to do my first deal within 3 months.” Let’s dissect this:

1. Timeframe: Giving the goal a timeframe, in this example, 3 months, is excellent. Every goal requires a timeframe. A goal with no planned completion date is just wishful thinking.

2. Specific Result: A result of, “doing my first deal,” is not specific enough to be helpful. In fact, it could be detrimental. For example, you could do your first deal and lose $20,000. That’s probably not what most people would define as a “deal”. Instead, this goal should be much more specific, such as, “Buy my first positive cash flowing rental property that earns at least $100/mo without using my own cash or credit” or “Close my first deal and earn $5,000 or more.”

3. Avoid Detailing the “How”: This example also correctly avoided detailing how the specific result would be achieved within the planned timeframe. Why can detailing the how be such a problem when goal setting? Overly detailing how you are going to achieve your goal can inadvertently pigeon hole you into very few options for making the goal happen. A good example of this occurs when a beginner makes the goal, “Do my first wholesale deal and earn $5,000 within 3 months.” The problem is that this goal restricts this person to just wholesaling. What if a wholesale isn’t your fastest and best route to money?

I recently spoke with a beginner who shared this goal with me and then later in the conversation, said that he got his real estate license but he had no interest in helping a buyer find a home, even if it was a doctor looking for a $500,000 home. Huh? Quick math would reveal that 3% of $500,000 is $15,000. Why would anyone who wants to do a wholesale deal and make $5,000, have an issue with making $15,000 as a buyer’s agent? Money is money. It all spends the same. In fact, if you are licensed, representing a highly motivated retail buyer of a large home can be quick and easy money. Far too many investors, either through pride, or arrogance or just plain ignorance, can get too pigeon-holed in their thinking of how they are going to reach their goals.

4. Review Often: This is perhaps the biggest mistake goal setters make, they write down their goals and then never read them again! At a minimum, review your goals monthly, but far better is once per week. When you review them, ask yourself how far along are you in reaching each goal. Think through what adjustments, if any, should be made to make sure you hit the goal. If you don’t know, ask yourself, who should you ask? What can you read? What can you do differently to get closer to your goal?

Note to Christians: For Bible believing Christians, the most important step in goal setting is to pray for the Lord to reveal to you what His goals are for you. There is an old saying, “If you want to make God laugh, tell Him your plans.” Christians throughout history have discovered that setting their own goals that they think will also serve God were not nearly as productive as asking God want He wanted for their lives and then pursuing God’s plans. Phil Vischer, creator of the wildly successful Christian cartoon VeggieTales, learned this lesson the hard way. His book, “Me, Myself & Bob” is fascinating and a great book for any Christians in business.

Danger of Expectations

Expectations are very different from goals. Expectations can be very dangerous. In his book, Man’s Search for Meaning, Victor Frankel describes a discovery he made while imprisoned in a concentration camp during the holocaust. He watched who survived and who didn’t make it. Who were the first to die? The people who set expectations by telling themselves, “We’ll be out by Christmas.” Well, Christmas would come and go and they would still be locked up. Their spirit would be crushed and they would lose the drive to survive. The future is unpredictable and their are many things that are outside of your control. An example of creating an expectation for real estate investors would be to plan on quitting your job in 6 months. Certainly that can be a goal, bu if 6 months comes and goes and you are still at your job, that should crush your spirit or reduce your enthusiasm.

When You Don’t Reach Your Goals

When you don’t reach your goals, rather than get discouraged, ask yourself what you need to do differently in order to get there? Who do you need to ask? What do tou need to learn?
If your lack of results is bringing you down, you can also take a page from the Holocaust concentration camp survivor book. Associate meaning to your challenges. Frankel found that the people who associated their experiences to something of deeper meaning, such as ensuring such human atrocities would never happen again, were the most likely to survive. Rather than ask yourself the destructive question, “why does this always happen to me?” instead, tell yourself that the roadblocks you have hit, have occurred for a reason. You may not know exactly why you have struggled, but attributing meaning and purpose will ensure you grow from your experiences and become that much more equipped to achieve and exceed your goals.

There are many different ways to save on real estate investment taxes. Rather than bog you down with the minutiae of tax savings tips such as keeping track of gas mileage for every trip to see a property, you’re going get the most powerful, most effective 5 ways for real estate investors to reduce their tax liabilities. And sorry, you’re not going to be given any creative deductions like writing off cruises to the Caribbean or setting up offshore accounts in tax sheltering countries. The following 5 tips are tried and true methods that allow investors to pay the least amount in real estate investment taxes year after year. Are you ready? Disclaimer: This is not accounting advice nor is the author a licensed tax professional. Consult a licensed tax adviser for any tax or accounting related advice.

1. Hire a CPA that Invests in Real Estate

First and foremost, you should hire a Certified Public Accountant (CPA), preferably in your local area, although not completely necessary, who also invests in real estate on the side. Ideally, this person both earns passive income with rental property and creates earned income from buying and selling, or flipping, real estate. Not hiring the right CPA will cost you more in taxes than anything else. When you are making good money, a solid CPA will pay for themselves many times over.

Finding the right CPA can be as simple as asking other real estate investors in your area who they use. However, sometimes your competitors aren’t interested in telling you who they use. In which case, you can also try asking other people on your team, such as closing attorneys, real estate agents, mortgage brokers, and the like, if they know of any CPAs that also invest in real estate. Local real estate investor clubs could even have a CPA as an advertiser in their newsletter. It may take some time to find this person, but it is well worth the search effort. Try not to get discouraged if not a single CPA you talk to owns their own real estate. These types of CPAs do exist out there, you just may need to be persistent.

2. Separate Short Term & Long Term Investing Activities

The first piece of advice my CPA shared with me was to separate earned income activities, such as my flips, wholesales, assignments and rehabs, from my passive income rental properties. He didn’t want my rental income to get taxed as earned income. This is critically important for those just starting out because if you own a rental property in your personal name, and then start doing some flips in your personal name too, that could cost you a lot in taxes. Therefore, if you own a rental property in your personal name, set up another entity to do your flips and wholesales.

What type of entity should you set up? There isn’t a one-size-fits-all answer to such a question. For example, I’ve seen trainings on “the power of the LLC”, which may have some valuable insight. But try telling that to Mr. Barrett in Nashville, TN, who owns over 300 single family homes free and clear in his personal name. Do you think a man that wealthy is missing the boat and should own his properties in an LLC? Nope. It turns out, in Tennessee, if you own real estate in an LLC, you are charged an extra 2.5% franchise and excise tax per year on the total value of the assets owned by the entity. That’s $2,500 per $100,000 property you own per year, even if you have a loan on it for $100,000! The State of Tennessee F&E tax alone can eat up all of a real estate investor’s cashflow. However, sole proprietorships and general partnerships are exempt from that F&E tax. Mr. Barrett isn’t quite so dumb now is he? (In case you were wondering how Mr. Barrett protects his real estate portfolio from potential lawsuits of those 300 tenants, he uses a general liability insurance policy.) Meanwhile, for short term investing activities, you may, indeed, opt for an LLC or perhaps an S-Corp. Who should you ask for clarity on which entity to set up for your short term as well as your long term investing activities? You guessed it…your CPA.

3. Get Organized

The IRS severely punishes disorganized business owners. The list of unorganized entrepreneurs who are either in prison or are no longer rich is both long and distinguished. There are several skills required to be successful in real estate; from finding good deals, to structuring deals so that everyone wins, to executing the most profitable exit strategies. In addition to those skills, you also need to have your books in order. Welcome to the wonderful world of being rich. You have to account for your riches

Every expense and income needs to be organized into a system. Quickbooks is the standard in small business bookkeeping management. There is now even an online version of Quickbooks that is very inexpensive. If you don’t want to learn how to use Quickbooks yourself, hire a bookkeeper. There are plenty of bookkeeping services out there and many charge a very reasonable fee.

When your books are organized into Quickbooks, you also activate the true power of a CPA. Investors that bring a shoebox full of receipts to their accountant once a year miss out on all the creative ideas a tax professional can unleash when you have everything in an easily accessible digital format. In essence, you are allowing your CPA to do his/her job the best way that they can when you organize your books digitally. You wouldn’t provide a painter with a toothbrush to paint your house, would you? That’s effectively what you are doing when you don’t use a system like Quickbooks.

When you begin to get your books in order, you may discover that you are co-mingling personal and business transactions in the same accounts. That’s a big no-no. Every business deposit and every business bill should be transacted through bank accounts and credit cards specifically set up for the business. There is a huge shortcut whereby certain banks like Bank of America and certain credit card companies like American Express integrate with Quickbooks so you can click one button and automatically import all of the transactions. So if you don’t already have a separate bank account or credit card set up for your real estate business, when you go to get these, make sure the bank or credit card integrates with Quickbooks. It saves hours and hours of time each month on bookkeeping duties, which even if you hire a bookkeeper, will still save you money on the costs of their services.

When your books are organized, you can also see clearly what is going on in your business. I learned a whole lot about where the real profits are made in real estate after studying my Quickbooks P&L reports. Your biggest and easiest profits don’t always originate from where you think. For example, I discovered the secret to flipping houses was, in most cases, to wholesale the deal to a contractor investor buyer rather than rehab it myself. I also realized just how potent retail wholesaling was. These were breakthroughs that have earned me a fortune since then…all because I took the time to get organized.

4. Own Some Rentals

Rental income is extremely tax advantaged money. It stems from this wonderful deduction the IRS allows you to take called Depreciation. For a single family rental property, the IRS allows you depreciate the tax basis amount of the property (the amount you purchased the property for minus the value of the land) over 27 1/2 years. For example, let’s say you buy a $100,000 rental home that has a land value of $10,000. Your tax basis would be $90,000 ($100,000 sales price – $10,000 land value). When you divide by 27 1/2 years, you get a tax deduction of $3,272.73 each year. That’s a significant “expense” to have on your tax return! Then, let’s estimate that after all normal rental property bills, including maintenance, you’re left with a positive cash flow of $270 per month. The $3,273.73 in depreciation each year would completely offset all of your positive cash flow. So essentially, you wouldn’t be paying any income taxes on your rental income! It’s incredible. Plus, as your property increases in value, you’re not paying any tax on the appreciation (so long as you don’t sell it). Rental property is one of the most tax advantaged ways to earn money in the United States.

5. Earn Money Like the Ultra Rich

Have you heard folks like Warren Buffett (one of the world’s wealthiest people) share that percentage-wise, he pays less in taxes than his secretary? Or perhaps you remember during the presidential election the big stink that was made over how little Mitt Romney paid in taxes? Technically, the majority of richest people in this country pay a very large total sum in taxes. In fact, the wealthiest 20% in America pay for nearly 70% of the total tax revenue. However, on a percentage basis, the rich pay far, far less than the middle class. Why? Because the wealthy earn some (or all) of their income through investments as opposed to W2s and 1099s created by working for other people. Rental property is one such investment that allows the wealthy to earn great money but not incur a heavy tax liability. Another example is when you sell your investment property after more than one year of ownership. You may incur a long term capital gains tax (15%…soon to be 20%) as opposed to ordinary income tax (15% – 35%+). One example of how this is applied in the real world is when you buy a property, fix it up, and then sell it on a 13 month Rent to Own so that the tenant buys the property in little over one year. The net profit can then potentially be considered a long term capital gain. Not only is your tax liability potentially much less, but you also can usually sell a property on a Rent to Own for top dollar and you typically don’t have to pay real estate commissions. That’s a winning combination!

Another creative way to earn money like the ultra rich is with a 1031 exchange. When you sell a rental property, you can defer your profits from being taxed by doing a 1031 exchange. In simple terms, this is the real world example of what you do in the game of Monopoly when you exchange 4 green houses for 1 red hotel.

How can the richest people in this country pay the least percentage-wise in taxes? They earn their income from investments as opposed to jobs. Shouldn’t you be earning more of your income from investments?

Those are the top 5 ways to save on real estate investment taxes. Do you recommend any other ways to save on real estate investing taxes?

IRA real estate investing is a great way for people to invest in real estate in their retirement account. Have you ever heard of buying real estate in your IRA or 401K? If not, you’re going to be pleasantly surprised to discover that you have more retirement investment choices besides mutual funds and real estate can be a great place to grow your nest egg. If you already have some knowledge of investing in real estate in your IRA, hopefully you’re opened minded because you’re about to discover what most real estate investors will never know about IRA real estate investing.

IRA Real Estate Investing 101

The traditional and most popular way that most investors IRA real estate invest is to use a self directed IRA. IRS regulations require either a qualified trustee or custodian hold the IRA assets on behalf of the owner. If you have an existing retirement account with your employer, for example, you could roll over some or all of it into a self directed IRA managed by a custodian. Further, any future contributions you would want to make would need to be sent to the custodian as well. Then, anytime you wanted to make an investment, you would contact your IRA custodian and they would instruct you on what to do and how to do it. In other words, custodians are chaperones that watch over and approve any moves you makes. And they typically get paid on an annual basis based on how much money you have in your account. The more money, the higher the fees.

Little Known Alternative to the Self Directed IRA

Self directed IRAs have been the standard for real estate investors who want an alternative to stock and bonds in their retirement portfolio. But there is a little known alternative to the self directed IRA that can be a much better choice for active real estate investors that very few people know about. It has many benefits over the self directed IRA, which you’ll discover here shortly. It’s called a solo 401K, also known as an individual 401K or i401K.

Solo 401K Benefits

Here are the main benefits of the solo 401k over the self directed IRA for IRA real estate investing.

• Checkbook Access & Control: With a solo 401k, you are setting up your own 401k for your company and therefore, you can be the administrator. This will give you complete control over the bank account so you will have have the ability to write checks whenever you want. Direct checkbook access and control is much more efficient than having to go through a custodian for your every move. For example, what if you find a great deal and want to give a seller earnest money on the spot to secure it? With a solo 401k, you can cut the check right then and there, whereas with a self directed IRA, you have to wait for your custodian to give you the green light which could cause you to lose the deal.
• Leverage:You can apply the power of leverage by obtaining a non-recourse loan to help with the purchase and you will not incur the Unrelated Business Taxable Income (UBTI) issue like with a self directed IRA. This gives you greater opportunity to do more deals with less expenses.
• Less Restrictions: You can contribute more per year with a solo 401k over a self directed IRA and there are no income limits for Roth contributions. This helps those who want to sock more money away as well as those with high incomes.
• Second Chances:If you screw up and conduct a prohibited transaction, you can fix it with an i401k whereas with a self directed IRA, making a mistake typically leads to a liquidation of the plan. There are no second chances in the self directed IRA world.
• Lower Fees:The costs to maintain it are much cheaper than having to pay a custodian each year as a percentage of the amount in your account.
• Borrowing Capabilities: And perhaps the favorite above all of the other benefits is the ability to borrow from it, up to $50,000. And you can do whatever you want with the borrowed money so long as you pay yourself back (since technically, you are taking out a loan from yourself).

You may be asking yourself, “If a solo 401K is so much better than the traditional self directed IRA, why haven’t I heard of it until now?”. First, it is relatively new, only coming into existence in 2001. A lot of people simply haven’t ever been introduced to it. Second, it isn’t as well known and typically, advisors advise clients on what they know best. Third, self directed IRA custodians can potentially make far more money off of people who have self directed IRAs versus solo 401Ks. Since you are the one handling all of the transactions yourself, there is less of a need to pay them for every little move you make. Fourth, it doesn’t fit for people who don’t have their own small business. And that’s what you’ll need to know next…the requirements.

 

Solo 401K Requirements

With a solo 401K, meeting the requirements can be ideally suited for real estate investors.

• Small Business: You need to have a small business. It doesn’t have to even be an LLC or Corp, it can be a sole proprietorship or partnership, but a small business nonetheless and that’s what most real estate investors have.
• Earned Income: You need the intent, or already be, creating some earned income as opposed to just passive income from rental property. Many real estate investors fit this requirement because a flip, a wholesale, a rehab and resell, an assignment, a commission or a property interest release fee can all be considered earned income.
• No Full Time Employees: You cannot have any full time employees outside of a spouse although you can have 1099 independent contractors as well as part-timers. any real estate investors are sole practitioners while other may have a 1099ed assistant.

There are some others, but those are the major requirements, and as you can see, its almost tailor made for real estate investors.

 

Solo 401K Drawbacks

As with anything, there can be some drawbacks.

• Competent Help & Support: Very few people and/or companies really know what their doing when it comes to setting up and supporting a solo 401K for real estate investors.
• Bank Account Set Up: It can be challenging to set up the bank account for an i401k because some bank officers simply don’t know how to set them up.
• Title Insurance: Some title companies run into difficulties with getting their underwriters to approve the issuance of title insurance when the purchaser of the property is an individual 401k.
• Personal Discipline Perhaps the biggest drawback is also the i401K’s biggest strength…relinquishing the custodial middleman for yourself. Some people have difficulty maintaining personal discipline when it comes to money. You CANNOT use the account for personal use. Co-mingling funds is a very big no-no in the world of self directed retirement accounts. So if you are the kind of person who spends every penny they earn and has little-to-no self control with money, perhaps you are better off leaving a custodian to watch over your nest egg because you may not possess the personal discipline necessary to protect it yourself.

All in all, this is not a very big set of drawbacks, especially when you are working with the right people to get it set up and administered. If you are serious about setting up a solo 401k, email me at phil at freedom mentor dot com and I can email-introduce you to the guy who has forgotten more about individual 401ks than most people will ever know. He knows how to get it set up with the right paperwork, get you connected to a bank that will get the bank account opened quickly and easily and he has the materials you need to educate title companies on how to close and issue title insurance on solo 401k transactions. Again, this introduction is only for those who are serious about setting up a solo 401k.

 

IRA Real Estate Investing Conclusion

Die-hard self directed IRA supporters have been able to acquire “checkbook power” by setting up an LLC in conjunction with their IRA. But that requires setting up and paying the annual fee for an LLC which, in California for example, is upwards of $800. Plus, these staunch self directed IRA defenders still miss out on all the other great benefits of a solo 401k. Meanwhile, nimble and open minded investors are IRA real estate investing using the individual 401k and loving all the added benefits with such limited drawbacks. I hope this information helps you in your IRA real estate investing!

]]> http://www.freedommentor.com/ira-real-estate-investing/feed/ 0 http://www.freedommentor.com/closing-costs/?utm_source=rss&utm_medium=rss&utm_campaign=closing-costs http://www.freedommentor.com/closing-costs/#comments Fri, 19 Apr 2013 12:50:55 +0000 Phil Pustejovsky http://www.freedommentor.com/?p=15895  



Would you like to know a hidden way to reduce closing costs? More specifically, how about a quick tip to save hundreds on one of the largest closing costs on a closing statement? I am referring to title insurance. Nearly every buyer of real estate requires a title insurance policy. As a real estate investor, in some cases, you are buying the property and pay for title insurance as the buyer. In other deals, you are selling the property and the buyer may require you to pay for their title insurance policy. Either way, as investors, oftentimes title insurance is a significant closing cost you’ll be paying.

 

 

It’s surprising how few title companies will tell you about this. It’s such a simple tip that can reduce your title insurance policy by $200 or more. Here it is. Before closing, to reduce the total cost of title insurance, simply provide the title company with a copy of the existing title insurance policy on the property. Then, they will give you a discount on the new policy.

That was easy, wasn’t it? That’s often the way it works in this business. Real estate truth is oftentimes hidden but when you get to it, you can make a whole lot more money.

Where do you get the previous title insurance policy? The seller should have it in their big, thick folder of closing paperwork from when they bought the property. If it isn’t in there, find the contact information of the title company from that paperwork and contact them. It my take an extra few minutes but its worth hundreds in savings and any savings in closing costs is usually pure profit in your pocket.

For the experienced real estate investors reading this, you may be mentally calculating all the deals you have closed whereby you didn’t employ this simple technique. Ouch! But better late than never. For those reading this who are currently on the road to closing their first deal, the good news is that you don’t have to learn this lesson the hard way. Good for you for reading this article. Real estate education pays.

Closing costs can eat your profits alive. I spend quite a bit of time each week pouring over HUD1 Settlement Statements of my apprentices, finding ways to reduce closing costs. In most closings, the buyer, the seller, or both, are paying too much in closing costs. And rarely are the brokers, loan officers, title companies, and closing attorneys going to tell you where you are overpaying. It requires a trained eye, to spot where they may be trying to gouge real estate buyers and sellers.

This tip is just the beginning. But it is simple and applicable to almost all closings. Do you have any other tips for reducing closing costs?

]]> http://www.freedommentor.com/closing-costs/feed/ 8 http://www.freedommentor.com/epartner-real-estate-software/?utm_source=rss&utm_medium=rss&utm_campaign=epartner-real-estate-software http://www.freedommentor.com/epartner-real-estate-software/#comments Wed, 10 Apr 2013 11:45:01 +0000 Phil Pustejovsky http://www.freedommentor.com/?p=15865 ePartner® Real Estate Software was developed for real estate investors by real estate investors. It is a very powerful tool for creative real estate investors. Watch the video below to learn more about many of the powerful features and benefits of ePartner® real estate software:

ePartner® Real Estate Software – Personal Edition

ePartner® Personal Edition is the most powerful real estate deal making automation software available. ePartner® helps you locate your deals, market your properties, analyze your profits, and close your transactions. All details regarding your deals, including complete information on every property, seller, buyer, tenant, lender, agent, vendor, etc, as well as every contract and crucial document is available to you from any computer anywhere in the world at all times (including directly from your smart phone). This unprecedented accessibility provides you with the ultimate in efficiency and success while also allowing you to literally run your real estate investing business from anywhere at any time.

ePartner® Real Estate Software – Enterprise Edition

With the ePartner® Enterprise Edition, you’ll get all of the amazing features included in the Personal Edition PLUS you’ll get the proprietary live coaching interface features as well. This propels your success by giving you live, real-time “direct interaction” between you and your highly skilled coaches and mentors. For the first time ever in real estate investing education history you can now be coached as if your mentor were sitting right at your desk with you, even if he/she is half way across the globe! All details regarding your deals as well as every contract and critical document is available to you and your coaching team at all times. Here are just a few of many incredible features contained in the ePartner® Enterprise Edition: Messaging Module – The ability to send messages to any individual coaches or the first available coach and all messages appear in the Notes tab of each deal so that every piece of advice is easy to find and is never lost. All of your correspondence is automatically organized so you don’t have to organize it yourself.
Interactive Notes Module: Allows you and your coach to work together in real time on all your deals.
Deal Document Review Module: Every key document you upload is reviewed by a coach to ensure you have completed it correctly. This “second set of eyes” prevents important details from falling through the cracks.
Activity Accountability Interface: Know where you stand in your progress as well as where you need to improve and shows the coach where you need to be held accountable so you don’t make excuses and so that you reach the goals you have set for yourself!
Most Influential Coach Designation Module: When a deal closes, you get to choose who was most influential in helping you get the deal under contract as well as closed. This creates even more incentives as well as some cooperative competition amongst the coaching staff to make sure you are successful.
This system allows real estate coaches to train and mentor students on a level never before seen in the real estate investing education industry. Using the power of technology, this system allows you to have the sharpest minds in real estate investing reviewing your business as if they were sitting next to you in your home office.
Freedom Mentor has a bulk licensing arrangement with ePartner® to allow its apprentices to use it so if you would like to use ePartner® Real Estate Software, consider applying to be my next apprentice.

]]> http://www.freedommentor.com/epartner-real-estate-software/feed/ 0 http://www.freedommentor.com/real-estate-investors-better-business-bureau/?utm_source=rss&utm_medium=rss&utm_campaign=real-estate-investors-better-business-bureau http://www.freedommentor.com/real-estate-investors-better-business-bureau/#comments Tue, 26 Mar 2013 00:39:13 +0000 Phil Pustejovsky http://www.freedommentor.com/?p=15821  

Should real estate investors join the Better Business Bureau (BBB)? It depends. Are you a creative or traditional investor? Traditional investors don’t need to join the BBB because either they use real estate agents or auctions to source their deals and are usually paying all cash for properties with no creative terms. However, creative real estate investors work directly with sellers to structure unique terms such as subject to financing, owner financing or lease purchase optioning. The more out-of-the-box your terms are, the more likely reputation and credibility can play a role in getting the deal. The Better Business Bureau is typically where people go to research if a company is legit or not. When they see a good rating, it can ease their fears about working with you. Therefore, real estate investors who operate creatively can benefit from having a good rating on the Better Business Bureau because it can help with reputation and credibility.


 

How to Get a Good BBB Rating

The Better Business Bureau has a controversial ratings system. If you are a brand new business owner and you submit your business information to the BBB, they will create a file about your company and you will typically not have a good rating. Why? The BBB would probably claim that you are a brand new company with no track record. What do you do if you want a good rating on the BBB but you recently started your business? Pay to become an Accredited member and surprisingly, your rating may instantly increase. This 20/20 BBB Investigation) exposes the deep, dark secret behind the Better Business Bureau, which is that historically, they have given preferential treatment, such as better ratings, to Accredited (paying) members.
Morally and ethically, you may not feel right about paying to get a good grade with the Better Business Bureau. But unfortunately, it can be helpful to have a good BBB rating and the vast majority of the general public is and will remain unaware of the BBB’s dark secret. Therefore, if you have a new business, you may only have two choices; either you pay or you avoid the BBB altogether and hope your business doesn’t show up in their system in the early years of your business.

 

The Costs to Join the BBB as an Accredited Member

The cost is usually around $400 per year to become Accredited, although this amount can vary slightly across the country. Plus, there can be several hoops to jump through, including getting a local business license for your business. If you have been operating your real estate investing business for several years without a business license and then go to apply for a business license with your local governmental authority, you can get hit with significant penalties and fees for not having set it up earlier. In one particular case, an investor walked into the business license office to inquire as to how to get a business license and left the building with an $800 bill for back business license fees. Ouch!
What if you have been operating as a real estate investor and have had your legal entity, such as an LLC, registered with the Secretary of State for several years? You can certainly become Accredited with the BBB and walk through all their hoops. Or, you can take advantage of a strategy that can get your business on the BBB with a good rating for FREE! Hopefully that got your attention.

 

The Free Way to Get a Good Rating on the BBB

If your legal entity has been in place for 3 years or more, here’s an incredibly powerful strategy for getting a good rating on the BBB without paying $400 or jumping through the hoops that they require to become Accredited. You simply apply to become Accredited on the BBB website. You can talk with the BBB salesperson who calls you to get you to join, but instead of paying them $400 bucks, you decline joining at that moment. Then, the BBB will post your business on their website anyway, even if you didn’t join, and show it as “Not Accredited.” So long as your entity has been registered, it can be easily searched on your Secretary of State’s website and the formation date shows as 3 years ago or more, the BBB will usually automatically show a good rating. Then, you simply operate a good business and take care of the people you do business with, and your rating will remain good overtime. This is what yours truly has done with his businesses.

 

What is the Value of Being Accredited

The problem with the free approach is that your business will not show on the website as Accredited. How important is that? Well, when a prospective seller is looking to get rid of their property and they are considering working with you, they may search the BBB website to check out your company. If they see a good rating, that will usually suffice for their research. Seeing that you are not accredited may bring up the objection, “Why isn’t your business Accredited?” To which you can email them a link to this 20/20 youtube video and you can tell them that out of principle, you are choosing not to join the BBB. That objection will only come up rarely though. However, if you haven’t had a business entity registered for at least 3 years, then paying may be the only way to get a good BBB rating.

 

Should You Join the BBB?

If you are a new creative real estate investor, without an entity that has been registered for 3 years, is it worth it to join the BBB and pay $400 as well as jump though all of their hoops? You really need to be dealing with a good number of sellers each month to make it worthwhile. If you are just getting started and are frightened to talk to sellers, don’t go spend money on joining the BBB because credibility and reputation doesn’t matter to you because you aren’t talking to anyone. But if you are meeting with sellers consistently and structuring creative deals, you may get the occasional question as to whether you are a part of the BBB. If so, then you would know the immediate impact of joining the BBB…you could get more deals. It is better to “cross that bridge when you get there” rather than get set up with them far in advance of being hit with that objection from a seller. When it is all said and done, it can help to show up with a good rating on the BBB, but it isn’t vital to your success.

What are your thoughts and experiences with joining the Better Business Bureau as a real estate investor?

]]> http://www.freedommentor.com/real-estate-investors-better-business-bureau/feed/ 2 http://www.freedommentor.com/determining-property-value/?utm_source=rss&utm_medium=rss&utm_campaign=determining-property-value http://www.freedommentor.com/determining-property-value/#comments Thu, 21 Mar 2013 17:09:26 +0000 Phil Pustejovsky http://www.freedommentor.com/?p=15800  

Determining property value the right way is a skill that is helpful for any owner of real estate, but it is particularly crucial for real estate investors because if you determine a property’s value incorrectly, you can make a huge investing mistake! For anyone who is, or is thinking about becoming, a real estate investor, having the ability to correctly determine property values is as vital to your success as any other skill you can acquire. And too often, real estate investors value property all wrong. You’re about to discover the quick, easy and best way to determining property value.

 

How are Property Values Determined?

Residential real estate is valued through comparison with similar properties. A residential appraiser determines a property’s value by selecting at least 3 comparable sales, or “comps”, that have sold within the past 6 months or less that are within 2 miles or less from the property they are appraising.

You probably do this already in your everyday life. Have you ever bought something on eBay? How did you know you were getting a good deal? You would have to compare the item you were bidding on with similar items that had sold recently. Determining property value works the same way, by comparing recent similar sales.

So if this is so easy, how come so many people get it wrong? It turns out that comparing houses is not quite as simple as comparing eBay items. First, you must make an apples to apples comparison, Second, you must get your property information from the right sources. And third, you must be the one doing the comparing of the data.

Apples to Apples Property Comparison

There are several rules of thumb that appraisers use in determining property value. When you apply these basic tenets, you can create an apples to apples comparison:

• Location is within 2 miles, even closer is better.
• Similar neighborhoods and demographics (even within 2 miles, there can be drastic differences in neighborhoods)
• Same property type (single family home, duplex, condo, etc)
• Square footage within 20% (bigger or smaller)
• Same number of levels
• Same number of bedrooms
• Same number of bathrooms
• Similar construction (brick, vinyl siding, stucco, logs, etc)

There are several other rules of thumb, but these are the main ones. Next, you need the right information.

The Right Sources for Property Information

The three main sources for property information include the Register of Deeds, the Tax Assessor and the Multiple Listing Service (MLS). However, all three have their strengths and weaknesses. This is where many real estate investors get tripped up. They get certain property information from the wrong sources. In order to get accurate information, you must know which sources are better for which data.

Register of Deeds

In every county in America, there is a Register of Deeds, or Recorder’s Office. NETRonline.com is a great resource for finding the Register of Deeds for any county in the US. The Register of Deeds is accurate for telling you who the current owner of the property is as well as when that person bought the property. It can also tell you what liens are against the property as well as the amount of each lien at the time that lien was originated.

However, the Register of Deeds is NOT reliable for providing the price of what the current owner paid for the property. This is a HUGE problem that causes massive confusion out there. In some states, the sales price is included on the Deed that is recorded, giving public access to sales price data. But in non-disclosure states like Texas, the sales price isn’t always added to the Deed. And in strict non-disclosure states like New Mexico, the sales price is not on the Deed at all.

And, in some states, the “purchase price” on the deed may actually not be accurate at all! Listen to this…

In some states, the standard Deed uses the term “consideration” rather than “purchase price.” In fact, in Tennessee, the standard Deed reads, “sales price or property value, whichever is greater.” This may not seem like much but it is a very big deal. Let’s say you are buying a property for $50,000. Rather than put $50,000 as the consideration amount, you can put the property value, which might be $80,000. What that will do is show in the Register of Deeds that the purchase price was $80,000, even though it was only $50,000! Since anyone can get access to public information, including new prospective buyers, when they are going to make an offer, they may think you paid $80,000 as opposed to $50,000. Is that legal you ask? Of course! And it works quite well, I am told

Tax Assessor

The Tax Assessor is responsible for valuing each property in order to be able to calculate the yearly tax bill, also known as a tax appraisal. Unfortunately, the tax appraisal is rarely an accurate representation of value. Although tax appraisers do their best to understand the particulars of each property, from bedrooms, to square footage, the reality is that property owners do their best to keep them in the dark so that they can keep their property taxes lower. Many counties have homestead exemptions and other policies that give incentives to homeowners by limiting how much the tax appraisal can go up each year. For long term homeowners, their tax appraisal can be much lower than it should be because they took advantage of those incentives. And for those near-bankrupt counties, some have kept the 2005 year tax appraisals in place here in the year 2013, even though property values have plummeted since then, in order to collect more tax revenue. So the tax appraisal that every property is assessed by the Tax Assessor is usually a very crude estimate and in many cases is way off. Plus, you can’t count on the Tax Assessor having the correct number of bedrooms, bathrooms or square footage.

The Register of Deeds can help you figure out who the owner is and if there are any liens against the property. The Tax Assessor can tell you how much the homeowner has to pay in property taxes. But none of that information is helpful in determining property value. So where does successful real estate investors get their property information? The Multiple Listing Service (MLS).

The Multiple Listing Service (MLS)

The MLS is the property information database used by licensed real estate agents and appraisers. Technically, each MLS is independently owned and there are hundreds of them across the country, but for simplicity, I will refer to all of those independent MLSs collectively as “the MLS”. The MLS has a monopoly on the most accurate property data. And they guard it like a hawk, only allowing licensed real estate professionals inside. The reason why MLS sourced property information is so good is because it is updated and maintained by real estate agents. And the MLS requires accurate information as part of their policies. For example, if an agent lists a property for sale on the MLS, and the property information is incorrect in anyway, that listing agent is going to hear about it. A buyer’s agent could show the listing to their client and once at the house, discover that the description is inaccurate, such as being a 2 bedroom vs 3 bedroom. That’s a serious problem because that is a waste of the buyer’s agent and the buyer’s time. And then the buyer gets mad at their agent and then that buyer’s agent tells on the listing agent and the MLS levies a fine…and then no one is happy. So the information in the MLS is self governed and therefore is about as close as you’ll get to perfect next to actually paying hundreds of dollars for a full blown appraisal.

The MLS provides the final sales price as well as the original list price. It can tell you if there were any seller concessions (when the seller pays the buyer’s closing costs). It gives you accurate details about square footage, bedrooms, bathrooms and every other detail you need in order to make an apples to apples comparison.

The one kink in the MLS armor is that it does not include For Sale By Owner (FSBO) sales, which can account for as much as 10% of total property sales in any given area. Since no real estate agents are used in FSBO sales, those properties are not in the MLS database. However, consensus among agents, appraisers and lending institutions is that they all but ignore FSBO comps because of the difficulty with which to obtain accurate data.

Successful real estate investors therefore use the Register of Deeds to help get a better understanding of who owns the property as well as what loans they have against it and then use MLS comps in order to determine the property’s value. (To learn how to get MLS comps, read my article, MLS Access for Real Estate Investors)

But even with the right information, many investors still value properties wrong. How?

 

Who is Doing the Comparison?

Ahhh, computers. For most, its a love-hate relationship. Computers are great at comparing massive amounts of data rapidly, consistently and accurately. But computers aren’t human. They can’t determine when the human that created them programmed a bug. They don’t know if the original data they were given was bad so they don’t know if their comparison results they calculate are way off. Computers can’t see the context of their work.

Meanwhile, what computers lack are exactly what humans are wonderful at. We can see when things don’t look right. We can see the bigger picture. Therefore, humans should view computers as tools to help make better decisions, rather than engines to make their decisions for them. But too many real estate investors are asking computers to choose and compare comps in order to outsource determining property value. This is asking the wrong person to do the comparison.

Zillow, Trulia, and others like them, are a double whammy. First, they get their information from the county records, which as you now know, can be completely inaccurate. Second, they are unable to determine which neighborhoods within a 2 mile radius are the most similar (which humans are ideally suited to do) so instead, they simply draw an imaginary 2 mile radius circle around the property. So the comps that they choose are not nearly as similar. When you combine these two issues together, you get some really wacky results. Even in markets where Zillow claims they have a high accuracy, it can be way off. Sure, Zillow can get lucky and hit it spot on sometimes, but other times, it isn’t and a successful real estate investor always knows, on every deal, the real and true value of the property.

But many real estate investors look for shortcuts. Such as using every free property valuation tool available online, obtaining the property values calculated by each one and then taking an average. Sadly, I have read real estate investing blogs that champion this approach (see my article Real Estate Truth vs Fiction). That averaging approach doesn’t work. Because each one of those sites is getting their data from the same place, the county records, and they are all doing a 2 mile circle radius around the property. So they are all picking primarily the same comps. Therefore, even though the values may be different because they use slightly different algorithms, in the end, you get an average of several inaccurate property value numbers. I’m tempted to recite a line from Tommy Boy when Chris Farley says he could do a certain something in a box and mark it guaranteed, because he has time. Moving on.

 

Determining Property Value the Right Way

Determining property value the right way starts with getting your comps from the MLS. Next, choose the comps yourself, as opposed to a computer, based on your own intellect and ability to compare similar properties in similar neighborhoods. Finally, put yourself in the shoes of a buyer when comparing the comps. If one comparable sold for $300,000 while the other sold for $275,000, what was the difference between the two? Did the $300,000 sale have more square footage or a larger yard? Just like you would compare similar items on eBay before you would buy something, do the same thing with the real estate comparables you collect. Don’t feel like you have to be a mathematician and use price per square foot calculations. Instead, compare the two like a buyer would if they were looking to buy a property because ultimately, that’s how property values work. Buyers make offers based on what they feel the value is and offers turn into sales and sales create comparables. And that’s how the country’s most successful real estate investors do it.

Do you agree? Is that the right way to determining property value?

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