Comments on: Update on ‘Fix and Flip’

By: Michael P Lindekugel

Michael P Lindekugel — Sat, 03 Nov 2007 06:08:06 +0000

I was never an economics professor. spent a year in public accounting. 9.5 years at Microsoft in finance/operations positions and on to commercial/investment real estate. teach an adult education class in real estate finance at DiscoverU.

the Capital Asset Pricing Model is referred to as CAPM (pronounced CAP-M). CAPM is used to determine the required rate of return for an asset to be added to a diversified portfolio. CAPM is for securities.

Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc

By: Eileen

Eileen — Fri, 02 Nov 2007 00:45:48 +0000

I’m dying to see if anyone responds to this! you must have been an economics professor, Michael.
p.s. I do use the Black-scholes option pricing model myself, but what the heck is the CAPM? Is that got anythng to do with cap rate?
Sorry, I for one am lost here.

By: Michael P Lindekugel

Michael P Lindekugel — Thu, 01 Nov 2007 18:43:18 +0000

Would anyone argue the CAPM model for pricing based on Markowitz’s work on diversification and Modern Portfolio Theory is irrelevant today? Diversification is irrelevant today? MPT is irrelevant today? The Black-Scholes option pricing model from 1973 is irrelevant today because we had an explosion in the quantity of stock options or stock option transactions during the 1990s? Of course not. The time period and the quantity for financial and economic mathematical models are irrelevant.

I disagree that the Holmes Slade study is only relevant for the time period 1990-1997. The hypothesis is built around the Scholes price pressure hypothesis and the Oates tax capitalization hypothesis in hot markets. The Holmes Slade hypothesis has nothing to do with the quantity of exchanges or the time of occurrence of the exchange. The time and quantity in the test are to document the sample data. Time and quantity is not the subject of the hypothesis and test. The quantity is relevant to determine if the sample size was adequate to supply valid statistical results. The Holmes Slade hypothesis tested the impact on price as a result of the decision to engage in an exchange in a hot market with rapid price increases, thin supply, and strict rules. Increased demand and decreased supply create price pressures and additional risk to yield. It isn’t about hypothesis fitting today’s market. The market fits the hypothesis as pricing stock options today fits the Black-Scholes option pricing model.

Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc

By: Identifying your Replacement 1031 Properties « The 1031 like-kind exchange blog

Tue, 30 Oct 2007 18:03:24 +0000

[...] your Replacement 1031 Properties Jump to Comments Over the last week or so I have been having a running dialogue with Michael Lindekugel of Team Reba– RE/MAX Metro Realty, Inc. about general 1031 exchange principles on the Rain City Guide. To continue that conversation about identifying replacement 1031 properties, I decided to post here about how to identify replacement properties. Tomorrow I will talk more about the challenges to identifying 1031 replacement properties and some ways to fix the potential identification problems. Sorry to Eileen Tefft for being a little late on the post. [...]

By: Eileen

Eileen — Mon, 29 Oct 2007 22:54:13 +0000

Chard, I have a couple of questions. you say “but remember that only in 1990 did the IRS make 1031 exchanges viable for the average investor. ”
By 1990, I had exchange one property 3 times and didn’t think I had any issues, although I have to admit, I paid less each time.
The second quesiton is that I went to your blog and couldn’t find the rules on replacement properties. Guess I wasn’t patient enough. Can you send the link for the correct page. Thanks.

By: Chad Hallberg

Chad Hallberg — Mon, 29 Oct 2007 17:00:07 +0000

I like your thinking Michael. A couple quick things though. Research born out of Phoenix, Arizona from 1990-1997 is great, but only for that time. Think of the influx of 1031 exchanges since 1997. I do not have industry numbers, but 1031 Exchange Coordinators (my 1031 exchange firm) did essentially the same marketing from 1997 to present and we went from beginning a maximum of 40 exchanges a month in 1997 to an average of over 70 exchanges per month last year, when the national market was peaking. So, assuming our firm is the norm – which all indicators in talking with other 1031 firms around the nation say we are – we must take the 1990-1997 research with a grain of salt. It was great stuff, but cannot neatly fit within today’s market. Sure, trends from 1990-1997 having meaning, but remember that only in 1990 did the IRS make 1031 exchanges viable for the average investor. So, the first 7 years of mass 1031 exchanges really can be seen as a poor indicator of what will happen now and in the future as the 1031 industry is much more established.

Also, Eileen’s experience is the norm across the boards from all of my firm’s experience. How to ameliorate this problem you ask? (1) Educate the Realtor sufficiently that the Realtor can see potential issues and pitfalls as they come up; and (2) Every Realtor must have a Qualified Intermediary they can trust so that the QI can help the client and Realtor determine the plan of attack dependant on the options and situation presented.

Finally, as to your Identification period, you had it almost right. Identification for replacement 1031 properties can be very tricky and to give it proper treatment, a comment won’t suffice. Not trying to be spammy, but to give the topic enough treatment, I’m posting about the 3 Identification rules on my blog today. Click on my name above and you’ll find it if you’re interested.

Best,

Chad Hallberg

By: Michael P Lindekugel

Michael P Lindekugel — Sun, 28 Oct 2007 19:43:31 +0000

Here lies the problem. Individual experience while very real is anecdotal. It isn’t large enough to be a sample of the population. Your experience and my experience don’t qualify for observable results of the scientific method using a testable working hypothesis. The research includes 2351 observations during 1990-1997.

In the case where the agents do not understand the tax law surrounding the 1031 exchange there probably is no loss of negotiating power for the buyer. Information is king. When parties involved are sophisticated, the buyer loses negotiating power. The “whole market” or supply is a thin market in a hot market creating supply constraints for replacement properties and additional risk. The time limit requirement creates risk constraint to the buyer and due diligence for the shortened periods and additional risk.

When the seller is aware the buyer loses power in a hot market. The buyer asked for new roof the seller can say no in a hot market. Many buyers are wiling to acquire the property as is. The buyer needs more time the seller can ask for more money in a hot market. The seller can sell for a higher price if the buyer bails. If the buyer decides to bail on the deal (if they can), then the previously identified properties may not be available which creates immediate supply constraints for the buyer and additional risk. The buyer has price risk as the two other properties identified may cost more at a later time.

The simple exchange requires identifying three properties in 45 days without regard to their FMV. Identifying more than three properties entails additional requirements.

1.) The exchanger identifies any number of properties as long as the aggregate FMV is less than or equal to 200% of the aggregate fair market value of all disposed properties.

2.) The exchanger identifies any number of properties regardless of the aggregate fair market value as long as the FMV of the properties acquired are greater than or equal to at least 95% of the FMV of all identified properties.

Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc

By: Eileen

Eileen — Sun, 28 Oct 2007 16:55:16 +0000

I haven’t found that to be the case. Possibly if the seller somehow learns that the buyer is up against the 6 week rule, maybe maybe, but the buyer still has the same negotiating power because they still ahve the whole market to chose from. All they need to do is identify 5 properties in the 6 week period. Also, I haven’t found that many seller agents who know the rules and would alert the seller that there may possibly be a problem. However, if the 6 month window is running out, and the buyer really needs to be, then there’s a real problem. That happened to me this spring as I was up against the 6 mos timing and two loan programs dissolved from underneath me and I didn’t have the ability to walk away from the deal becuase of the huge tax hit I would have taken.

By: Michael P Lindekugel

Michael P Lindekugel — Sun, 28 Oct 2007 06:35:29 +0000

“As such, a good Realtor will still be able to negotiate a good deal for their buyer-client.”

The research indicates otherwise. More often than not, the seller finds out and the buyer loses negotiating power. The parties might be negotiating additional contract items such as the inspection response, a close extension, etc. In high appreciating markets, the buyer will pay a premium more often than not. If the Realtor or another professional working for the buyer failed to calculate the boundaries of the price premium, the after tax discounted cash flows, and the after tax yield, then negotiation is meaningless. If they were calculated and ignored, then negotiation is meaningless. The research is based on the work of Scholes , Kraus, Stoll price pressure hypothesis and the Oats tax capitalization hypothesis. (Scholes won the 1997 Nobel in economics)

Holmes & Slade. “Do Tax-Deferred Exchanges Impact Purchase Price? Evidence from the Phoenix Aparment Market”. Real Estate Economics. Winter 2001;

Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc

By: Chad Hallberg

Chad Hallberg — Wed, 24 Oct 2007 22:46:45 +0000

Eileen, I hope the #15 comment will answer your question about the 1 Year Holding requirement. I am going to get something together for you in the next couple of days as to your primary residence/investment property question. I’m thinking about it, just too much is going on to give it the time needed to give you a good answer right now. Sorry about that.