Buying Investment Property – Entity Protection

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Many “average” Americans are dipping their toe into the world of investment real estate. Not satisfied with owning REITs, many non-real estate professionals are turning to buying vacation homes, single family rental properties, small multi-family dwellings and even small commercial buildings.

If you are in this group (or thinking of joining this group), I want to give you three letters to remember as you begin your journey – LLC.

LLCs is an acronym for limited liability company. It is a form of entity recognized by states as providing liability protection for its members. At the same time, it receives different tax treatment than traditional corporations. It also is much more flexible than corporations when structuring relationships between members. The following is a very high level discussion on some benefits of forming an LLC. While forming LLCs can be done by laypersons, you should consult an attorney or CPA before taking that step.

TAX TREATMENT – When an individual forms an LLC, the feds disregard the entity and tax the individual as if no LLC existed. If more than one unmarried persons form an LLC, again there is entity protection like a corporation and the individuals are taxed as partners by the feds. So, instead of filing a separate corporate tax return, the members file form K-1s as part of their individual return. The benefit of this is that there is no double taxation as there would be if the investor(s) had created a C-Corp. Moreover, the members can have a much more flexible relationship than had they formed an S-Corp.

LIABILITY PROTECTION – This is the main reason to form the LLC. Say you want to purchase a rental house. If you purchase it in your own name, all of your personal assets are subject to risk in the event that something goes wrong. If you and your renters get into a lease dispute, they may sue you and your individual assets are on the line. What if someone gets hurt on the property and your insurance coverage is not enough to cover the loss? Again, your assets will be at risk. If you form an LLC, you have just created an entity that is separate from you. Its assets are only those that the LLC owns – usually the property. Thus, if something goes wrong, usually only the property is at risk and not your life savings. This can be worth a lot of sleep at night.

While LLCs may not be for every real estate investor, they are certainly three letters that need to be discussed when buying investment property.

Understanding STI

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In answer to Craig’s question, when you look for property “on market” at www.SearchingSeattle.com, you will see two types of property.

The ones on which you can make an offer, that is not a “backup” offer, will show “ACTIVE”.

The others, that I have asked you to pay more attention to in my previous entry entitled USING THE INTERNET TO BUY YOUR NEW HOME, will say “OFFER STI”.

Now Craig, being a lawyer, will be the first to understand that STI (Subject To Inspection), is not necessarily about an inspection at all. It is what we might call a very broad escape hatch or an “out” clause. This “out” clause can be used for many, many reasons that have absolutely nothing to do with an inspection at all.

If a buyer makes the offer contingent on an inspection, especially if it is a 35A inspection clause and not a 35B inspection clause, they have a huge timeframe to change their mind based on many things. In fact, in parts of this country, a buyer may tie up five properties all at the same time, and cancel four “based on the inspection” as he only tied them up to have the time to consider which one he really wants to buy.

That is why our mls system internally, calls these “ACTIVE STI” vs. the public sites that call them “OFFER STI”. Sometimes the very best property on market is the one that falls out of STI status and comes back on market.

It is very important to note that you, as a buyer, should ALWAYS have an inspection, even when you do not make that inspection a contingency. The Home Inspection Addendum makes the seller responsible in some way for the results of that inspection. Sometimes you make an offer without a home inspection contingency to get a better price. The property status then goes straight to PENDING and skips the STI phase, but that does not mean you do not do an inspection. It means you are willing to lose your Earnest Money if you are not happy with the inspection.

Sometimes you can save 5% or more off the price by being the one offer without an inspection contingency, and only lose $1,000 if you want to cancel based on the inspection. But, please do not think that not having an inspection contingency means that you do not do an inspection. You still need to close on that property with full knowledge of it’s total strengths and weaknesses.

The Lame List – Real Estate Web Sites that Suck

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evccliftIn a recent post, Galen said “And no, it’s not what Windermere or ZipRealty already do: their sites s-u-c-k compared to true consumer-oriented sites like Amazon.com and Google.”.

Now, comparing nearly any web site to Amazon or Google isn’t a fair comparission. Google & Amazon have 1) many of the best software engineers on the planet working for them and 2) they have thousands of them working on their web site. Microsoft (which is in the same league as Google & Amazon) is said to spend over $100 million/year on it’s corporate web site (I’m sure they spend even more on MSN)!

The only real estate company that I can think of that could afford that level of R&D is Cendant (they own Century 21, Coldwell Banker, and ERA). Ironically enough they also own Orbitz & CheapTickets.com (who are Expedia competitors). The vast majority of brokers are probably smallish companies that under-invest in technology (and Cendant is probably happy enough with the status quo that they aren’t going to rock the boat until the waves of change force it upon them).

Now, I do think ZipRealty’s site is medicore and Windermere’s site is average. But suck is way too strong a word. Could their sites be better? Yeah. But given they aren’t billion dollar internet/software companies with multi-million dollar R&D budgets, I think the sites are OK. I could do better, but don’t mistake a medicore site for one that sucks.

What I want you to do is tell me about the WORST agent & broker web sites out there. I only want to hear about the truly awful. Let me give you an example of how bad it can be.

Teri Herrera, is a very successful agent at John L. Scott with whom I purchased my first house with. However her web site makes me cringe in horror. Fortunately, she’s a much better agent than her web site would suggest, but her site is nothing but a flash link farm. Nothing of value other than links to other places and it’s wrapped up as an obnoxious flash app. At least ZipRealty & Windermere have branded MLS searches, instead of being just a link farm or framing somebody else content.

See, ZipRealty & Windermere look pretty good now, don’t they.

Robbie

Using the Internet to Buy Your New Home

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I have recently been enlightened on how grossly inadequate many of the home viewing sites are and how misleading they can be.

Maybe I should have known this before, but frankly, those sites rarely come into play in my everyday life. I use the mls and clients use me. I truly haven’t considered until recently how people use the internet in the home buying process and why they do that.

Now that I am viewing the world through your eyes a bit, with the help of my most recent clients, I would like to “give back

Feeling "at home" on the web

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There have been some interesting conversation around the web on Zillow’s business model…

But I’d argue that it is way too early to know their business model. In an interesting interview with Inman News (The link is dead) Rich Barton stated that the purpose of building a home estimation service up front was to get people comfortable using the web to find the value of their home.

Rich also mentioned that when he started Expedia he was frequently advised that he needed to “lock-in” potential ticket buyers before giving them flight information because many people (myself included) would to go the site to find good deals, but go to their travel agent to actually purchase tickets. (Marlow, doesn’t that remind you of something that is going on in real estate right now?). However, Rich stuck to his guns in giving the information up free because he recognized how important it was to get people comfortable with finding travel information on the web. In due time, people became comfortable enough with finding travel information on the web that they did away with the travel agent altogether.

I don’t think Rich’s intentions are the same with real estate agents, but I think he’s looking down the road a few years and seeing that agents are going to be more and more marginalized as home-buying and -selling consumers do the bulk of their purchasing research using web technologies. (I’d also bet that Zillow’s business plan is closer to a sketch than a detailed drawing as he likely recognizes the importance of making things up as he goes along.)

Giving away (for free!) great tools like Zillow’s Zestimator is simply a means to getting people comfortable using the internet to set a value on a home. Nothing more, nothing less. And recognizing that Zillow is a long-term project, I don’t think it is a stretch to say that Rich is developing a bunch more tools that will be a more obvious threat to the status quo of the real estate agent commission structure.

Without a doubt, it is a much softer play than with Expedia where he went head-to-head with travel agents. But then again, the stakes are even higher in the real estate industry.

Technology Sucks!!!

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OK…Got that off my ample chest.

I know you guys just love the technological advances, but some days I just want to kick it all back to the 80’s. If you “kids” can say “I Want MY MTV!”. then why can’t I say “I Want My MLS BOOK!!!”

You guessed it. The mls is DOWN! It’s a beautiful sunny Sunday, I’m ready to show houses, and the system is acting up. Guess I’ll have to go to my own website, www.SearchingSeattle.com, and find properties to show.

We are getting a new super-duper, upgrade to the mls. Well thank you very much Rappatoni boys! Who asked for it! The whole system will be screwy in the meantime, for what? So we can say we “added” something? So the background color can be different or the buttons can be “cooler” and rad or whatever you kids say today.

Then I call the mls to gripe, so I don’t have to do it here, and they are closed for President’s Day from Sat. through Tuesday.

Are the upgrades really worth the inconvenience? Then we all have to take a class to learn how to use the stupid new upgrade…OK, I’ll find the homes the way that you do.

I bet the darned new upgrade is just a fire wall designed to help keep Robbie and his RSS feed out 🙂

RCG may have completed the real estate blogging trifecta, but which horse is going to win?

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About a week ago I noted that the Zillow Blog added Rain City Guide to its sidepanel and that I hadn’t found out about both the Redfin Blog or the HouseValues blog because they hadn’t spread any link love. As Rain City Guide hasn’t done much to deserve traffic from either site, I didn’t really expect my comments to make much impact, so I was pleasantly surprised to find that both blogs added Rain City Guide to their sidepanel in less than a few days, thus completing my Seattle-real-estate-search trifecta!

I start with this story because it highlights two timely points I want to make: (1) all real estate is local and (2) business blogs can be shockingly responsive in ways that simply is not possible with a standard business website.

And just as all real estate is local, I’m happy to say that all interesting real estate search technology appears to be local as well. I’ve seen some fun tools come out of New York and California (or should we say CaliYork), but I don’t think it can be argued that the future of real estate is being developed right here in Seattle.

So who is going to win the real estate technology race? Will it be:

I don’t pretend to have the answer, but I sure enjoying keeping score. 😉

The second (and only tangentially related) point I want to make is that business blogs are now the norm for tech companies. When done right these blogs are much more than just a place to put press releases and instead give some great insight into the corporate personality behind the company. Go ahead and read the first few blog entries from each of the big three real estate search sites:

(I’m waiting…)

Here’s is what I read… The Zillow people are a zany, tech bunch who really believe that they can crack the real estate nut through increased data crunching and processing power. The Redfin people have figured out a better business model and now only need to expand so that they can demonstrate efficiencies of scale. The HouseValues people have a laser-like focus on present marketing opportunities, so they really don’t spend much time thinking about the future. Had any of these three companies been blogging a year ago, I’m sure their blogs would read the same! And more interestingly, I’m fairly confident that if I read the “latest” three or four entries from those same three blogs one year from now, those will also read the same because the culture that created those blogs is the same culture that created those companies. There is a real honesty in blogging that is hard to mask. Both a company’s strengths and weaknesses show through in their blogs!

However not everyone sees blogging from this vantage point. Recently, Daniel Gross of Slate signaled the beginning of the end of the business blog, by focusing on all the problems with blogging. But by focusing on the financial aspects of blogging (which often don’t make sense), he misses out on the overwhelmingly positive marketing opportunities associated with adding a friendly face to an otherwise impersonal website. I’m so glad that these three big real estate tech companies out of the Seattle area have all begun blogging because it gives some great insight into the soul behind the companies.

"Klaatu Verata Niktor"

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Before we read Osman’s piece on Buyer’s Agency, let’s do a little review.

Does the seller or the seller’s broker really pay the buyer agent’s commission? To suggest, as Osman does, that the buyer is getting a “free ride” (down the garden path), is too simplistic.

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The day we envisioned that buyers would control their half of the transaction, we, the real estate industry, spent about 30 days toying with the concept. Then, in a New York Minute everyone turned on a dime and backpeddled to their comfort zone. That place where the seller and the seller’s broker controlled everything.

When you start talking about Buyer Agency in this Country, you might as well be spouting “Klaatu Verata Niktor”, as only agents seem to want to talk about it, while the general public’s eyes glaze over.

Buyer’s want a house, sellers want a buyer, and agents want to talk about agency.

Osman, buyer’s pay the buyer agent fee, not the seller. Unless we think of it that way, buyer’s will never be empowered in this Country, regardless of this whole data control “smoke and mirrors game” everyone is playing.

There are still many old curmudgeon rules in play, that prevent the buyer from truly controlling that fee, but let’s not suggest that buyer’s are getting anything for “free” please. The day the buyer takes possession and the right to pay a big mortgage payment every month, he starts paying for that fee in his monthly payment. The fact that he finances that fee, does not mean he doesn’t pay it…he pays it with interest!

Until we recognize this fact, buyer’s will remain Klaatu’s and will never become true Jedi’s.

"Sarasota Realtor sues local real estate association"

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In response to Giles comment and question, here is an Inman article from December 2004 giving the whole story. Lois had been emailing me some strange things. She then went into a coma and passed away. I believe her suit was dropped at that point. I’m pretty sure the Association won on the Kentucky suit. Not sure what happened in Spokane. Not sure how Barry can do these in so many states, aren’t lawyers restricted to the state where they are a member of the bar?

“A Florida Realtor is suing the Sarasota Association of Realtors for allegedly forcing local real estate agents to buy memberships in the association as a condition of purchasing lockbox keys and multiple listing service data.

The suit, filed Wednesday in federal district court in Tampa, Fla., seeks $5 million and class-action status, amounting to $4,500 for each member of the class, and names 14 association directors as defendants. Lois M. Hekker, broker with Buyer’s Agents International Realty in Sarasota, is the plaintiff in the suit.

A representative from the Sarasota Association was not available to comment on the suit Wednesday afternoon.

The complaint cites the 1991 federal appeals court decision in Thompson vs. Metropolitan Multi-List in Florida, which held that a Realtor association that had monopoly power over its MLS could not force real estate agents to purchase memberships in the trade association as a condition of gaining access to the MLS. The complaint alleges that the Sarasota Association and other Realtor associations in Florida evade the Thompson decision by tying lockboxes and historical MLS data to purchases of membership.

The suit seeks an injunction ordering the Sarasota Association to sell lockboxes and historical MLS data without requiring MLS users to purchase trade association memberships.

“In order to practice her profession as a real estate broker, plaintiff needed to buy lockbox services and MLS comparable data from the Sarasota Association, which forced her to purchase trade association services she did not want,” the complaint states.

Agents purchasing the local trade association services also must purchase state and national association services, totaling about $424 per agent in 2004, the complaint states.

Sarasota Association members rent electronic lockbox keys from the association, which purchases them from GE, according to the complaint. Lockboxes are attached to the front door of a for-sale home and contain a key so agents can show the home to prospective buyers. “Licensees who purchase lockbox services have lockbox keys that open all lockboxes in the area covered by the MLS,” the complaint states.

The 21-page complaint cites other states where courts have declared it illegal to tie the sale of trade association services to the sale of the MLS, including California, New Jersey and Colorado.

San Francisco-based attorney David Barry of Barry & Associates represents the plaintiff. Barry has filed more lawsuits against Realtor associations than any other attorney in the country. He has racked up a number of losses with the exception of one case in San Diego that accused the Sandicor MLS of illegal price fixing. Barry has attempted repeatedly but unsuccessfully to obtain class-action certification in the Sandicor lawsuit.

Barry filed two similar lawsuits this year against the Northern Kentucky Association of Realtors and the Spokane Association of Realtors in Washington, alleging antitrust violations through Realtor association and MLS membership ties-ins. Both suits are pending and neither has reached trial.

The plaintiff in the Kentucky suit is Sherry Edwards, broker of Florence, Ky.-based Buyer’s Corner Realty. Edwards seeks return of association membership dues from the past four years.

Real estate brokers Mathew Prencipe and William Koshman of Prencipe Realty and Robert Cooke of R.H. Cooke & Associates are the plaintiffs in the Spokane suit, which seeks up to $8.7 million in damages and an injunction ordering the association to sell MLS memberships to agents whether or not they join the Realtor association.”

Real Estate Search is an evil hard problem

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google evilOne of my pet peeves about most real estate search sites is that I can’t search on what I want. All of them, ask the same 4 or 5 questions. Where is your house located? How much can you afford? How many bedrooms? Blah, blah, blah..

Well, I’m going to attempt to change that. I want to find houses with CAT-5 wiring built in! I want to find houses with home theaters & wine cellars. I want to find a home with air conditioning (believe it or not, summer is coming). And now, I can. I proudly present our new search remarks feature.

Using the power of SQL Server‘s Full-Text Indexing features, this is now possible. Granted, our search is a long long ways away from being Google good, but it’s a start. If somebody wants to throw a lot of money at me so I can turn around and buy a copy of Endeca In Front or a Google Search Appliance, I suspect we’d get a lot better.

For example, when I looked for “cat 5” and found a house that doesn’t have a black cat. I looked for “home theater” and found a lot of homes (but not lot of homes with home theaters). Do a search for “media rooms” and you’ll find a lot rooms (but not as many media rooms). Obviously, you need to pick your words carefully to get what you want. Also, I need to start adding words like “home” & “room” to SQL’s noise word list since those words appear on nearly every listing’s remarks section. But, let’s face it, writing a search engine is hard. Eventually, I’ll tweak things so I can get Google or Microsoft to do my dirty work.

In the mean time, I hope finding your dream home got a little easier.

Robbie
Caffeinated Software