Max Sale Profit
Gross vs Net Profit
Sale Negotiation *
* (IMPORTANT ENOUGH TO MENTION AGAIN)
Disclosure Done Right
DIY vs Agent/Broker
MaxSale / MaxProfit
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Max Sale Profit
Max Profit is the profit created by preparing and selling the property by Max Sale techniques AND taking into account the ownership of the property (LLC, Corp, individual, couple, etc.) and the owner’s overall financial scenario and goals.
Both the investor and owner occupied property owner are wise to MaxSell their appreciated assets but also important is to make a MaxProfit because “it is not what you make… it is what you keep that counts”.
If you choose, when working with MaxSale, we provide you a free consultation with a financial advisor and tax planner. Or, we can work with your financial team to strategize how to best serve your interests.
Gross vs. Net Profit
The difference between Net and Gross Profit in real estate transactions can be a very large amount. The better the strategy, the better your chance of gaining (and keeping) the highest Net Profit so you can then roll those returns into your next successful investment.
The final sale price is not always the final determination on what your long term net profit will be. The final net profit can be positively and negatively affected.
Negatively Affected by not disclosing properly thus is subjecting you to liability, lawsuit and damages to be paid later to the Buyer.
Positively Affected by good tax planning that rolls the full momentum of profits into better opportunities and delayed income and taxes through installment sales, seller financing and other techniques.
The IRS will probably change many of these beneficial rules in the future so why not take advantage of them while they still exist?
Your free initial consultation will include presentation of all options available to you.
Sale Negotiation was covered in detail in the Sell It! but bears repeating due to the importance of performing it correctly. Negotiation is a art; it requires a choreographed routine of setting expectations, maintaining interest, targeted control, allowing then checking displays of Buyer ego and generally playing smartly the ‘cards’ you have and not “overplaying your hand”.
When a property is prepared and priced properly it will create interest and offers. That will cause natural feeling of pride and excitement that ‘someone wants what you have’ and if left unchecked may lead to reactions by the Seller that cause harm to both parties.
It is normal for Buyers to at some point in the transaction have “Buyer’s Remorse”. It can manifest itself in an immediate cancellation of contract, inspection or appraisal delays, a long repair request or unreasonable requests of the Seller. When inventory is low and buyer motivation to purchase a house is high circumstances sometimes fix the problem but usually it takes the Buyer’s agent or an experienced family member of Buyer to calm them to move forward. See Sell It! section about Buyer Agent research to be done to find an agent that knows what they are doing and how to Qualify and Control them… it is so VERY important!
If deal is held together with proper Sale Negotiation, controlled Buyer Remorse and keeping the buyer happy then the next step is Proper Disclosure... or as we call it Disclosure Done Right.
Disclosure Done Right
Max Sale uses “Proactive Disclosures” as part of our price support negotiation strategy so most disclosure is completed prior opening escrow. No matter when disclosure is done though… Disclosure must be “Done Right”.
Statutes of Limitations – Disclosures
All California residential purchase agreements are required to be written, so the statute of limitations for breach of contract (failure to disclose) is 4 years. Additionally, there is a statute of limitations of 3 years from the date of discovery of fraud.
Disclosure Done Right means disclosing all the Seller (and Agents) know about the property AND ensuring the paperwork is completed correctly and fully.
Disclosure Done Right results in seller protection! If a Buyer of a property, perhaps years later, discovers an item that costs them money to repair they may likely come after the Seller for failing to disclose the item. If the disclosure paperwork is missing or not completed correctly the Buyer could win in court or force a monetary settlement because Seller was not prepared to fight it.
Actual Example of “Disclosure Done Right”
To maintain confidentiality Party titles instead of names are used.
Conversations are summarized for brevity and clarity.
Events took place about 2 years after the sale of the property:
Buyer Agent to Listing Agent: My Buyers are remodeling the bathroom and they found a leak behind the shower wall that your Sellers failed to disclose and will now pursue them for damages.
Listing Agent to Seller: The former Buyers are planning to sue you for failure to disclose.
Seller to Listing Agent: That is too bad but I knew and know nothing about that. What do you suggest?
Listing Agent to Seller: Plan to hire a real estate attorney but first attempt to halt them now by sending disclosures they signed and agreed to. Send a signed copies of the mandatory Seller’s Disclosures showing you complied with the law AND the Buyer Investigation agreement disclosure that places responsibility for researching all facets of the property on the Buyer. Do you have Buyer signed copies of those documents?
Listing Agent to Buyer’s Agent: The Seller regrets the Buyer has to deal with that unknown problem but Seller disclosed what he knew about the property and knew nothing of that leak. I sent you the Seller disclosures to review and the Buyer signed “Buyer Investigation” disclosure showing they had agreed to purchase the property after having completed their buyer investigations and due diligence.
Buyer’s Agent to Listing Agent: I’ll send these to my Buyers and get back in touch with you.
End Result: Neither Buyer or Buyer’s Agent contacted Listing Agent or Seller again.
Lesson: Carefully, correctly and thoroughly complete disclosure paperwork.
Conclusion about Disclosures:
“Disclosures Done Right” creates and maintains higher Net Profits
(Additional Benefits: Peace of mind, no later waste of time, nuisance lawsuits, etc.)
The main reasons for lawsuits happening after a property has been sold is for the Seller failing to disclose an item or otherwise engaging in fraud (knowingly or unknowingly).
As noted earlier there is a statute of limitations of 3 years from the date of discovery of fraud on documents and no limitation if it can be proven a party willingly and knowingly perpetrated fraud to gain an advantage.
Constructive fraud is when the circumstances show that someone's actions by unfair means (lying or failing to tell you about defects in a house) gave them an unfair advantage. Constructive fraud being present allows a court to treat the other person's actions as fraudulent, even if all the specific requirements of actual fraud have not been proven. Constructive fraud can arise out of a breach of a duty (such as a duty to disclose) even if the person did not have a fraudulent intent.
So all must be done to avoid fraud and even the appearance of fraud that could be seen as “Constructive Fraud” as that would sway any arbitrator, judge or jury towards the plaintiffs case of damages, rescission or other damage sought.
Disclose all that you know, follow the “Disclosures Done Right” guidelines, encourage the buyers to fully investigate the property and readily allow access to the property for them to complete their buyer investigations.
Lawsuit Avoidance Summary:
- Disclose all that you know.
- Follow the “Disclosures Done Right” guidelines.
- Encourage the buyer to visit the property.
- Make notes of when buyer visited property.
- Keep records of all buyer inspections and inspection reports.
If you did not follow the Disclosure and Lawsuit Avoidance advice and get in a legal bind Contact Us to let tell us about your situation and based on your needs we can refer you to a good attorney.
Both the homeowner and investor have significant tax avoidance, tax deductions and tax deferment options concerning the ownership and sale of their real estate.
1031 Exchange - Pyramiding wealth accumulation:
Just like investors can make tax-free income by placing mortgages on properties until the rental income equals the expenses sellers can 1031 exchange their properties and defer paying the taxes to a time of their choosing. The former has the advantage of allowing you to borrow money against the value of those properties free of tax: for example, if the property was valued at $2 million and you can borrow 75% of the equity, this would give you $1.5 million of tax-free borrowing. The latter, 1031 exchange, allows the seller to within 180 days replace the property “tax deferred” with one of greater value and "like-kind". The “like-kind” term apply to many properties; small, large, residential, commercial, industrial, rural, resort-area, etc. Even raw land can be rolled over into cash-producing rental property (or vice versa) and several properties can be disposed of, or acquired via the same 1031 rollover.
Use of Entities
With an entity, such as an LLC or corporation the owner can use corporate documents to authorize and support deductions. Here, you have this statutory LLC entity (separate from its members), via legal documents (such as an operating agreement), authorizing tax saving deductions and strategies. This is excellent documentation, especially with IRS hot spots such as active participation for bypassing passive loss limitations; avoiding dealer status, as well as deductions such as auto, meals, entertainment; travel to find property; educational tuitions for boot camps; travel to such educational events; and the like.
$250/500K “Principal Residence” Tax Exclusion
To qualify for the $250,000/$500,000 home sale exclusion, you must own and occupy the home as your principal residence for at least two years before you sell it. Your home can be a house, apartment, condominium, stock-cooperative, or mobile home fixed to land.
If you meet all the requirements for the exclusion, you can take the $250,000/$500,000 exclusion any number of times. But you may not use it more than once every two years.
One aspect of the exclusion that can be confusing is that ownership and use of the home don’t need to occur at the same time. As long as you have at least two years of ownership and two years of use during the five years before you sell the home, the ownership and use can occur at different times. The rule is most important for renters who purchase their rental apartments or rental homes. The time that a purchaser lives in the home as a renter counts as use of the home for purposes of the exclusion, even though the renter didn't own the home at the time.
To qualify for the home sale exclusion, you don’t have to be living in the house at the time you sell it. Your two years of ownership and use may occur anytime during the five years before the date of the sale. This means, for example, that you can move out of the house for up to three years and still qualify for the exclusion.
This rule has a very practical application: It means you may rent out your home for up to three years prior to the sale and still qualify for the exclusion. Be sure to keep track of this time period and sell the house before it runs out.
To qualify for the exclusion, you must have used the home you sell as your principal residence for at least two of the five years prior to the sale. Your principal residence is the place where you (and your spouse if you're filing jointly and claiming the $500,000 exclusion for couples) live.
You don't have to spend every minute in your home for it to be your principal residence. Short absences are permitted—for example, you can take a two month vacation away from home and count that time as use. However, long absences are not permitted. For example, a professor who is away from home for a whole year while on sabbatical cannot count that year as use for purposes of the exclusion.
You can only have one principal residence at a time. If you live in more than one place—for example, you have two homes—the property you use the majority of the time during the year will ordinarily be your principal residence for that year.
If you have a second home or vacation home that has substantially appreciated in value since you bought it, you’ll be able to use the exclusion when you sell it if you use that home as your principal home for at least two years before the sale.
$500,000 Exclusion for Married Couples
There are certain additional requirements you must meet to qualify for the $500,000 exclusion. Namely, you must be able to show that all of the following are true:
- You are married and file a joint return for the year
- Either you or your spouse meets the ownership test
- Both you and your spouse meet the use test, and
- During the 2-year period ending on the date of the sale, neither you or your spouse excluded gain from the sale of another home.
If either spouse does not satisfy all these requirements, the exclusion is figured separately for each spouse as if they were not married. This means they can each qualify for up to a $250,000 exclusion. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. For joint owners who are not married, up to $250,000 of gain is tax-free for each qualifying owner.
If your spouse dies and you subsequently sell your home, you qualify for the $500,000 exclusion if the sale occurs within two years after the date of death and the other requirements discussed above were met immediately before the date of death.
“$250/500K Exclusion” Source: http://www.nolo.com/legal-encyclopedia/the-250000500000-home-sale-tax-exclusion.html
Other Tax Strategies
- File an extension for your tax return and file as late as legally possible because the IRS computers run on a "first come, first serve" basis so returns filed early are more prone to audit.
- Attach written explanations to your return, for items that you believe unusual or audit prone. Include the appropriate tax law citations with these explanations.
- Do not overtax rent income: While it is ordinary income, rent income is not subject to social security taxes.
Tax Strategy Conclusion
Many strategies may be employed prior to the purchase of investment properties that allow for the best possible accumulation and exit outcomes. And if that prior planning did not take place there are still good ways to avoid paying taxes as much as legally possible and ensuring ALL OTHER MAX PROFIT strategies are being employed to assure current and long terms profits from the sale.
DIY vs Agent/Broker
The opportunity, tools and resources available for an owner to sell their own property has never been greater but yet the number of FSBO’s has been decreasing over the years from 20% in 1987, 12% in 2011 and 9% in 2013. This is likely due to a number of factors… 1. The bottom of the housing market in 2010 to 2012 had more bank owned and short sales that were most all of the time represented by an agent or broker. 2. There are more FSBOs when the market is ‘hotter’ so FSBO #’s may go up. 3. More than ever there is more liability and hassles associated with selling your own home and the statistics and blog feedback do show a “professionally represented” sale will net the seller more money (and without the hassle, potential liability and time spent with FSBO attempt).
There are many tired analogies and statistics surrounding an owner selling a property on their own vs hiring an agent to do it we’ll avoid most of them but here are a few of the most popular:
- You can cut your own hair… but can you do a better job than a professional?
- Would you take your vehicle to the neighbor down the street to rebuild your transmission though he’s never actually rebuilt one? Or, would you take your vehicle to a licensed, insured and reputable mechanic to rebuild your transmission.
- FSBOs accounted for 9% of home sales in 2013
- 88% of buyers purchased their home through a real estate agent or broker.
- Homes sold by a licensed professional sell for over 20% more than by FSBO.
- 88% of sellers were assisted by a real estate agent when selling their home.
DIY = Do It Yourself
There are many discount “1% commission” type companies that encourage you to sell your property by yourself, be responsible for all the preparation, negotiation, paperwork, etc. The “discount broker” will place the property in the MLS, provide you instructions to follow, give you some forms and sometimes supply a lock box.
What “discount brokers” do not usually advertise is to attract buyers with agents you need to offer the Buyer’s Agent (called the Selling Agent) 2.5 to 3% commission of the final sale price so after you add up the 1% + 2.5% to 3% + other fees the difference between you doing all the work yourself or a professional agent doing all the work is 1 to 2% of the sale price.
Let’s call it 2%... that is what the potential seller needs to decide… can they can get 2% worth of value by hiring a broker?
Experience shows Sellers who attempt to sell their own property usually over price property and net less in the end because of the reasons detailed in Max Sale Price It section.
So if you are going to FSBO a property be sure to get the price correct, get it in the MLS and assure the buyer agents you will pay them a commission because they control over 80% of the buyers in the market. Be prepared to do lots of research, work with an experienced escrow and title company willing to work with FSBOs and review the below list to see where you will need to invest additional time, energy and resources as referenced by other FSBO sellers.
Most difficult (time, resources and energy) tasks for FSBO sellers:
- Understanding and performing paperwork: 18%
- Getting the right price: 13%
- Preparing/fixing up home for sale: 12%
- Selling within the planned length of time: 7%
- Having enough time to devote to all aspects of the sale: 6%
- Helping buyer obtain financing: 3%
- Attracting potential buyers: 3%
Reasoning and Reasons TO FSBO a Property:
“The requirements to obtain a salesperson license remain the same: a 40-hour fundamentals class, passing the exam, possessing good moral character and a valid employing broker.”
If my doctor or lawyer had those same qualifications, you can bet I would represent myself in court or treat my ailments myself. The same way i have purchased and sold my properties without an agent.” James D. Source: Realtor.com blog
Top 5 Reasons to FSBO
1. Straightforward Pricing
2. Homeowner Control of Process
3. No Commissions
4. Buyers Benefit from Direct Homeowner Knowledge
5. Less Stress with Open House and Showings
There are many that believe selling For Sale by Owner is the way to go and about 10% of the homes sold in the US are sold FSBO. Max Sale lays out the steps and details of the many facets to Maximizing the Price and Profit so the sellers can decide for themselves what the best decision is for them.
Agents / Brokers = State Licensed Real Estate Agents or Brokers
There are some very good and excellent Agents and Brokers working today but there are more that are not so good or those that have a good attitude and want to do well but do not have the correct education and experience to perform.
Just like a smart seller interviews potential agents… a good agent/broker will thoroughly qualify the home owner before working with them.
This summarizes well what agents / brokers feel and how they work with FSBO’s
Comments That Summarize Agent/Broker to FSBO Perception
Source: Trulia - Agent/Broker, Larry Tollen
Why real estate agents do not want to work with FSBO’s?
And when they do… why do they?
The reason is two fold, first top-notch agents are busy, we don't have the time to explain everything to the Seller who 90% of the time really has no idea what their doing or what their obligations are. Selling a FSBO means more work and typically dealing with unrealistic and inexperienced sellers.
Secondly the vast majority of FSBO properties aren't priced right. These sellers tend to believe they own the Taj Mahal and could care less about relevant market data. They simply want what they want.
My thoughts are based on decades of experience. There's not a year that goes by that I don't sell one or more of these properties to buyers I'm working with; I've already closed on this year and have a second under contract now, but I do it for my buyers and would prefer to avoid it whenever possible.
FSBO vs. Agent Conclusion…
Statistics demonstrate owners do sell on their own (FSBO) about 10% of the time but they also show that is in decline as rules, regulations, buyer qualifying and other factors become more complex.
In the end if the difference between you doing all the work yourself or a professional agent doing all the work is it worth the 1 to 2% of the sale price? And if an agent could actually net you MORE money than doing it on your own would you still want to FSBO?
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