This featured blog is by RealtyJoin member Jeff Adams

We are all aware that the economy has taken a nosedive over the past couple of years. Businesses are closing their doors, employees are being downsized, and the current market value of houses has been consistently dropping. Although, the recession is damaging the current market, it does offer a plus side to the real estate investor.

Buying real estate during a recession allows buyers to thrive during a recession. They have the opportunity to make substantial financial growth. Falling prices and less activity in the current market can benefit the buyer in many ways. A recession typically lasts for about two years so investors should think about not just how low the prices will go, but also how much they can invest until it is over.

Upon deciding to invest, you should consider a variety of factors.

Realize if each house in question is functional to your particular needs. Buying because you fear the recession will end is not wise. The current market should not sway your judgment in this way. But since prices are typically down by three to five percent, buying does offer many advantages. Buyers stand to pay less for homes, usually five percent of more, during time of distress. In addition, sellers are often more anxious and motivated to sell just for the shear fact that they do not want their houses on the market for too long.

Before investing in a down market, it is critical that you research the comparable housing prices in the area, remodeling records for the home, and any financial situations attached to the home. Websites such as zillow.com or trulia.com are excellent resources for gather such information. The general location and overall condition of the house should also be taken into account.

Timing is everything if you plan to capitalize on the falling prices of houses and property. If you are a seller and you wish to move to a more expensive home, now is the time to buy. The longer you wait, the lower the value of your currently owned home will go. Savings to you on a new house are also available as it is being sold for less. Interest rates are also much lower and are gradually increasing, which is another reason to buy now.

Borrowing cheap is another benefit. Interest rates are very low, and even though banks may not be lending to risky buyers, investors with good credit are welcomed. Foreclosures, Short Sales, and Real Estate Owned (REOs) properties are an excellent way to potentially profit from an investment during a distressed economy. When a notice of default has been filed in public records because the owner has stopped making payments on the mortgage, and a lender has given notice that the house will be sold at public auction if the payments are not made current, the house becomes foreclosed upon. If payments are not made and the house goes to public auction, a buyer can usually purchase the house for the amount of money remaining on the loan. There is substantial profit to be made by only paying the amount owed on the mortgage and the owner’s equity can be picked up for free.

One thing to consider though, when going the foreclosure route, is that a house being sold at auction is not just a steal. Due diligence and thorough inspection of the house should be done prior to any bidding on any home.

Short Sales or Pre-foreclosures are also an option. These are homes that are in foreclosure but before the property goes to public auction. The lender must agree to accept an offer less than the amount owed on the property. Since the lender agrees to take less money in order to avoid foreclosure, the transaction is better for the investor. REOs are similar to Short Sales, but the lender already owns the house due to foreclosure proceedings. The house has been auctioned publically and did not receive a bid. This offers a benefit to the investor because the lender will usually sell for less than what is owed on the mortgage.

This is the best way to buy because the seller is no longer involved in the transaction. The deal is made between the lender, the seller, and the agents that represent them. At times the agents are not even necessary.

Overpriced homes are another investment opportunity to consider. An inflated price is the number one reason a house does not sell. A home that has been previously overlooked because is has been overpriced, has been on the market for a long period of time, and has not sold because of its price, should be revisited. A motivated seller could lower the price in a hot seller’s market where there are many buyers and less inventory. Offering the seller a sizable earnest money deposit or “Good Faith Deposit,” which is a portion of the down payment attached to the purchase agreement, and a list of prices for other homes is the area could also encourage a price reduction. Offering a “Good Faith Deposit” can also offer less risk to the seller because most contain provisions that give this initial deposit to the seller if the buyer backs out of the deal without cause. The money is usually held in a trust until of the necessary negotiations have been made and contracts have been signed.

Finding real estate to invest in can be easier said than done. Don’t wait for these homes to show up in traditional real estate listing services. Look for information on bank websites and county loan offices that know of foreclosures. You can also ask local real estate agents that are familiar with the area. Realtors can also offer insight on overpriced homes.

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Is the housing news we’re getting good?

That’s the question the New York Times asked in an editorial this week. And if you look at some of the press releases that have been issued recently, you might think that the housing market has indeed turned the corner.

The National Association of Realtors announced that pending home sales (homes that are under contract but have not yet sold), reached a two-year high and existing home sales beat expectations (which, truthfully, were not very high at all).

Mortgage interest rates, according to the weekly Freddie Mac survey, are at or near an all-time low.

On the other hand, the number of people actually applying for a purchase mortgage is extremely low as well. It’s tough getting approved for one of these super-low interest rate mortgages.

According to the Standard & Poor’s/Case-Shiller housing price index, home values fell 4 percent nationally. Home prices nationally have now been rolled back to where they were in 2002, although it feels more like the late 1990s in Atlanta, where home prices fell nearly 13 percent last year.

And new home sales, which have helped lead the way out of countless recessions since World War II, remain at an all-time low. Home builders aren’t building that many more homes and selling even fewer of them, as supply continues to outpace demand.

What about foreclosures? Nearly 25 percent of all existing homes in the most recent quarter sold were foreclosures and Moody’s Analytics says there are 3.3 million homes currently in foreclosure. Another 11.5 million could fall into foreclosures if the economy worsens again.

And then there is the government’s response to the housing crisis. Thus far, the various Making Home Affordable programs haven’t done much to help the housing market form a bottom, let alone cure the problem.

This week, Federal Housing Administration announced it would reduce costs for a streamline refinance for those homeowners who have FHA loans. The problem many borrowers are having is that the increased loan origination and refinancing fees mean it’s difficult for lenders to “prove” that a borrower will save money on a refinance. Strict rules prohibit lenders from refinancing a borrower who won’t save money. The same announcement offered extra help to servicemembers and veterans who are trying to refinance or who were wrongly foreclosed on.

Based on all of these announcements, if you were in the business of making a housing market prediction, would you be forecasting good real estate news?

Perhaps not yet. But the real estate community is so weary of its depression-like status, and so eager to prove that with a positive attitude anything can happen that the “good news” is being heavily promoted as the beginning of the turnaround.

The biggest problem is that the real estate industry isn’t like the stock market. You won’t see values bouncing back to new highs after just a few months, or even a few years. With some industry observers predicting another 5 to 10 percent drop in home values in 2012, it could be a decade or more before the real estate industry really recovers.

Question:

About 3 years ago my neighbor moved out and abandoned her home. Now I find that the house will be auctioned off for tax delinquency. The starting bid is very low.

I would like to bid on and try to buy this home, and then use it as a rental property. I know about the laws requiring me to wait one year before foreclosing on the owner, but I am unsure if the house was paid for, or the lender has just decided it won’t get its money back. (You would think after three years abandoned the bank would have foreclosed already.)

I am real nervous about the whole idea because I have never invested in real estate before.

Do you have any advice or pros and cons I should be thinking about? I am planning on purchasing the property and then doing some repairs to make the house habitable.

I have a set amount I put aside, to pay for the property and then for repairs so I’m set financially. I am just worried about things that I might not know legally that might come back and bite me.

Buying and renting this property seems like a win-win proposition, but is there any way someone can come take the property and I will lose my money?

Answer:

Here’s what happens when you bid on property at a tax sale: you can purchase the tax delinquency, but you will probably have some competition. If the bank finds out that the property is being sold for back taxes, it might jump into the fray and pay the taxes that are owed.

In some parts of the country, when you buy a home for the real estate taxes that are owed, you don’t get title to the home. You get the right to start the process of owning the home but the current owner of the home has the right to redeem herself and come current with the taxes: that’s the one year period you were referring to. If you somehow made improvements to the home, you might not get that money back.

Depending on the process in your jurisdiction, the homeowner or the lender can simply repay the real estate taxes that are owed, with penalties, fines and other costs and the tax sale would be cancelled.

On the other hand, if the homeowner doesn’t pay and the lender decides not to pay either, you, as the tax buyer, have the right to wipe the slate clean and become the owner of the home. There are certain steps that you may have to take to make sure that the slate is clean when the final tax deed is issued to you and for that reason you’d better make sure you know the rules in your jurisdiction and know what you are doing.

Why don’t you hire a real estate attorney or an attorney that has experience in tax sales to walk you through the process for the first time?

I often recommend that wanna-be investors hire a team of people who can help them achieve their real estate investing goals. You’ll want to chat with a tax preparer (accountant or enrolled agent), a contractor (who can advise you on how much money you’ll have to spend to get the property into habitable condition), a mortgage lender (if you decide to finance part of the purchase), and a real estate attorney to draft up the paperwork and make sure you’re protected.

You’ll pay a little bit of money, but will have peace of mind that you will understand what your risks are.

But if you get the home, what I like best about your plan is that you live right next door. You’ll always be able to keep an eye on your investment.

I meet landlords all the time who have poor conversion rates on their ads.  Landlords should be able to consistently convert 50 – 60% of all phone calls to appointments.

We all get calls from “feature-specific tenants”, “information gatherers”, as well as “control freaks” (fire away questions without letting you get in a word).

As a landlord, remind yourself that most of these people have jobs and need homes, and if you cannot convert them you are wasting your marketing.

In my seminars I teach my students to view ANY phone call as being $100, and anytime a phone call does not result in an appointment to view your home, you have just lost $100.  In other words take each call very seriously, do your best to maintain control of it, and ultimately give it your all to close the deal….get the caller to show up for an appointment.

A new data set published last week by CoreLogic, a provider of real estate information and analytics, indicates that the real estate market still faces a number of substantial problems – and not all of them contain the word “foreclosure.”

U.S. homeowners who are regularly making mortgage payments, and have no current desire to buy or sell, may still have a home equity crisis on the horizon. That could spell big trouble for anyone who used their home as a piggy bank, expecting future home value appreciation would make things right.

According to CoreLogic’s data, a full 23 percent of borrowers are considered to be “underwater” in their homes. How much underwater?

CoreLogic says U.S. homeowners have a whopping $750 billion in negative equity.

If you live in Florida, Michigan or the Southwest, the situation is much more dire. Here are the top five states that, according to CoreLogic,  average the most underwater properties.

Top 5 States for Underwater Mortgages

1. Nevada: 65 percent of homeowners are underwater
2. Arizona: 51 percent of homeowners are underwater
3. Florida: 47 percent of homeowners are underwater
4. Michigan: 36 percent of homeowners are underwater
5. California: 32 percent of homeowners are underwater

The numbers are awful, but it seems we haven’t hit bottom yet. CoreLogic’s report mirrors an industry consensus that home prices will fall an additional 5 percent to 10 percent in 2011, with a similar rise in negative equity averages.

It’s tough to swallow the fact that two-thirds of Nevada’s borrowers, who may have never been in trouble with their mortgages, still have less than nothing to show for their investment – and would have a doozy of a time selling their property.

If you sold your house today, would you turn a profit?

To view the full CoreLogic report, click here.

Q: I was divorced a little more than 20 years ago, and a quit claim deed transferred the property to my name. My name was never on the original deed or mortgage. When I sell my home will I have to pay taxes on profits over $250,000 over the value of the home when it was built in 1972, or can I use the valuation when the quit claim deed was signed in 1984? Many thanks.

A: When you were given the property, you were given the property at its original cost basis. So, if the property was purchased for $25,000 and someone gave that property to you, the cost basis is still $25,000 even if the property was worth $100,000 when it was given to you.

If you’re single and use the property as your primary residence, you’re allowed to exclude from federal income taxes up to $250,000 of profit from the sale of the home. And, if you’re married, you are allowed to exclude from federal income taxes $500,000 of profit on the sale of the home.

The key question for you will be what is your cost basis and how much profit will you receive from the sale of the home.

To determine the cost basis, you take into account what the home was purchased for and add to that number the costs associated with the purchase of the home.

Then you add all capital improvements made to the home over the years. If you put on an addition to the home, install a new kitchen and put on a new roof, all of these items will increase your basis in the home. And then when you sell the home, the costs of sale will get factored into determining your basis and the profit you get out of the home.

Given all of these issues, you should talk to a real estate attorney, tax expert or accountant who can help you figure out the cost basis for the home, and assist in helping you figure out whether you’ll have any taxes to pay or estimate the amount of taxes you will have to pay the federal government.

Good luck.

I had a reader recently ask about avoiding capital gains taxes on the sale of a real estate property. It’s an interesting question and there are a couple of different options if you’re in a situation like that. Read below to see what I told them:

Q: I am 67 years old and own a rental property. I would like to sell the home but don’t want to pay taxes on the gain. Should I live in the property for two years and then sell it?

I’d like to avoid paying capital gains taxes on the sale. I am still working but I’m in the poverty income tax bracket. The house has no mortgage but the taxes, insurance and utilities are eating up my savings. Is there any way I could declare a hardship and avoid the capital gains taxes?

A: Before you make any decision, you need to know what effect the sale of your home would have on your federal income taxes. If you don’t make much money now, you’re probably not paying much to the federal government. If you know what sales price you might get from the sale of the rental property, you then can decide whether to sell it and not worry about the tax consequences.

However, if you’ve owned the property for many years and the taxes you owe will be quite large, you may have some options to limit the amount you pay without fully eliminating the entire tax bill.

The only sure way to defer the payment of capital gains and other federal income taxes on the sale of rental properties is to use a company that specializes in 1031 exchanges. When you use a company that handles 1031 exchanges you basically sell the current investment property, place all the proceeds from the sale with the exchange company and buy a replacement investment property of like kind within a certain time period.

Using a 1031 exchange will allow you to sell the property, but won’t let you get to the money. That money would be tied up in the new property you would be required to buy.

It seems that you probably want to sell the property and keep the money. If that’s the case, you won’t want to use a 1031 exchange. You’ll need to sell the rental property outright.

You talked about living in the rental property for at least two years. Well, when it comes to your primary residence, if you have lived in the primary residence for two out of the last five years, you can exclude from federal income taxes all profits up to $250,000 (or $500,000 if you are married). But the key there is that the home must be your primary residence and you must live in the home for two out of the last five years.

In your situation, you could move out of your current home and into the rental property and live there at least two years. But a couple of years ago, the IRS changed the rules: If you owned a rental property that was later converted into your primary residence, you would still have to pay capital gains and other federal income taxes due on the sale of that property based on how long the property was an investment property and how long it was your primary residence.

So moving into the home would not eliminate your obligation to pay capital gains taxes or other taxes to the federal government, but over time would decrease some of the tax obligation.

Still, it’s worth finding out exactly what you’d owe. Because the highest capital gains tax rate right now is 15, you might find that if you sell the property now, you won’t pay all that in capital gains taxes.

But you may owe more to the IRS because you have to recapture any depreciation you took on the property over the years.

Real estate investors typically take a tax break on their federal income taxes by depreciating the property. That depreciation may result in a reduction in your federal income taxes previously paid. When you sell the rental property, the federal government requires you to repay that benefit previously given to you at a rate of about 25 percent.

In other words, if you took $100,000 in depreciation on your rental property over the years, you’d owe $25,000 to the government when you sell.

Given all of this information, you need to understand what you ultimate liability would be if you sold the property. If you have someone that helps you with your federal income taxes, you can work with that person to see what it is you might have to pay if you sell the rental property.