Category Archives: Real Estate Terms

PortABILITY: The 4th Real Estate-Related Term of 2008

“Take what you can. Take what you can!”, I heard someone shout softly at my voting precinct, Iglesia Bautista de Renovacion (Baptist Church of Renovation for you English-speaking heathens), last Tuesday.

I guess.

By now, Amendment One is so last week’s news. Britney was released from UCLA Medical Center while “in the throes of a mental health crisis”, the Eli Manning-led NY Giants won the Super Bowl, Andy Petitte talked to the House (he tried HGH only twice – no for real, he was recovering from an injury) and Kazaam was handed a one-way ticket to the desert.

In the meantime, A Miami Real Estate Blog was busy at work adding a 4th real estate-related term to the 2008 list.

A MIAMI REAL ESTATE BLOG: Ladies and gentlemen, it is with great pleasure that I introduce to you

[Drumroll.]

A MIAMI REAL ESTATE BLOG: Portability!

[The crowd rises to its feet.]

PORTABILITY: Thank you, thank you…thanks…too kind. Please, please…have a seat. [Pause.] I want to, first and foremost, thank YOU all for your support. Thanks for showing up in droves and making all of this possible.

[Deafening applause.]

PORTABILITY [after a short pause.]: I’d like to specially thank Governor Crist for indoctrinating his tireless efforts. Without him, there is no me.

CROWD [in unison]: Charlie, Charlie, Charlie, Charlie…

[GOVERNOR CRIST, tickled pink and seated to PORTABILITY’S right, stands and acknowledges the crowd.]

GOVERNOR CRIST [in a soft whisper meant to be lip read, not heard]: Thank you. Thank you.

PORTABILITY: Due to the exhaustion caused from the overwhelming support, I will not be answering any questions today. I have chosen a publicist, A MIAMI REAL ESTATE BLOG, to do the talking for me.

A MIAMI REAL ESTATE BLOG: Portability has been with us for about 9 days now. My apologies for not introducing him sooner. I felt that we needed to get to know each other a little bit better before I introduced him to the masses. As he mentioned seconds ago, he’s a little weary from the traveling and endless campaigning, so I’ll be doing most of the talking for him.

If you received a Homestead Exemption in 2007 on a Florida home that you sold or abandoned during 2007 and purchased a new home in Florida that served as your primary residence as of January 1, 2008, you are eligible to take some or all of the benefit (up to $500,000) of Save Our Homes (Amendment 10) to your new home. The Save Our Homes benefit is the difference between the Market Value and the Assessed Value of your (previous) homestead property.

Portablity Example

Let’s say that Danny Adejo owned a homestead property in an unincorporated area of Miami-Dade County in 2007 in which the following scenario applied:

2007 Market Value: $331,281
2007 Assessed Value: $178,848
– Homestead Exemption: $25,000
2007 Taxable Value: $153,848

2007 Millage Rate: $18.5679
2007 Property Tax Amount: $2,856.63

Save Our Homes Benefit: $152,433

(Please keep in mind that in order to simplify things, I am not including non-ad valorem assessements like garbage/trash removal, recycling, fire fees, etc. in the examples.)

Mr. Adejo purchased a new property in unincorporated Miami-Dade County in June 2007. The sale price of the new home was $385,900. Since Mr. Adejo occupied the home as his primary residence as of the assessment date (January 1, 2008), he qualifies for a Homestead Exemption. As a result of Amendment One’s enactment, he also qualifies for portability in 2008. His new scenario (assuming that the Miami-Dade Property Appraiser will assess the property at the same amount as the purchase price) is as follows:

2008 Market Value: $385,900
2008 Assessed Value: $385,900 – $152,433 (Save Our Homes Benefit) = $233,467
– Homestead Exemption: $25,000
– 2nd Homestead Exemption: $25,000
2008 Taxable Value (non-school district): $183,467
2008 Taxable Value (school district): $208,467

2008 Total Millage: $18.5679
2008 School Millage: $7.6078
2008 Non-school Millage: $10.9601

2008 Property Tax Amount: $2,010.82 + $1,585.98 = $3,596.80

(The 2007 millage rate was used for the 2008 example.)

Let’s take a look at Mr. Adejo’s scenario had Amendment One not passed last week:

2008 Market Value: $385,900
2008 Assessed Value: $385,900
– Homestead Exemption: $25,000
2008 Taxable Value: $360,900

2008 Millage Rate: $18.5679

2008 Property Tax Amount: $6,701.16

Wow! As a result of Amendment One’s portability opportunity, Mr. Adejo will save $3,104.36 in property taxes in 2008 in his new home.

Hold on. Before you pop the Veuve Cliquot in celebration,

veuve.jpg

let’s take the scenario one step further. Mr. Adejo did not sell his former homestead property in 2007. Instead, he decided to keep it as a non-homestead investment property.

Assuming that the Miami-Dade Property Appraiser’s Office makes no change to the market value of Mr. Adejo’s non-homestead property for the 2008 tax roll and that the 2008 millage rate remains the same as 2007’s, the scenario will look as follows:

2008 Market Value: $331,281
2008 Assessed Value: $331,281
2008 Taxable Value: $331,281

2008 Millage Rate: $18.5679

2008 Property Tax Amount: $6,151.19

Ouch! That’s a 215% increase in property taxes for the non-homestead property. Instead of saving $3,104.36 in property taxes in 2008, Mr Adejo is actually in the red $190.20:

$3,104.36 (taxes saved from portability in new homestead property)
– $3,294.56 (increase in taxes in non-homestead property)

Why did Mr. Adejo’s property taxes rise by astronomical proportions at his non-homestead property in 2008?

Well, for starters, Amendment One just didn’t go far enough in addressing property taxes for non-homestead second homes, investment properties, commercial properties, vacant land, etc. You can see that the tax burden in the preceding scenario (which, by the way, is a real one) was just shifted from one property to the other.

Yes, had Amendment One not passed, Mr. Adejo would be facing two stiff property tax bills instead of one.

Interlude: I don’t know about you, but $3,596.80 in property taxes doesn’t exactly sound like a bargain to me – portability or no portability.

That’s not the point, however. Mr. Adejo decided to keep his former homestead as an investment property and provide quality housing to a qualified tenant. The chances of Mr. Adejo breaking even, let alone having a positive cash flow in the non-homestead property due to the large property tax increase, is slim to none. The rising costs of property taxes, as well as property insurance, have literally washed away the rental economics of owning residential investment property in South Florida.

Mr. Adejo is forced to make a decision sooner rather than later. Continue to hold on to the property despite a negative cash flow in a “declining market” (it’s official) or attempt to sell the property in an already crowded real estate market.

Transferring Save Our Homes Benefit to Your New Home

If you qualify for portability in 2008, you must apply for a Homestead Exemption with the Property Appraiser’s Office by March 3, 2008. In addition, you must also submit a Portability Application Form (DR-501T) to the Property Appraiser’s Office by March 3, 2008.

If you have already applied for a Homestead Exemption on your new home, you must still complete the Portability Application Form by March 3, 2008 in order to benefit from portability.

Someone looking to transfer his/her Save Our Homes benefit from a previous homestead located in a different county, needs to fill out a Certificate for Transfer of Homestead Assessment Difference (DR-501R) with the Property Appraiser’s Office in the county in which the new homestead is located.

Additional $25,000 Homestead Exemption

All persons currently receiving a Homestead Exemption and who continue to live in the same (primary) residence will automatically qualify to receive the additional Homestead Exemption. You need not apply for the new Homestead Exemption.

10% Assessment Limitation on Non-homestead Property

2008 will serve as the base year (first year) for the 10% limitation on the assessed value of a non-homestead property. Owners of property subject to the 10% assessment limitation will need to apply with the Property Appraiser’s Office on or before March 1 of each year beginning in 2009. As it currently stands, the 10% limitation will not renew itself like the Homestead Exemption. You must apply each year in order to qualify. Applications are not yet available for the 10% limitation.

For more detailed information on Amendment One, visit the Florida Department of Revenue’s website.

If you prefer to speak to a human voice (I think), feel free to call me at 305.491.7179.

Adrian Salgado is a Realtor Associate with RED I Realty in Miami, FL and can be reached at 305.491.7179 or SalgadoA@gmail.com.

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Filed under Portability, Property Taxes, Real Estate Terms

Top 3 Real Estate-Related Terms for 2008 in South Florida

If you haven’t already encountered these terms in casual conversation – don’t worry – there’s still plenty of time to catch up. After the following introduction, you’ll possess just the right amount of knowledge to be able to discuss these most important matters over a cup of tea, a pint of brew, or a tall glass of heavily chlorinated new world water.

Short Sale

A short sale occurs when a property is sold at a purchase price that is insufficient to cover the amount necessary to pay off any liens and/or encumbrances secured to the property (first/second mortgage, prepayment penalty, etc.) and the expenses (real estate commission, documentary stamps, attorney/title fees, etc.) associated with the sale.

For a short sale to take place, the lender must agree to accept a discounted payoff. In other words, the lender must be willing to receive less money (from the sale of the property) than is actually owed in exchange for releasing the “short seller” from the lien(s).

The term “pre-foreclosure” is commonly used to describe a short sale situation.

The following is a fictional scenario that should help you better understand the concept of a short sale:

Jose Sabelotodo, better known to his personal and “business” associates as Cheito, purchased a bad a*s penthouse in an 8-story luxury boutique building with only 3 units per floor in the Patta Alla section of town. He paid $500,000 at the height of the condo boom in the summer of 2005. In need of keeping his payments as low as possible in order to maintain his enviable lifestyle – Benzino, Rolex, pinky ring with a 2-carat diamond, Armani suits, dinner at Azul, a nose candy habit, and a revolving door of the finest escorts north of Cali, Colombia, Cheito leveraged as much of his money as he could and opted to finance 100% of the purchase price with a 2-year interest-only adjustable rate mortgage (ARM).

At the time, he figured, “in two years when the interest rate on my ARM adjusts from a 6.25% to a 9.25%, I’ll be able to refinance into a 30-year fixed mortgage. By then, after I marble out the living room, remodel the kitchen and all 3 baths, this baby’s gonna be worth about $675,000. With my clinics and the Assisted Living Facility (ALF) doing this well…oh and that condo conversion my buddies and I are doing in East Hialeah….quien sabe? I’ll sell this y me mudo pa’ Cocoplum.”

Fast forward two years (Cheito’s ARM is set to adjust).

Cheito’s bachelor pad (he’s now twice-divorced with two child support payments – one to each baby momma) depreciated a whopping 20% (he took a bad hit – he failed to factor in the importance of being in an established or emerging neighborhood when he decided to purchase in Patta Alla).

In addition, he had to let his clinics go pennies to the dollar cause the Feds were hot on his trail.

The ALF? That got shut down – it wasn’t licensed and the daughter of one of the elderly under its care blew Cheito’s cover when she complained to the Agency for Health Care Administration (AHCA) about her mother’s soiled sheets not being changed, as well as the weeks-old bedsores that were left untreated.

You’re probably wondering, “Cheito still had that condo conversion thing going though right?”. Not quite. After choosing not to renew any of the leases and “decking out” the 10-unit all studio building, the on-site sales team from Yo Lo Vendo Realty was unable to close one sale. The keys to the locks of all 10 doors were recently handed over to the lender who financed the project, El Diez de Oro.

Cheito’s income stream is now down to a small percentage of what it was just two years ago. In fact, the only thing keeping him from going hungry these days is the graveyard shift one of his few remaining “socios” was able to hook him up with en un “huerhow” (that’s warehouse) west of Miami International Airport.

Cheito cannot refinance his property – it has no equity and besides, lender underwriting guidelines have become much, much stricter these past two years. Furthermore, his bank account is in the red and he cannot afford to make these exorbitant payments anymore.

What is Cheito to do?

Cheito, ladies and gentleman, is a prime candidate for a short sale. He has no problem proving a hardship (although you have to wonder how Cheito was able to qualify for that loan in the first place), he has no assets, and he can prove that his bank account hasn’t seen a deposit in over 6 months.

“How about if the lender doesn’t accept a short sale”?

Well, that leads us to our second term for 2008.

Foreclosure

If the lender doesn’t accept the short sale and Cheito hasn’t made a payment in about 90 days (this varies), chances are that the lender will begin a legal proceeding known as a foreclosure.

A foreclosure is a legal proceeding in which the lien holder (usually a bank or other financial institution) sells or repossesses a property due to the borrower’s (Cheito’s) failure to meet his or her contractual obligations – a default in payment of a promissory note, secured by a lien on the property.

In other words, the borrower is delinquent on payments and the lien holder either sells the property at a foreclosure auction after going through the legal process of “foreclosing the mortgage or the lien”or receives title to the property if no buyer steps forward at the auction.

If misery truly enjoys company, boy is Cheito enjoying himself these days. As of October 2007, 20,457 mortgage foreclosure filings had been filed with the Miami-Dade County Clerk of Courts. Compare that to all of 2006‘s filings of 9,814 and that gives you an astounding 108% increase from 2006 to 2007 (November 2007 and December 2007 figures are pending).

In a case such as Cheito’s where the remaining mortgage balance is higher than the actual value of the property (negative equity), the lien holder is unlikely to attract any bids and, as a result, becomes the owner of the property.

At this point the property becomes…

Real Estate Owned (REO)

Real Estate Owned, more commonly known as an REO, is a class of property owned by a lender after an unsuccessful attempt to sell the property at a foreclosure auction.

REO’s are becoming more and more common these days in South Florida due to the fact that a very large percentage of the properties going up for sale at the auction have negative equity and therefore, are not sold.

The lender now attempts to sell the property (at a loss) through more traditional channels (i.e. the use of a realtor). The lender may remove some of the other liens or encumbrances attached to the property and/or repair some of the damages in order to make the property more marketable.

In general, REO properties are known to suffer from deferred maintenance and/or are in need of extensive repair. However, in some cases obtaining a property at a low enough purchase price may be enough to compensate for the condition of the property.

Congratulations! You are now qualified to hold a casual conversation regarding short sales, foreclosures, and REOs at your local Starbucks, Jamba Juice, or neighborhood bar.

2008 promises to be a year filled with opportunity for savvy real estate investors looking to benefit from current local real estate market conditions.

Will you be a spectator, a participant, an innocent victim or any combination of the three?

You don’t have to answer that.

Disclosures: Any similarities to persons and/or corporations living or dead is purely coincidental. Adrian Salgado is a Realtor Associate with RED I Realty in Miami, FL. He is not licensed as a lawyer nor a CPA and cannot advise on those consequences. However, he can be reached at 305-491-7179 or at SalgadoA@gmail.com if you have any real estate-related questions or just need someone to talk to about society’s ills.

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Filed under Real Estate Terms