Buying New Homes For 77 Cents On TODAY’S Retail Amount?
April 15, 2009, Writen by: Chris Anderson, Ph.D
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In today’s market, everybody is looking for the next “great deal” which is obviously smart investing. However, many investors are also falling into the “you can buy at 50 cents on the dollar” trap. The trap that investors are falling into is that, unfortunately, these numbers are frequently referenced to yesterday’s market value and have little to do with what things are worth today.
Now let’s look at one way to buy new homes at a true 77 cents on the dollar relative to today’s retail value. To accomplish this, we are going to use a combination of a reasonable builder discount coupled with current, special IRS tax legislation. Using absolutely no “smoke or mirrors”, we are going to show you a real-life calculation, using IRS GO Zone tax law, to see how people are really creating equity for themselves.
Let’s look at the following REAL world example for a recent investor:
· True Retail Value: $141,128
· Net Purchase Value: $109,124 (Note 1)
· Net Cash In: $ 8,046 (Note 2)
· Realistic Profit In 3 Years: $51,664 (Note 3)
If you look at the above numbers, they are quite impressive numbers for purchasing and owning a BRAND NEW home and collecting some positive cash flow along the way (note that the positive cash flow has NOT been factored into the above for simplicity reasons). The difficulty is that many don’t recognize these “Net Numbers” when they see them offered on a home sales flier. In this article, we want to take you from actual purchase numbers and then show you how the above “Net Numbers” result. There has been 100’s of Millions of dollars in real estate done using these special tax results. Yet, most investors, and even most tax professionals, “just don’t get it!”
Referring to the above numbers, let’s now address the “Notes”:
NOTE 1: Realize that NO BUILDER in their right mind will sell you a home with that big of a discount to TRUE MARKET, especially when they are truly moving homes at retail prices. In this example, the builder has discounted their retail currently in this slow retail market. In addition, they have provided a reasonable discount to the GO Zone buyer.
The actual, discounted, purchase price on the home is $129,578. But, when you factor in GO Zone tax benefits, there is over $20,000 in real tax savings for an investor in a 35% tax bracket. When you take the actual purchase price and then subtract the tax savings, the NET purchase price becomes $109,124.
NOTE 2: Realize in this lending environment, most investor loans are pretty straight forward with 20% down plus closing costs. Obviously that is less than ideal but yesterday’s excesses impact you today.
In the above example, the total dollars required at closing is $28,416 which includes both the down payment and closing costs. But, when you realize that you get the tax savings back within a year or less, then your NET Cash In becomes that total amount to close minus your tax refund: or in this case, $8,046.
NOTE 3: In the GO Zone, while retail homes have seen a slow down they have not seen a “crash” like in other locations. Home pricing is very reasonable relative to income and the strong demand is expected to return with a small shift in the economy, home buyer incentives, relaxed credit, etc.
I know it seems strange to be discussing potential price escalation but at these locations, most professionals tend to agree that we have to go up in the area. Using a past, reasonable safe escalator of only 5%/year, you get to a retail value of over $163,000 in 3 years. Obviously nobody has a crystal ball and you can apply your own witchcraft here. However, when you look at the economic strength of the region, most agree that the area should do just fine over time.
Robert Kiyosaki once wrote that the wealthy “see” finances very differently than the average person by factoring in all aspects of a transaction including net tax considerations. As this example has shown, this is especially true for tax advantaged properties, such as found in the Katrina GO Zone.
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3 Responses to “Buying New Homes For 77 Cents On TODAY’S Retail Amount?”
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I thought Katrina GOZone property had to be placed in service by 12/31/2008
Hi Ralph.
No, not everywhere. There is 5 counties in Miss. and a few parishes in LA where it goes till the end of 2010. However, be advised that because of a quirk in the law, anything you plan to put in rental service needs to be done so before the end of 2009. Complicated situation but will address on our webinar
For those of you who do not know, we are hosting a webinar on the GO Zone on Tuesday April 21st, 2009 at 9 p.m. ET. To sign up, go to our home page and click on the webinar link!