Why Use An LLC for Real Estate Investments | LLC

25th Apr 2016 Blog

There are a number of reasons why the limited liability company, or LLC, has become increasingly popular for the purpose of owning of real property. The benefits and protections afforded by an LLC often far outweigh the costs and burdens of forming and maintaining an LLC. While each situation is different, there are a number of clear and common reasons to use an LLC over a corporation. One of the most obvious benefits of an LLC, like a corporation, is that it limits the personal liability of its members. However, unlike a corporation, where shares of stock are attachable by judgment creditors, interests of LLC members are not attachable. In an LLC, the owners’ exposure to liability is insulated by the protection of the LLC. Another advantage of an LLC is the benefit of pass-through taxation, whereby the business income “passes through” the business to the owners’ individual tax returns. Pass-through taxation applies to a single member LLC or one formed with two or more members, which are by default taxed as a partnership. Single-member LLCs are taxed as a sole proprietorship, and thus no separate tax return is required. These tax classifications enable real estate owners to avoid double taxation on the income generated by the property and the appreciation in the value of the property upon disposition. Single member LLCs also provide the convenience of not having to file a separate tax return and the activities of the LLC can be reported on Schedule C of the individual return. Furthermore, in a 1031 Exchange, a single member LLC can dispose of real estate held under one LLC and purchase under another and still meet the statutory tax deferral requirements as the transaction is tracked by the federal identification number of sole member and not the identity of the …

What I Learned From One Mistake That Seven Years of College and Law School Did Not Teach Me

15th Apr 2016 Blog

Back in 1988, when I graduated with honors in Economics from UNC Chapel Hill, with a prestigious Morehead Scholarship, I figured I was pretty well equipped to succeed in whatever I endeavored. Thus I ventured out to invest in real estate. A brand new tower was being constructed in Flushing Queens, around the corner from where I lived at the time. I walked into beautifully decorated and arranged apartments with modern furniture and sleek paintings, with a nice lobby and a parking lot with gorgeous looking sales staff. They convinced me that if I invested in a $148,000 condo, after paying the requisite 20% down payment and closing costs and obtaining a mortgage for about $120,000, I would be able to rent the 450 square feet for $1,100 a month and would soon be on my way to real estate riches. They all sounded very earnest and sincere, so I figured they had my best interest at heart. As a result I applied for and got a mortgage from then Green Point Bank at 8% per annum, over 30 year fixed rate amortization, which at that time was a bargain, considering I did not have a full time job or a credit score I was aware of. At the closing, I discovered that my monthly interest and principal payments were $880. With tax escrow of about $150 per month and $230 of common charges per month, my monthly payment was $1,260 per month. After closing, it took me a few months to rent the place for $750 per month, which was the going rate at the time for a studio. Absorbed in the excitement of owning real estate, I had done no homework. I was starting out with a $510 per month deficit on an investment of about $30,000, not …

What To Look For In An Offering Plan

14th Apr 2016 Blog

The purchase of a unit in a cooperative or condominium has significant legal and financial consequences, so prospective buyers should always be sure to consult with a competent real estate attorney prior to signing a purchase agreement. These purchases present an additional challenge to buyers in the form of a voluminous and legalistic document known as an Offering Plan. Co-ops and condos are subject to the Martin Act, which requires that the complete terms and conditions of the property be fully outlined in an offering plan. Many offering plans can be anywhere from 300-500 pages long. The offering plan itself contains an array of information, including floor plans, unit sizes, architect’s reports, calculation of common charges or maintenance, types of appliances to be installed, how many units the sponsor plans to rent, as well as a Special Risks section that is perhaps the most important provision in a new offering. The Attorney General requires that all of these details be apparent. Most buyers will never read through the offering plan, so a good real estate attorney will carefully review all of the relevant details to arm the client with the necessary information in order to make an informed decision on whether or not to purchase. A buyer seeking to finance their purchase should pay close attention to how many units, if any, the sponsor plans to hold to rent. While bank requirements vary from one to another, many banks do not lend in buildings with low owner-occupancy rates. If the offering plan does not contain a mortgage contingency, buyers could be in for a rude awakening when they lose their down payment. Buyers should also be aware of unexpected costs, which may be specifically imposed on one party or the other in the offering plan. Unit closing costs and adjustments, …

Who is Pan Am Mortgage? I Have Never Heard of Them

12th Apr 2016 Blog

A borrower need only turn on their TV, radio or search the internet to reach traditional lenders like Wells Fargo, Bank of America, Chase, Santander, etc. These lenders can be great for individuals who are buying single family homes throughout the country. However, in the Tri-state area it often takes a little more than just sitting in a bank lobby and completing a 30 year fixed mortgage application. Mortgage Brokers in the New York City area need to know their market and their borrowers inside and out to make any purchase or refinance a smooth transaction. Pan Am Mortgage is a professional group of seasoned loan officers who are knowledgeable with all lending situations in the city, whether they are warrantable or unwarrantable Condos and Co-ops or multi and/or single family residences. Even foreign nationals are not an issue if qualified. Pan Am has lenders for all of the above properties and situations. Pan Am has been in business for 16 years. We are conveniently located in Midtown Manhattan at 116 East 30th Street. At Pan Am Mortgage we pride ourselves on being a one-stop mortgage broker. Our strength is that we have experienced Loan officers who know how to pre-qualify clients for real estate brokers. With our pre-qualification in hand, the real estate broker can be 100% confident that the transaction will close if they find the right property. In 2015, Pan Am closed over 90 million dollars’ worth of mortgages with approximately 20 different lenders. We offer a tremendous amount of options to our clients, and we thoroughly explain every detail of the loan process and all program options available. The client can then make an informed and educated decision on which option to choose. We base these programs on their credit profile. We explain the different products …

Why So Many Conditions On My Mortgage Applications? | mortgage

28th Mar 2016 Blog

The larger banks like to hire Junior Underwriters and Processors. It saves them big dollars in the short run, but does it build broker loyalty in the long term? I had been doing a lot of business with a well-known wholesale lender, 60-70 % of my pipeline would consistently be placed with this lender. They would react to all my concerns and work very hard to close my deals in a nice timely manner, with conditions, but nothing out of the ordinary. I closed a lot of business and the Account Executive would always respond to my concerns. As they grew, I noticed my account managers being transferred and I kept getting new processors. At first it was no big deal. Then I started noticing 50 + conditions a file? I am not new to the rodeo and I started researching conditions that I found were in the original submission and already in the file. This went on for a few loans and then I researched some new lenders who treated me the way I expected in the loan process. The loans were underwritten skillfully and no conditions that were totally out of whack!! So the moral of this post is that although there are many banks out there promising the world and having that brand name, they are also watching the overhead and putting people in positions that they were not quite up to speed on and delaying the loan process which does not make the client happy! I will always go with the Lender with the best inside team, Account Executive, processor & common sense underwriting. Win, Win every time! Thomas Dougherty, NMLS # 232024 Branch Manager Panam Mortgage & Financial Services, Inc., NMLS# 3360

What To Look For In Condo And Co-op Financials

27th Mar 2016 Blog

It is essential to review the financial information of a co-op corporation or condominium association prior to buying. When conducting due diligence on a building, one of the key documents is the annual financial statement. The financial statement is an indication of whether the building is in good or poor financial condition. Under New York law, every co-op corporation or condominium association must furnish its board of directors, and shareholders or unit owners, a financial report prepared by an independent, certified public accountant. Prospective purchasers should seek the advice of a diligent and experienced real estate attorneys like the firm of Kakkar & Associates to conduct due diligence on the building’s financial status. The financial statement will usually include the CPA report, balance sheet, income statement, cash flow statement and reserve fund. In reviewing each of these items, the focus should be on the assets, income and expenses of the building. If the building is a co-op it should have sufficient cash-on-hand to cover monthly expenses, and it should also have a healthy reserve fund to cover repairs or capital improvements to the building. If the reserve fund is insufficient, the likelihood of an assessment for such repairs or capital improvements is greater. Additionally, a lot of lenders will not lend in buildings where reserves are not at a minimum 10% of the gross annual revenues. In a co-op, where the underlying land is owned by the cooperative, the underlying mortgage can have a significant impact on the financial condition of the building. If the mortgage is maturing and rates are going up, then it is likely that shareholders’ maintenance will increase. A fixed rate mortgage, generally lasting five years, with twenty five year amortization, might be more favorable as compared to adjustable rate mortgage where the monthly payment may …

Mortgage Contingency Explained

15th Mar 2016 Blog

Buying a property is one of the most important decisions most of us will make in our lifetimes. While we hear a lot about both domestic and foreign buyers with all-cash offers, the bulk of the purchases are still subject to financing. This “mortgage contingency” clause is perhaps one of the most important provisions in a purchase contract. A mortgage contingency provision is designed to allow the Buyer a certain period of time to obtain a Mortgage Commitment from a lender. Simply stated, this is a clause whereby if the buyer cannot secure a mortgage loan within a stated period of time, either party is free to cancel the transaction if within the contingency period the buyer obtains a denial from a lender and properly notifies a seller. Some contracts call for the buyer to only apply to an Institutional Lender, defined as a conventional bank or mortgage banker. Other contracts include mortgage brokers in the definition of the Institutional Lender. Make sure before you reach out to a broker, you look at this definition carefully. A broker like Panam Mortgage & Financial Services, Inc. (“Pan Am Mortgage”), unlike lenders or bankers, has more options. Pan Am has relationships with over 50 wholesale lenders and we update all rates and programs on a daily basis as opposed to having a single option at one lender. We can generally obtain financing for unconventional properties or borrowers, or for amounts that greatly exceed Fannie Mae and Freddie Mac limits. We have relationships with banks who will keep and service their loans. Many a times, borrowers will equate a pre-approval letter to a mortgage commitment. Most brokers issue pre-approval letters if borrowers meet the basic requirements for a loan, i.e., they have sufficient income, assets and the requisite credit score to qualify for …

What Lenders Look For in a Credit Report

11th Mar 2016 Blog, Credit Scores, Mortgage

How to analyze and help your credit score. Although each of the three credit bureaus, Experian, Trans Union and Equifax have a different algorithm to measure credit scores, they all basically use the same information. It is best to look at your credit report several months before you commence the financing process. A good mortgage professional like those at Pan Am Mortgage can give you priceless advise in anaylzing and boosting your credit scores. Rates are determined by credit scores, thus the higher the score, the better the rate. While you can get your own annual free credit report from each bureau, a single bureau report does not break down the information in a useful manner to facilitate easy analysis. So if you are shopping around for a home loan, have a report with all bureaus scores on it, and make sure it is not pulled repeatedly by different mortgage people. Ask your broker to give you a copy of your credit report. A good loan officer will not refuse, as he or she knows that even after you shop around, you will come to back to them. What to look for in your report Make sure your names, i.e., all variations, are correctly listed along with your social and home addresses. Your employment history is also listed. Make sure that information is consistent with your actual history. If there is inconsistency, it can raise red flags during mortgage process. Correct any information by contacting the bureaus and they have an obligation to investigate and correct any misinformation. Percentage of Credit Use to Available Credit. Our loan officers will carefully review your credit history and tell you what to do to increase your scores. It is often advisable to use less than 50% of your available credit. Once the home …

Big National Banks: Open up the Wholesale Lending Channel

Closing wholesale mortgage channel by big banks is like killing the messenger because they did not like the message. The mortgage bust of 2008 was not created by wholesale mortgage brokers, but as elegantly depicted in the movie, The Big Short, everyone but the brokers. Brokers did not have their own money to lend. They were just a channel by which money was pumped in the housing market by unscrupulous bankers and secondary mortgage backed securities markets and the rating agencies. Safeguards put in place to monitor the individual brokers since the crises, including vigorous testing and licensing and extensive back ground checks including criminal and most importantly credit checks to make sure those peddling credit can at least manage their own credit, have weeded out the dishonest and incompetent brokers out of the business. Only 6% of those brokers in business in 2008 remain in business today. This is the cream of the crop that consists of knowledgeable, caring, informed, honest and hard-working professionals who understand their clients’ needs on a personal basis and can suggest better options. Moreover, compensation caps instituted by Dodd-Frank limit what the brokers make, thus dis-incentivizing hard sell pitches. Therefore, besides opening the alt-a loans, as discussed in my post of a few days ago, the big banks need to re-open the wholesale channel. This a win-win situation for all. Banks will save the massive overhead expenses they incur in opening and managing big facilities and brokers who have a more direct relationship with the consumer can provide better service and a menu of options. With the new safeguards in place, this channel is critical to providing credit to a large swath of borrowers. This is good for the consumer, the housing market and the overall economy.

Lenders Need To Add Atl-A Programs So That Everyone Can Participate in Housing Recovery

Over the past 8 years, the lending pendulum has swung towards extremely conservative underwriting. The benefits of low interest rates have primarily accrued to those with the highest credit scores and people with secure jobs and enough cash in the banks to meet the full documentation requirements on loans that are then sold to Fannie and Freddie. With all the fines and penalties paid by both small and big banks after the hangover of the last mortgage boom, almost all the major lenders have become risk averse and have left the same people who suffered the most in the last boom and bust on the sidelines, as those with pristine credits have continued to take advantage of ever lower interest rates. It is time to provide credit to those on the second rung of the credit ladder. Between the A paper and sub-prime resides Alt-A lending. A lot of borrowers used Alt-A from banks like Greenpoint in 1990s, when they did not have either sufficient income, assets or credit history to qualify. This program is perfect for those who don’t have two years’ full incomes, or sufficient cash reserves or W-2 salaried jobs, or in other words those other than mostly well off with stable incomes and credits. Alt-A serves people with at least a minimum fico of 680, who may be lacking one or the other requirements of prime lending. Alt-A can be a common sense alternative if used wisely, i.e., verify self employment income, limit loan to values to no more than 75 percent, use one year’s income if possibility of continued employment is high and limit to owner occupied properties. There are a few banks out there offering this at sub-prime rates. However, It is time the pendulum starts swinging back towards the middle and banks need …