Archive for November, 2009

Marketing your real estate

November 18, 2009

Each week I send an email to customers, clients and suspects with a selection of new commercial/investment listings that come into my mailbox. I say “selection” because there is a one-line synopsis of 150-200 listings, but it is just a portion of what I receive. The properties I select either represent what is new on the market, or may appeal to certain people on my email list.

When I get the listings I see graphically the shortcomings that otherwise excellent real estate practitioners make in their presentations.

My own background includes print advertising sales. I became a student of marketing back then, so whenever I met advertising professionals I picked their brains. I remain a student of marketing and note the good and the bad in real estate presentations. Here are the major and most common mistakes.

Email Subject Line: Studies show you have just moments to entice the recipient to open, not hit Delete. The Subject Line is the most important part of your email. If prospects don’t open it they will not see your property. When I see something like “Investment offering,” I reluctantly open it because I am in the business; but prospective buyers usually hit Delete. The Subject must be brief and specific about what’s inside.

Headline: No buyer will ever buy a 0000 S. Main St., but they might buy a small office building, on a large corner lot, with plenty of parking, directly across the street from the University of Michigan football stadium press box. For this listing I would use a simple Office Building Opposite UM Football Stadium. Not flowery – but that’s not the place to be flowery. I cringe when I see an address used for a headline.

Location: I have seen presentations of great properties “in Orange Township,” or “Near the popular Smith Park.” The broker may know where Orange Township is, or Smith Park, but I sure don’t. The first order of business is to give the location – logically. For a property that may be used by a foreign corporation I start with a map of the United States, then the region, state, and right down to the sight itself. If the property appeals to a local buyer I will forgo the bigger picture. A buyer loses interest fast if they have “Where is this property?” nagging at them.

Price: Studies show that real estate ads with prices draw 42% more calls, yet a remarkable number of presentations have no price. When there is no price I think either, “Sloppy broker – all information suspect,” or, “They’re afraid they’ll scare me off.” When I see “Contact broker for price and cap rate,” I read, “I must explain why the list price is too high.”

Auctions: When a property is put up for auction a buyer must have time for due diligence up front, because auction sales are final. If the auctioneer really intends for other brokers to present the property to their prospects they must have time to study it before taking it to their prospects. Yet, auctioneers have told me that 2-3 weeks notice is the standard of the industry, and daily I receive advertisements with a mere 10-14 days notice of the upcoming auction. Sperry Van Ness has a division that knows how to conduct a real estate auction.

Why: There are times when it is helpful to tell why a property is on the market; Owner Retiring, Bank Ordered Sale, To Settle Estate. If it is relevant to explain why such a good property is on the market, or why it is underpriced, the broker should use it in the marketing.

The Internet: There are many places on the Internet to market a listing and too many brokers use just one or two.

Commission Splitting: Why should the seller care? That requires an entire column. The answer will be given next week

If you would like to be included in my weekly email send me an email with the word INCLUDE in the subject line. Of course you are always welcome to discuss business

Land Depreciation: a case study

November 10, 2009

A number of years ago I had 840 acres of premier hunting land listed for sale. It had three private lakes and was a veritable duck & goose factory; not to mention that it was overrun with trophy-sized deer. Located in the middle of a triangle between Ann Arbor, Michigan; Toledo, Ohio; and Chicago, Illinois; this was the perfect, I mean perfect, property for a private hunt club. But I couldn’t get it sold. Every high net-worth person I spoke to said, “Sounds good – but that’s a lot of money for hunting and you can’t depreciate land.”

I scheduled an appointment with a CPA in a national firm. I showed him a map marked with the location of the property. The map was an oil exploration map showing all of the wells that had been drilled in the area, including the nearby Albion-Scipio field. That field is the most productive oil and gas producer east of the Mississippi; having produced more than 150-million barrels of oil, and billions of cubic feet of natural gas.

The Albion-Scipio followed a 3,500-foot deep fracture that ran northwest to southeast, just 5 miles west of my listing.

My map also showed the early discoveries of a new field; the Stoney Point. The Stoney Point field followed a fracture that paralleled the Albion-Scipio. The new field was on a course that, if it continued, would take it right through the center of the 840 acres.

Up to that point prospective buyers were unimpressed with the new field. “The oil business is sheer speculation,” was correctly said by all.

I was familiar with oil exploration and briefed the CPA on the business. I showed him my map with the projected path of the new field, charted by a geologist in the oil industry.

It’s well known that with producing wells there are tax deductions based on “depletion,” but no “depreciation” that I knew of when there was not a producing well. I challenged the CPA; “There must be some way we can use this information to justify depreciation.”

He phoned another office and we held a conference call with the firm’s expert in the oil industry, who came up with the solution.

“Allocate the purchase price, separating the surface rights and the sub-surface rights. The sub-surface rights (she spoke only of oil and gas) are depreciable over a five year period.”

Subsequently, any time I ran that past a prospective buyer I would emphasize the usual “may qualify – run it past your CPA and attorney.” The immediate response would invariably include something about the real estate broker chewing loco weed, but once they did their research they would phone their client and say, “By God – he’s right.”

Shortly thereafter, I sold an 840-acre hunt club I had listed. After going through the usual “he’s crazy” scenario, the attorney added an addendum to the sales contract allocating the purchase price, which in this case, did not matter to the seller (more on that in a future article).

The buyer was very aggressive. Of the $2,100,000 purchase price he allocated $600,000 for the surface rights and $1,500,000 for the sub-surface rights (oil, gas, minerals, sand and gravel). Those rights the buyer depreciated over a five year period. That is a $300,000 per year income tax deduction on hunting land!

Discuss this with your attorney and CPA prior to your next land purchase. You may not be able to come up with a justification for allocating the purchase price – but if you can…

You can’t depreciate land? Come on.

November 4, 2009

Historically, it has been taught that you can depreciate structures, but you can’t depreciate the land underneath. If you accept that premise you may be paying too much Income Tax. There are most likely tax deductions available, and there may well be tax credits.

You must follow Federal guidelines, of course, but if you take advantage of cost segregation you may:

  • Reduce your current tax burden
  • Convert ordinary income to capital gains income.
  • Defer income on the gain until you sell the property, at which time it can be further deferred with a like-kind exchange (subject of a future blog).
  • File an amended return and take the increased depreciation in the previous year(s).

Cost segregation:

It is becoming common practice to hire a firm with expertise in segregating the structure on paper in order to take advantage of shorter depreciation schedules on certain parts of the structure. Following are two paragraphs taken directly from the IRS web site. Note the reference to “land improvements”

http://www.irs.gov/businesses/article/0,,id=134122,00.html

Cost Segregation Audit Techniques Guide – Chapter 1 – Introduction

In order to calculate depreciation for Federal income tax purposes, taxpayers must use the correct method and proper recovery period for each asset or property owned. Property, whether acquired or constructed, often consists of numerous asset types with different recovery periods. Thus, property must be separated into individual components or asset groups having the same recovery periods and placed-in-service dates in order to properly compute depreciation.

When the actual cost of each individual component is available, this is a rather simple procedure. However, when only lump-sum costs are available, cost estimating techniques may be required to “segregate” or “allocate” costs to individual components of property (e.g., land, land improvements, buildings, equipment, furniture and fixtures, etc.). This type of analysis is generally called a “cost segregation study,” “cost segregation analysis,” or “cost allocation study.”

So what are land improvements? The IRS says they can be: I.R.C. §1245 property (shorter cost recovery period property) or §1250 property (longer cost recovery period property).

They vary with the industry; from logging, to golf courses, to car dealerships, and everything in between; but be confident they can be found in IRS guidelines.

With certain restrictions, here are just a few (those taken directly from the IRS guidelines are in quotes):

“Site work includes curbing, paving, general site improvements, fencing, depreciable landscaping, roads, sewers, sidewalks, site drainage and all other site improvements, such as storm water retention basins, not directly related to the building.  See also Landscaping & Shrubbery.  For sanitary sewers, see Site Utilities.  Does not include land preparation costs, see also Site Preparation Grading & Excavation.” Bollards, roadbeds, culverts, bridges, paving, gates, concrete landscape islands, guardrails, permanently affixed displays. “Foundations or footings for signs, light poles, and other land improvements (except buildings). Includes excavation, backfill, formwork, reinforcement, concrete block, and pre-cast or cast-in-place work.” Sanitary sewer, irrigation systems. “Clearing, grading, excavating and removal costs directly associated with the construction of sidewalks, parking areas, roadways and other depreciable land improvements are part of the cost of construction of the improvements and depreciated over the life of the associated asset.” ” Freestanding enclosures for waste receptacles, typically constructed on a concrete pad with its posts set in the concrete.”

This one applies to golf course in particular, but illustrates what may apply to other real estate. “For example, a golf course has a 6-inch underlying drainage pipe that carries runoff to holding ponds. The removal of the drainage pipe would require a 12-inch wide ditch. The depreciable costs would be the land preparation costs of 12 inches of fairway surface times the length of pipe running through the fairway. If there were 30,000 feet of pipe being installed, 30,000 square feet of land preparation costs would be depreciable.”

For other classifications of real estate go to the above web site and search: Depreciable Land Improvements.

Next week I will describe a method I conceived, and had confirmed by a CPA in a national firm, where under certain conditions a buyer may depreciate a significant portion of the purchase price of large land parcels. The most aggressive taken by a client of mine was 60% of the $2,200,000 purchase price, in five years. Raw land – no buildings.

I have yet to meet an attorney or accountant who didn’t initially say, “It can’t be done.” When I suggest they research it, I soon hear them say, “By God – you can do it.”