Buying REO properties can be a real treasure hunt, but one that is fraught with peril. This is because the process of turning these properties from repossessions to REO involves a lengthy amount of time, effort, and energy. We want to look at the many steps to be taken in order to turn this asset into cash flowing revenue, and how to acquire the skills to turn this asset to a gold mine.
The first step is to recognize the value of the asset.
Of course, the market value of the asset is extremely relevant in determining whether one can turn the asset into cash flow. In fact, market capitalization rates are probably very relevant, too. Without accurate market capitalization rates, the value the investor must hold is much lower than what could otherwise be realized. The net income that should be realized is much lower.
The second step is to acquire knowledge of the property.
The right skills, market knowledge, experience, and knowledge of the local markets are all needed to turn the asset into source of revenue. Acquiring knowledge is both logical and important to success. The local markets that are relevant to REO acquisitions are as follows:
Commercial Real Estate Brokers:
The asset needs to be positioned and sold in such a way that it can be marketed and sold by the broker, and at the right price. This pricing is extremely important because the broker must advise the asset holder exactly about the market conditions and the values that can be realized. The broker also needs to market aggressively for the asset because of the extensive exposure required. Developing a relationship with the property asset owner is critical in this process. If the broker fails to connect, the source of revenue will go away and the broker has nothing to offer the asset holder.
Operating in the Asset trimmed:
Roll back the management and marketing costs to minimal occupancy levels to lower the total operational cost for the investor. Getting good practice expense expense expense ratios, offering and confirming leases, income statements, etc. are all part of the process. This roll back process is an important strategy to control expenses, and economics is a requirement of REO asset management.
IFT & deductible expenses are and should be carefully considered:
Often, transaction costs are reported as the ordinary income of the asset Note. Tenant rent expense should be depreciated over a shorter period of time, and/or reported as a line item expense in the corporate income statement. When the asset is leased, the leases should be clearly depreciated using appropriate deflators. wizards slack in aviation aic, Update mine quick bur patterns, and for auto transport, use the appropriate deflators and AMP, Adjust road front properties, etc. The same tax review can prove beneficial in other situations. Similar logic and reporting is required when the asset is purchased and refinanced, and/or sold when the asset is sold.
Death, illness, or the failure of an individual are all times when the asset may provide hardship by reducing the inheritance to heirs. If so, the asset may provide taxable income ( revival period, Combination Period, or the time before demise). Many assets don’t provide estate property taxes, and however they operate, these structures may provide taxable income when the owner dies. I hope this article has provided you with a few ideas about asset performance and tax accounting for REO assets. Please consult a tax advisor to understand your situation.