HOME PAGE

The Black Hills Market Watch gives you daily, weekly and monthly comprehensive analyses of the current real estate market, the historical trends and news that affects your real estate decisions. We also try to provide a rich reference-library collection of checklists, guidelines and tips, for making the most of the properties you buy or sell. We hope you'll enjoy it and offer feedback.

This includes key local market indicators such as median price of sold properties, median price of un-sold properties, days-on-market, price reductions, sales per month, number of currently pending sales, and months of inventory on hand (how long it would take to sell all the currently unsold properties at current rates of sales).

Black Hills Market Watch also tracks key national market indicators such as Federal Housing Price Index, the Pending Home Sales Index, Unemployment Index, GDP growth, Consumer Confidence Index, inflation, Consumer Savings Rate, and mortgage rates.

The Black Hills Market Watch also analyzes the implications of public policy issues that impact local real estate markets, such as stimulus-monies, IRS/Tax Code rules, loan guarantees, Federal Reserve policy, foreclosure regulation, low-income assistance, mortgage financing criteria, and inheritance/wealth-taxes. This includes actions by Federal regulatory and statutory agencies, quasi-governmental financing institutions, Rural Development, South Dakota Housing Development Authority, mortgage lenders, appraisal services, and others.

Finally, the Black Hills Market Watch monitors and analyzes consumers (real estate buyers and sellers), including demographics, and behaviors.

Your many suggestions and requests have proven invaluable in developing a Black Hills Market Watch that addresses the questions most important to consumers, lenders, and real estate agents. Please continue to offer your ideas and make requests via the Comments box below each article.

All information on this site is (C) 2009 Black Hills Market Watch. When you use or cite information from this web site please include this exact phrase:
"Source: www.BlackHillsMarketWatch.com".

DEFER TAXES WITH "REVERSE" 1031/STARKER EXCHANGES ON BLACK HILLS INVESMENT PROPERTY

The 1031/Starker Exchange is one way to avoid or defer capital gains on property. But the IRS also recognizes the "Reverse-1031." We believe the Reverse-1031 can become more attractive in this real estate market, particularly if you suspect the valuation outlook for your next property is rosier than your current property.


The more familiar ("regular") Delayed-1031 exchange involves selling your current investment now, then replacing it within 180 days with like-kind property(s). If all the criteria are met the IRS recognizes this sale as a non-taxable capital gain (for now). The IRS Publication 544 gives more details. The Internal Revenue Code itself provides more guidance (see Section 1.1031, the identifier from which the policy gets its name).

In a Reverse-1031/Starker Exchange, Internal Revenue Procedure 2000-37, you don't have to wait until you sell your current property before finding the replacement property. But when you find the replacement property you'll need to involve an "accomodation titleholder" to take possession until you sell your current property. (You cannot own both properties simultaneously.)

This seems to be a very handy way to handle a situation where you suspect you've already found the next, replacement property and you're concerned about it's purchase price escalating faster than your presently held property while you try to sell the present property.


And then, there's the risk that you'll have difficulty selling the current property, in which case the IRS plays arson on your 180-day burning platform.

TAX-FREE TRANSFER OF YOUR IRA FROM STOCKS TO INVESTMENTS IN BLACK HILLS REAL ESTATE

Most people assume that an IRA is synonymous with stocks and mutual funds. Not true. When Congress set up the IRA tax deferral concept, they deliberately left it wide open for us to invest our IRA's in many kinds of assets other than stocks. But most stock brokers sure don't tell you about this.

In fact, when Congress established the IRA tax-avoidance/deferral program, Internal Revenue Code 4975, they said we could invest in any type of asset, except for five very specific things:

1. Collectibles such as art, antiques, jewelry


2. Life insurance


3. Coins


4. "Party-in-interest" transactions


5. Most sub-chapter 'S' stock.
   

So that means Congress intended we could invest our IRA's in just about anything else, such as French gas stations, American fast food resturaunts, or...Black Hills real estate. (Full disclosure: I have transferred much of my lifelong retirement savings out of gambling in the stock market, over to investing in Western-U.S. real estate. And done very well, thank you.)

As it turns out, real estate is one of the easiest forms of asset to invest in with your IRA. And buying real estate with my IRA was no more complicated than buying my last home.

However, keep in mind that the IRS is real persnickity about not violating a few specific "prohibited transactions", which they enumerate very clearly in IRS Publication 590, Individual Retirement Arrangements. The IRS penalties for violating one of these prohibited transactions can be severe. But it is not difficult to steer clear of problems if you don't play games against the IRS.

It has helped me to think of it this way (I hope this is right). The IRS seems to treat my IRA account as the domain of virtually another person, separate from me. The IRS knows that my "Lee's IRA" does not pay taxes. So the IRS gets real interested if this guy "Lee's IRA" starts slipping assets to the real Lee. Reason is, the real Lee is not tax exempt. And if a tax exampt entity has avoided paying taxes, then if that entity (my IRA) starts shuttling money or beneficial use of assets to me, then the IRS regards it as a "taxable distribution.

In fact, that is why it is important to invest in things that will not transfer virtual benefits directly to you. For example, if your IRA invests in a campground, don't go camping there without paying. Or if you invest in a gas station, don't get caught with the gas station giving you gas. Otherwise, it a taxable event, to transfer assets from your non-taxed IRA to your taxable self.

However, it's not that difficult to avoid these violations. In my case, I pay a small fee to my bank's trust department (Great Western Bank in Rapid City) to help me manage my self-directed real estate IRA account. I make all the decisions, to buy or sell or select or enhance a real estate holding. But I run it by the trust officer ("custodian" in IRS parlance) first, so that he can make sure I'm not violating an IRS rule. This has been a simple and convenient relationship. In fact, for the fee involved, I have greatly appreciated having a partner on my side to talk over investment ideas.

If you are contemplating a switch from gambling in the unruly stock market, and moving in to investments in Black Hills real estate, you are welcome to call me to chat. But keep in mind, you really need to consult with professional tax advice and engage the services of a custodian for your account. You could also consult with one of the self directed/real estate IRA services companies such as Pensco Trust Company. You may also be interested in the IRA Association of America.

Now, just for fun, let's start considering the matter of leveraged investments within your IRA. That is, borrowing part of the purchase price of an investment in a real estate oriented business, such as strip malls. That gets much more interesting, due to the IRS' prohibition agains the IRA using collateral from outside itself, or relying on your personal income for securing the loan. That's where "non-recourse loans" come in. In a non-recourse loan, the lender has no recourse to go outside the IRA to recover bad debts (to your IRA). In fact, when I talked with Roger St. Pierre of First Western Federal Savings Bank here in Rapid City, he had surprisingly minimal interest in my personal credit record or FICO score, because if my IRA were to default on the non-recourse loan, the bank would not have recourse to my personal assets.

REVERSE MORTGAGES IN THE BLACK HILLS

How can you draw value from your home to pay critical expenses without selling? The rising press coverage and skyrocketing use of government-led reverse mortgages might seem at first to offer a solution for you or your parents. A reverse mortgage can bail you out of a genuinely unpredictable jam. But it can also bite you back. Painfully.

The U.S. Department of Housing and Urban Development offers a reverse mortgage program that is insured by the U.S. Federal Housing Administration. But others have characterized the reverse mortgage as the seniors' own sub-prime swamp.

There are several alternative ways to start drawing cash from your home to pay critical living expenses:

• Sell the home for cash


• Second-mortgage cash loan


• Home Equity Line of Credit


• Reverse Mortgage.

The reverse mortgage is available only to seniors over age 62. And the government even makes you get financial counseling before securing the reverse mortgage. The reverse mortgage has been characterized as "the self-funded bailout for Baby Boomers' parents." In a sense, it's somewhat like borrowing money from yourself. It is generally a program only for people who have high percent equity in their home, with little balance on the mortgage.

The concept of a reverse mortgage is simple. Some one, such as a bank, loans money to you in exchange for "equity interest" in the eventual sale of your home. It may be on a graduating scale so that the equity interest is fully transferred piece by piece over time. A reverse mortgager can withdraw value from their home's equity in alternative ways, including:

• A loan of one lump sum amount


• A monthly recurring payment


• A line of credit.

There are two categories of reverse mortgage sources:

1. Home Equity Conversion Mortgage (HECM)
   Offered by the U.S. HUD, and insured by the U.S. FHA. These account for the great majority of reverse mortgages.
   
2. Proprietary Reverse Mortgages
   Offered by banks, credit unions, etc.

Some of the complaints against reverse mortgages mention high pressure sales tactics, including otherwise-optional products (such as long term care insurance) as if required to accompany the loan, and just plain high fees for originating and servicing the loans.

And these "gotcha's" can seem overwhelmingly complex for elderly people. For example, if someone takes a lump sum payment in the form of a reverse mortgage for home repairs but fails to spend it in the same month as the distribution is taken, then the left-over money may be counted next month as an asset against net-worth limits for medicaid eligibility.

Because of the rough image some people have of reverse mortgage lenders, the National Reverse Mortgage Lending Association offers a code of ethics for reverse mortgages. The NRMLA reports over a 1,000 percent increase in the number of reverse mortgages in recent years. The NRMLA lists two reverse mortgage lenders for the Black Hills and Rapid City areas. These are the Financial Freedom Senior Funding Corporation and Wells Fargo Home Mortgage. These folks are prepared to offer advice on reverse mortgages.

For related information, contact me or ask me for a copy of the booklet "Use Your Home to Stay at Home," or a copy of the study "Tapping Home Equity in Retirement."

But what ever you do, or your aging parents, please proceed very, very carefully when getting the government involved in lending your own money to you. That's got big amber caution-flags all over it.

(For more information about the Black Hills and Rapid City real estate market for homes for sale and land investments for retirement, or for green homes, and real estate for Baby Boomers, see http://www.hillswatch.com/).

PERFECT STORM BREWING FOR RAPID CITY REAL ESTATE?

We believe more strongly today that, on top of what's already happened, a perfect storm may be brewing in our local housing market. This is due to evidence of colliding structural forces.

Prices are way down nationally, steady locally. But the number of newly listed homes continues to plummet, both nationally and locally. Economists like to say that "price" is the variable that balances supply and demand. So far, home prices in the Rapid City/Black Hills area have remained steady. As the number of local sellers have declined due to market queeziness, the number of viable buyers ready to buy has also declined too due to the plugged and leaking pipeline of lenders. As a result, although our sales turnover volume is plummeting, prices are holding rather steady.

But, our premise is that if either the number of sellers or the number of buyers (but not both) changes significantly, or if the numbers of buyers and sellers trends in different directions simultaneously, then our current frail balance of market forces could yield an amplified price-reaction in the market to re-reconcile supply and demand.

According to the Wall Street Journal, the U.S. "months of inventory on hand" is climbing as the pace of sales is outstripped by new listings. But here in the Black Hills/Rapid City area, new listings are coming on line at a declining pace. We believe that if something occurs to elevate the number of buyers, even a small amount, it could reverse the local sense of a buyers' market. As the number of active listings declines, and the rate of incoming new listings declines, we could find ourselves in an oversold misalignment of supply/demand market forces.

This could take as little as, perhaps, an extension of the IRS' first time homebuyer credit, or sustained lower interest rates, or rising employment.

There is much talk of a second wave of foreclosure properties flooding the market due to unemployed middle class homeowners. But things just don't seem to allow for such a phenomenon here.

A growing number of 'expert' industry analysts are predicting that the U.S. housing market bottom will occur sometime between now and next spring. A contrarian would say that implies an excess of optimism, and therefore the real bottom may not come until latter 2010, or even later.

We believe the best time to buy may become even more disjoint from the best time to sell. In any case, our stance remains the same...the three traditionally most important factors in real estate (location, location, location) may be in line to be displaced by when, when, when.

What's your opinion?

RAPID CITY HOME INSPECTIONS: "PLEASE TRY THIS AT HOME"

Every home buyer should require a prepurchase home inspection. But you should also know what common risks and hazards are not included in standard inspections. This is one of the most under-rated and mis-handled steps in home buying.

South Dakota's standard home buying Purchase Agreement contract offers a clause whereby the buyer has the option to require that the home to pass a home inspection. By the time a typical home buyer gets to the point of filling out the Purchase Agreement offer for a home, you have likely been all through the home multiple times opening doors, flushing toilets, checking for ceiling stains, and kicking all its tires. You want to offer a smokin-low price so you don't want to offend the seller by complicating things with a home inspection. After all, you've inspected it and know in your heart it is fine shape.

But that's the problem. By the time you're ready to buy a home, your heart has already fallen in love with it. Inspect a home after you offer to buy it? Humbug. Kinda like asking your fiance' to consent to a medical checkup, "just in case", after accepting your marraige proposal, slipping on the engagement ring and setting the wedding date.

So we'll say this again. Every home buyer should require a prepurchase home inspection.

But it's not that simple. There are no government regulations or standards on how to conduct a home inspection. Each home inspector checks things a bit differently, has their own special instruments, their own unique expectations, and their own availability of time for thoroughness or how rushed the inspection will be.

Not all inspections are the same. It matters who you select to do the inspection. It matters what they include and don't include.

You're going to spend a few hundred dollars on a stranger to conduct a process you have no experience with, so he or she can advise you if you have tens of thousands of dollars worth of problems with a hundred thousand dollars or more purchase commitment. Who you select, and what you pay them to do, and what they will not include in the inspection are critical issues.

If you interview 2-3 inspectors you'll be better able to answer those questions. But what do you include in the interview? Here are some tips-n-tricks.

Ask your realtor to recommend several reputable local inspectors. And make sure they are physically local, not examining photographs from 1,000 miles away. Or even better, check with one of the several professional associations of inspectors to help you identify a list of local inspectors. One association we like is the InterNational Association of Certified Home Inspectors. They offer a service to help you find a home inspector in your area. When we searched for Rapid City home inspectors here is who's names came up:

Liz Runquist, Amerispec Inspection Services, (605) 388-0904

Scott A. Haskell, Hayman & Associates, (605) 381-3002

Lynn W. Gerving, Gerving Home & Building Inspections, www.inspector.pages.com/lgerving, (605) 342-8703

Kelly L. Moore, Energy-Spec of the Black Hills, (605) 342-3252

Leslie R. Niederworder, Integrity Home Inspections, (605) 890-2501

Daniel R. Blecha, Hayman and Associates, http://www.haymanandassociates.com/
(605) 381-3002

Keith Runquist, AmeriSpec Inspection Services, amerispec.net/runquist

When you first contact the home inspectors ask them for references. Not from novice home buyers, but from people who are seasoned in the real estate market, such as a realtor, or title company or your mortgage lender.

It's best to interview 2-3 inspectors, at least informally on the phone. Yes, "interview." Keep in mind, they work for you. You are paying them to do work for you. Here are some specific interview questions to ask a home inspector before you select one. And this will also help you settle on a "scope of work", inspection methodology, and home-performance benchmarks before the inspection, rather than just showing up and hope for the best like on a blind date.

But what to include? It's easy to find an online checklist for home inspections. (That one includes a great diagram and glossary of home-building lingo.) But be careful to check the intended purpose. An inspection checklist for your home each fall before winter time is different than checking out a home to love for the next 30 years. Here is a good introductory tutorial video on home inspections. Here is a very good overview of home inspections including some hints about what is not included in most inspections.

"Not included?" Yes, that's right. Most regular home inspections performed as a home buying contingency omit some very important potential risks. This is important. This is one of the most misunderstood and most overlooked essential aspects of home buying. Please don't just follow the herd and do it the way most every one else does it. Some realtors may want to minimize these omissions because it can complicate or kill the deal. Here's some examples of what is omitted. You decide.

Most of the home inspection reports we see are focused mostly on the structural integrity of the house and on functional integrity of it's systems. However, there are very real, albeit uncommon, serious environmental risks to family health and safety that are not checked for. The things that are not included in a typical home inspection can include:

• Radon gas
• Asbestos
• Mold
• Lead based paint
• VOC's
• Indoor Air Quality
• Water quality
• Septic system.

Meth contamination can be deadly for resale value, but it's difficult to detect it and infinitely more difficult to mitigate for it.

You can have all those things inspected, but normally you'll have to order it special, and sometimes from a specially licensed professional. And they're extra cost options.

Most of those items are "environmental" issues for the home. It requires very special training to even know what questions to ask, let alone the answers. There is a special designation for realtors who specialize in this realm. (For example, out of thousands of specially trained EcoBrokers in the U.S., I am the only realtor in the Black Hills who has earned this special designation. Additionally, with my Ph.D. studies in engineering and physics, I feel confident in understanding most of the questions and issues involving in-home environmental hazards. Still, I am not a licensed Home Inspector to render recommendations.)

The standard South Dakota purchase offer form does not restrict how many or what kinds of tests and inspections you will arrange for under the inspection contingency.

I recently viewed a Rapid City home for sale that had nine (yes 9) snakes in a window well. They weren't poisonous. But running from them could certainly ruin your day. A recent buyer client of ours paid for the typical-vanilla $325 inspection, then felt it was prudent to invest another $252 for video inspection of the sewer line to the City's sewer main. (Kinda like a colonoscopy for a sewer line. She was worried about tree roots invading the sewer. But hey, for the $252 she also got a take-home DVD of all 143 feet of the 75 year old sewer line she bought.) It turns out the sewer line itself was so old that the casing was being squeezed shut. Another of our buyer clients had a tree care company advise on risks of tree branches overhanging a neighboring home.

You should see a pattern here. It's up to you to decide what you want included in the scope of a "home inspection contingency." And you can hire any number of inspectors. You'll get no more than you pay for.

It's hard, asking your new love to submit to a thorough prenuptial inspection, whether it's a spouse or a house.

NEW RULES, NEW STRESSES, NEW METHODS, NEW RISKS CAN DELAY CLOSINGS

There is no "the" market. Pick your stats to match your fancy. Nationally, things are looking up (on the surface), in general, with some key exceptions. Locally, things are staying strong (on the surface), with some key exceptions.

Nationally, Consumer Confidence is up, mortgage rates are down, new-purchase mortgages are up, employment is down, pending home sales are up, ...down, up,...

Locally, sales volume remains up, new-listing volume is down, pending-sales volume is up, ...down, up...

This market is just as confused as you are. That is why so many buyers and so many sellers remain lurking on the sidelines.

It used to be that the rough part of home buying and selling was often before the buyer and seller came to agreement on price and purchase terms. But now there is so much confusion, change, and new complexity in the activities after the purchase agreement and before Closing, that what used to be a relative cake walk has become a swampy minefield.

The things a buyer and seller and their agents, lenders, inspectors, surveyors, and appraisers have to attend to and comply with, after the Purchase Agreement and before Closing, is in great flux of change. The national mortgage underwriting industry is in change, there are new Federal regs confusing the appraisers. Inspectors are absorbing new public opinion and accountability pressures of risk in environmental hazards. It seems the lawyers are primed to benefit from all this.

Real estate is fast becoming a realm only for highly educated, intensely alert, risk-tolerant, full time professionals. ("Real estate... Don't try this at home.")

Sure, there's silver linings where you can find them. Pending home sales are up, and mortgage rates are re-approaching long term lows. But it has become so much more complex and time consuming to Close on deals, where a short sale is involved, or multiple funding and regulatory agencies are involved. And some national experts are predicting a next wave of foreclosures nationally, not due to abused lower income people but because of middle and upper middle class workers losing their jobs.

What does all this mean to you? First, if you're going to be casual about selecting your next home, your next home's seller, your real estate agent, or lender or appraiser or inspector or...then this might be a good time to join the herd of lurking sidelined sellers and buyers.

But if you are comfortable with deep diligence, humble enough to engage expert professionals, used to risk management, patient, and pretty shrewd, then this could be the best chance you'll have had in a long time to make some really, really smart investments in your next home or rental unit.

That's my opinion. What's yours?