Time to pull out of Palm Beach
By Kevin Allison
Published: January 18 2005 02:00 | Last updated: January 18 2005 02:00
Uncertainty breeds opportunity, as any astute businessman knows. And so it should come as no surprise that, amid the raging debate over whether the real estate market is nearing its bursting point, an entire industry has sprung up to help people manage the risk of falling house prices.
With opportunists racing to bring real estate derivatives to market and wealth managers talking up alternative asset allocation strategies, one tried and true approach to managing an appreciated asset tends to get short shrift. What if that Aspen ranch is looking a bit overvalued and you just want to sell the thing?
Brokers, economists and wealth managers agree that sellers would be hard-pressed to find a better time to sell. "The cash is there right now," says David Lereah, chief economist with the National Association of Realtors, a real estate industry organisation. "The fundamentals are very good for the high-end marketplace."
The median price of a single family home in Palm Beach, Florida, soared more than 40 per cent last year, according to the Florida Association of Realtors. Several other exclusive resort areas around the country posted similar rises.
However, Angelo Campanile, managing director of real estate at Bessemer Trust, the wealth managers, cautions that the good times might not last. "Today's market might be near the peak. I think within the next year we will start to see the length of time it takes to sell a house begin to go up, and eventually that will start to bring prices down."
Unloading any property can be a harrowing experience. But when it is an exclusive vacation property that is going on the block, things get more complex. Finding buyers for a multi-million dollar home can be difficult and vacation homes are subject to capital gains tax. As a result, there is near universal agreement that, after the decision to sell has been taken, the next two steps of the selling process are the most important. First find a broker. Then get on the phone to your accountant.
"The right broker needs to match the property and the sellers," says Mr Campanile. "There needs to be a good personal relationship. You don't have to be friends but you need to deal with a broker you feel comfortable with."
Working with a broker has a number of benefits regardless of a home's sale price. But for wealthy sellers, the limited pool of potential buyers means that having a broker with the right connections is particularly important.
"People in the market for a multi-million dollar resort home don't come running through the door every day," says Tim van Camp, broker at French & French Sotheby's International Realty in Santa Fe, New Mexico. "If you have a discretionary buyer and a discretionary seller it's a bit of a juggling act putting them together."
Exclusive realtors such as Sotheby's, Brown Harris Stevens and the Corcoran Group all offer their local affiliates ways to access wealthy potential buyers through their national and international advertising campaigns, printed brochures, and, increasingly, the web. That exposure can create liquidity that adds tens of thousands of dollars to the sale price of a home.
Once a buyer expresses interest in a property, a broker can make discreet enquiries into whether he or she is financially qualified to make an offer. "A seller who has an expensive property doesn't want to be there just as a chamber of commerce showcase," says Mr van Camp. The typical fee for such services runs at 6 to 7 per cent of a property's sale price. But brokers and wealth managers insist you are better off paying the fee than going it alone.
Once you have chosen a broker, the next step is to get in touch with your accountant to find out about the tax implications of selling a vacation home. The US government levies a capital gains tax of 15 per cent against the profit made on the sale of vacation homes, minus closing costs. Several states take an additional withholding at the time of sale that can become permanent at the end of the tax year. Non-US citizens can face additional tax burdens.
One way around taking a hit on capital gains is to convert a residential vacation home into a rent-producing investment property. But that can take up to two years and can leave owners burdened with hefty management fees.
David Suss, managing partner at the accountants Maryanov, Madsen, Gordon & Campbell in Palm Springs, California, says that, for owners of lifestyle properties, the hassle of becoming a landlord is rarely worth it. "You've got to make a commitment to becoming a landlord for an extended time, probably a couple of years." Mr Suss says landlords can run foul of tax authorities if they rent to a family member or if they use an investment property for more than 14 days a year.
Mr Suss says he tells his clients to be thankful that the capital gains rate is as low as it is. "It's only 15 per cent on the profit, which is really a drop in the bucket on apercentage basis." Moreover, capital gains on the sale of a property can be offset by losses on the sale of other types of assets, including stocks and bonds. Thus, a seller eager to cash out of a losing position in the stock market can use his capital losses to offset the capital gains on the sale of a vacation home.
Once a seller has chosen a broker and worked through the tax implications of a sale, it is time to get down to brass tacks, such as deciding whether the furniture will be sold along with the house.
"If there is something very special that is not going to go with the house, remove it before you show it," says Ruth Krinke, a real estate broker in Steamboat Springs, Colorado. After that, she says, just let the market work its magic. |
