Typically, when an individual prepares to purchase real estate, he retains a lawyer and possibly an accountant. Involving an independent financial adviser as well, however, can help create a truly satisfying transaction by working with the other professionals involved and helping to determine if purchasing or selling the property makes long-term financial sense for the buyer.
While it’s often a lawyer or paralegal who draws up the contracts and an accountant who determines the tax liability of each transaction, a financial adviser can help coordinate the process to determine if the property in question will help the client, and can work to be sure each of the involved parties is optimally working on behalf of their shared client.
“If the client is the quarterback behind a transaction, the financial adviser is the coach,” said Harley Kaplan, a certified financial planner at Beta Industries in Sherborn. Kaplan emphasized that, among other things, a financial adviser can “clarify client goals and objectives” by going beyond providing a one-dimensional service.
Jacqueline M. Pierre, a financial adviser in Plymouth, agreed. “Involving a financial adviser in a client’s real estate transaction can help from numerous angles, but one of the most important is by helping to anticipate problems that may occur in the future. No other professional on the team is trained to help in that regard.”
While both Kaplan and Pierre note that in their experiences it’s typically been high-net-worth individuals who involve financial advisors in real estate transactions, each side tends to appreciate their contributions. Although more people are turning to financial advisers to help with such things as creating a reliable retirement-income stream, tax-minimization, estate planning, long-term care and the efficient transfer of wealth, using their expertise when buying or selling real estate is a relatively untapped area. A financial adviser generally can be depended upon to offer a broad foundation that goes beyond traditional investing and includes insurance, tax planning, budgeting, mortgage selection and estate planning. Others are trained to help with more technical situations, including managing money received from property held in foreign countries, dealing with partnership arrangements or in navigating complicated family situations that may involve children from a prior marriage.
“The financial adviser can suggest alternatives that may benefit the client,” stated Michael Brockelman, an attorney and certified financial planner with B&D Advisors in Worcester. Alternatives Brockelman’s clients have used include charitable remainder trusts (CRTs) and 1031 exchanges. “In the case of a sale we can advise on how to best invest the proceeds,” said Brockelman, who has also recommended wealth replacement trusts for clients, a form of irrevocable trust that owns a life-insurance policy on the client that can be used to pay estate taxes. A 1031 exchange postpones taxes on the sale of commercial property when replaced with another “like kind” property and when other stipulations are satisfied.
Most financial advisers are found through a referral from a friend or related professional such as a lawyer, accountant or insurance agent. The Financial Planning Association, a nationwide trade organization with local chapters (www.fpanet.org), offers referrals based on geographic location, specialty or name. Introductory meetings should be pressure-free and focus on articulating the client’s long-term needs. The most widely recognized financial planning designations are certified financial planner (CFP), chartered financial analyst (CFA) and chartered financial consultant (ChFC). Designations such as those show an exceptional level of commitment to the profession while requiring designees to take continuing education courses and adhere to a code of ethics. Many advisers supply a questionnaire to better learn about clients, and often ask to review such items as tax returns, insurance polices, financial statements and retirement accounts before making recommendations. Usually there’s no charge for the initial consultation but, once retained, advisers are paid either by commission or by an agreed-upon fee based either on a percentage of the amount of assets changing hands or for the time spent managing and preparing for the transaction. Many use a combination of a basic planning fee plus commissions. As fees can erode returns, it can pay to agree in advance how any adviser is compensated but don’t base the decision entirely on rates. Ethics, experience and reputation are very important.
‘Proper Asset Mix’
“An accountant will generally view the tax consequences of the single transaction,” said Kaplan. “But what’s in the client’s best long-term interest? What’s the client’s objective in buying or selling this property? Have estate-planning issues been explored? What about the possibility of a 1031 exchange?”
Other questions an adviser may be able to answer include: Is the client using your home equity to fund the purchase? If so, is that the right decision? That type of borrowing can weaken one’s credit rating. Before making such a decision, an independent financial adviser can help weigh any perceived benefits against risks and articulate a number of issues such as tax liability, budget and liquidity concerns. “We don’t want to be dream-killers but we should expose the worst-case scenario to the client before he goes ahead,” said Pierre. Kaplan pointed out that real estate is no longer the steadily appreciating asset many have been brought up to believe it is, nor is it readily liquid.
“Will buying or selling this real estate result in the proper asset mix for the client?” asked Kaplan.
Clients often hear of a third party who has done well financially in real estate and believe they can do the same. But there are basic questions to answer before going ahead, such as: Who will manage the property? What about insurance? Should a separate corporation be formed? Could the client’s needs be better served through a different investment? Is the client comfortable using their primary residence as collateral or can a more reasonable way be found?
Pierre, who has worked with accountants and lawyers when clients are buying or selling real estate, said her involvement generally has been welcomed by the other professionals.
“The big difference is, we have in-depth client knowledge and can use it to, among other things, help select the right mortgage,” Pierre said. “In the end the client gets greater choice, professional guidance and peace of mind with their decision.”
“Often some degree of real estate exposure is helpful to a client,” noted Brockelman. “An adviser can help determine the best way to acquire or maintain it.”
