That’s a great question! In fact, that is most people’s first reaction when they hear that Kars4Kids accepts donations of real estate. In truth, it is the same reaction most people had thirty years ago before car donations were commonplace.
There are a few different factors that play into the success of our real estate donation program. One is that real estate is unlike many other assets in that it may have a negative value if not handled properly. Holding costs, like property taxes, maintenance, utilities, and association fees can amount fairly quickly, and can sometimes eclipse the value of the property that isn’t being used. Additionally, real estate can incur tremendous liability whether from environmental contamination, code violations, or injuries as a result of neglect.
There’s also a large amount of effort that goes into maintaining a property. Grass must be cut regularly (sometimes a few times a month depending on the region and the season). Broken windows and sidewalks need to be repaired quickly. Snow and garbage need to be removed before someone complains. This could be difficult to keep on top of even when this is someone’s primary residence, but what if it’s a property located miles away or across the county?
Another factor is that while the average home in the US is worth over $200k, that value varies widely. While some homes in California are sold for many millions of dollars, there are homes in parts of the heartland that sell for just a few thousand dollars. In small towns with a decreasing population, home prices can be so depressed, that a house can sell for far less than the materials is costs to build!
Lastly, people come upon their properties in various different ways. Some receive a home as part of an inheritance, but live too far away or lack the resources to manage. Others purchased a home as an investment to rehabilitate and rent it out or sell for a profit (flip), but are caught by surprise by the really poor condition or funds dry up before they have a chance to implement their plan. Still others purchase a land in a future vacation resort, and find that life circumstances change, and they no longer wish to build there.
With these points in mind, it stands to reason that donating a property to a qualified 501(c)(3) charity like Kars4Kids can be an attractive option to some. The responsibilities of property ownership, coupled with the complications of distance can make a property into a burden, and the benefits of donating can be a salvation.
A qualified, professional real estate donation charity like Kars4Kids can make the process easy, hassle free, and rewarding. We cover all the costs of the transfer, deal with the title search and document preparation, and even send a notary to a location and time of the donor’s choosing to complete the donation. The beleaguered property owner is now left with a generous tax deduction, and the knowledge that they were able to help children reach their potential.
What are the benefits of donating real estate?
When choosing to divest oneself from a property, most would immediately think of selling. While that is the most common strategy, savvy property owners consider other options as well.
Here are 7 reasons property owners have benefitted from donating their real estate, as opposed to a typical sale:
- Selling takes time: While the average time to sell a home varies widely by market, the national average is 68 days. Where there is high demand, a home can sell in a little over a month, in a slow-moving market, homes can be listed for many months, if not years. This is exaggerated further when trying to sell land. The average days on market for land is about 7.5 months, but that can obviously run much longer when the land is looking for a very specific buyer (ie commercial developer), is located in a saturated or depressed market. If a seller is in a rush to move on from the property, either because he lacks the resources to hold onto it any more, or is located far away, or for any other reason, these time frames become difficult. With a professional, experienced real estate donation charity like Kars4Kids, the entire process can take as little as 3 weeks (or shorter!).
- Unique property: Occasionally, a very valuable property can be very difficult to sell. While appraising for its true value, since there is a much more limited pool of buyers for such a property (whether residential or commercial), it can languish on the market for an inordinate amount of time, accruing large liabilities in the form of taxes and maintenance, before selling for the full amount. In such a case, the property owner can find it extremely beneficial to take the tax deduction to offset current income, and move on to more lucrative opportunities.
- Tax savings: This is the most common motivation to donate. The full Fair Market Value (as determined by an appraisal) can be deducted from the donor’s taxable income. This, in addition to avoiding Capital Gains tax on an appreciated property, can make real financial “cents”.
- Broker’s commission: When listing a home or property for sale with an agent, they will typically take anywhere from 4-6% commission on the sales price as payment for their service of facilitating the transaction. While their services are usually invaluable, this cut obviously significantly lowers the proceeds that the seller will receive. A minority of sellers (about 8% as of 2017) do sell their home For-Sale-By-Owner (FSBO), but those homes typically sell 10% lower than with an agent. On the other hand, when donating, the property owner will benefit from the tax deduction of the FULL value of the property.
- Helping a good cause: Of course the main reason to donate is the great feeling that comes with doing a good deed. Your property often has good memories or intentions attached to it and lowball selling it to an aggressive new owner is not a heartwarming experience. Donating the property to Kars4Kids instead, can provide a proper and respectful closure. Your dreams and hopes will be newly reflected in the eyes of the children benefiting from your kindness. For more information about our charity please see: kars4kidsprograms.org
- Long distance property owners: There are many reasons why someone would own a property far away from their primary residence. Sometimes they own a vacation home they rarely use, other times it’s a property they purchased as a long-distance investment or as part of an investment portfolio. Some are still holding on to their old home after relocating, and others receive a relative’s property as part of an inheritance. Without being local, property ownership can become very burdensome. It will often require the additional cost retaining of a property manager, and will also be more susceptible to vandalism, squatters, and neglect. It is also more difficult to sell an absentee-owned property, as the owner is at the mercy of the local agent to give potential buyers information and access to the home. When donating the property, they are relieved of all these issues.
- Hassle free: Owning a home or any property creates a lot of responsibility. Maintaining the property, managing a rental (or even worse, a vacancy) can be a full time project. Selling a home could be especially exhausting. Whether the intrusion of giving strangers access to the home for viewing at all hours, or the ups and downs of the offers and negotiations, it can all seem overwhelming. When donating to a charity with vast experience in real estate donations, like Kars4Kids, the entire process is effortless and rewarding.
What criteria does the charity consider before accepting a donation?
Real Estate donations are a less commonly known charitable contribution. Although a very generous offer on the part of potential donors, prudent charities will do research before accepting such a gift.
Some factors that are considered:
- Resale value: While some properties are a good candidate for the charity to use for their operations, most donated properties are sold to generate funds. With this in mind, a charity would research the property’s resale market by looking at comparable sales to gauge the potential price and listing time for a property of that time in the area. Another aspect to consider is the buildability of the property, if undeveloped land, since that would greatly influence the sale price.
- Tenants: A property with tenants can either be a tremendous boon or burden for the charity. While tenants can bring in income for a property being held long-term, and prevent the deterioration and vandalism that are common with vacant properties, it doesn’t come without risk. Owning a rental property opens up the charity to liability issues, as well as the obligation to maintain the occupied property at a much higher standard. There’s also the need to keep on top of collecting rental payments, and possibly evicting tenants who don’t pay or violate terms of the lease.
- Holding costs: Depending on how long the charity is planning on holding onto the property, the charity may have different thresholds of how much they are willing to pay. Holding costs include the expected property tax, Homeowner’s association, as well as landscaping (if the property is in an urban area), utilities, and others. When the property is above average value, the charity may be willing to pay more to hold onto it, but needs to have the resources to keep it up until the sale.
- Violations: This can include anything, from overgrown grass or broken windows, or to a more serious structural violation that would require the complete demolition of a home or structure. For the more easily rectifiable ones, a charity may accept responsibility to bring the property up to code, but others may preclude the property’s acceptance by the charity.
- Environmental: Most properties are not at risk of environmental contamination, which includes contaminants like petroleum, paint, and asbestos, among others. High risk properties are commercial properties or properties near businesses that are in the automotive industry, like mechanics or gas stations. A desktop search by a reputable engineering firm is sometimes sufficient to allay those concerns, but sometimes a more pricey Phase I Environmental Site Assessment may be necessary.
Although some of these steps may seem arduous, with the proper due diligence, real estate donations can be a lucrative source of revenue for a charity.
Which types of property won’t a charity accept as donation?
Real estate is a tricky thing. While it is an asset, often a very valuable one, it sometimes can be a tremendous liability for the unwary recipient. At Kars4Kids Real Estate, we receive thousands of donation offers yearly. Of those, we are actually only able to accept a minority. What can make a real estate property unqualified for donation, you ask? Here are some common reasons:
- Extremely low value: Although the average property value in the US is slightly above $200,000, some properties can be worth less than a few thousand dollars. These are often undeveloped land in very rural areas, or homes in depressed markets. Although those values are impressive for a cash donation, when in the form of real estate, when factoring the cost of title transfer and ongoing taxes and maintenance, it can result in a net loss to the receiving charity.
- Large open mortgage: When we’re offered a property with an open mortgage, there are a few factors to consider. When a mortgage is be taken out on a property and it subsequently loses so much of its value that it is worth less than what is owed on it, it is considered “underwater”. Even when there is some equity in the home, the cost of the title transfer, ongoing holding costs, and allowing for a margin of profit for the charity when selling, will sometimes prevent the charity from accepting such a home. Sometimes if the donor is willing to pay off a portion of the mortgage, it may be a viable donation.
- Environmental: While this is not so common with residential properties, environmental contamination could be a death trap for the unsuspecting charity. A common contaminant is petroleum (oil) from a nearby gas station, mechanic, or car dealership. Other contaminants include excessive pesticide or fertilizer, paint, arsenic, tire rubber. The big risk with any of these contaminations is that the current property owner is liable for the remediation, which can often run into the hundreds of thousands of dollars. Once the charity owns the property, it would be their responsibility to clean up any issues that are discovered.
- Buildability: There are many reasons why a property might not be buildable, although some are not obvious to the unexperienced eye. A difficult topography (like a lot located on the side of a hill or mountain), wetlands, environmentally protected land, or zoning restrictions, can all prevent a piece of land from being developed. In some cases, while the surrounding properties are extremely valuable, an unbuildable lot can be nearly value-less.
- Unclear title: During the course of due diligence, all sorts of title defects can show up. If a property is purchased at a tax sale, the buyer will sometimes receive the rights to the outstanding taxes, but not the actual ownership of the property. For an inherited property, if the will is not properly probated, that can create issues will transferring the property further as well. In other cases, an unclear transaction earlier in the chain of title may cause issues. An unclear legal description on a previous deed has occasionally caused issues as well.
Things you didn’t know about real estate donations:
- Charities still have to pay property taxes and mortgages (with few exceptions):
With the exception of a property that is regularly used for the charitable purpose of the organization, almost all other properties are still subject to property taxes. Additionally, aside from some exceptional cases, lending institutions do not forgive loans just because the property was donated.
- Real estate donations are more common than you think.
Although not nearly as common as cash donations, Real Estate donations have been a “thing” for many years. Alumni of prestigious colleges and universities have bequeathed their properties to their alma maters to fund generous endowments, and others have donated their properties to churches, fire departments, and even the government.
- You don’t need a lawyer.
Much of the work that is typically done by a real estate attorney in a real estate sale is done by the title company in a real estate donation. This includes the title search, deed preparation, notary scheduling, and recording. With the exception of more complex, higher value property donations, many donors find that an attorney is not necessary.
- You can donate your property even if it’s listed with a broker
Some charities, like Kars4Kids, will pay the listing agent’s commission, so everyone wins!
- The date of donation is the date of “closing”
Whereas cash donations can be made up until midnight on December 31st to be counted towards the current year’s deductions, real estate needs a little more time. Although a donation will take considerably less time than a sale, in most cases, you’d need to start the donation process at least a few weeks before year’s end to allow for the title search to be completed and transfer documents prepared and signed.