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Short Sale vs. Foreclosure

Steven Keefe, Broker/Owner
Coldwell Banker Sky Ridge Realty 
Arrowhead Home Loans, Inc.
www.mountainmoves.com
steve@mountainupdate.com
909.336.2131

Forgiveness of Debt on Short Sales and Capital Gains on Trustee Sales:
This topic is so important today because of the number of homeowners receiving Notices of Default and the value of their property is less than their loans.  These people need as much information as possible when they are evaluating short sale vs. foreclosure and other options.  Anyone who is not a tax professional should not offer tax or legal advice.  I am not giving you tax or legal advice.  I am giving you sources of information that may help you.

Hot Off the Press:
The IRS homepage www.irs.gov has a new section heading "Questions & Answers in Home Foreclosure and Debt Cancellation."  Tell everyone about this section, it will help anyone who is facing this difficult situation.

A Quick Summary of Foreclosure:
When a homeowner loses a home at a Trustee Sale, the bid amount at the sale is considered the sales price.  Any gain is calculated the same was as any typical sale (sales price-basis).  If the property is a primary residence, capital gains can be excluded under the provisions of the $250k/$500k rules of section 121.  For more information on this calculation download page 4 from publication 523 on the IRS website.  On second thought, download all of publication 523, it will answer a lot of future questions.

Short Sales & Forgiveness of Debt:
Many homeowners who sell their homes under a lender approved short sale are surprised when they receive a 1099 for the amount forgiven as ordinary income.  Everybody seems to have an opinion on this practice.  Many say that the 1099 will not issued.  Further many opinions are that the short sale is better credit wise than a foreclosure.  It has been my experience that lenders do issue 1099's and the short sale does affect your credit profile in a negative way.

Is Cancellation of Debt Always Taxable:
What does the IRS say?  Not always.  There are some exceptions.  The most common situations when cancellation of debt is not taxable involve:

• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
• Insolvency:  If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.  You are insolvent when your total debts are more than the fair market value of your assets.  Insolvency can be fairly complex and the assistance of a tax professional is recommended if you believe that you qualify for this exemption.
• Certain farm debts:  If you incurred the debt directly in the operation of a farm, more than half your income for the previous 3 years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.  The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe that you qualify for this exemption. 
• Non-recourse loans:  A non-recourse loan is a loan for which the lender's only remedy in case of default is to repossess the property being financed or used as collateral.  That is, the lender can not pursue you personally in case of default.  Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.  However, it may result in other tax consequences.

California Law:
A debt is considered "non-recourse" when a loan is made under either of of the following two circumstances:

• The loan was made to purchase  a one to four unit property and the borrower intends to occupy one of the units.
• When the seller carrys back financing for all or a portion of the purchase price of any real property.

A Great Publication From CAR:
On September 24th the California Association of Realtors published a publication known as "Taxation of Foreclosures, Deeds in Lieu of Foreclosure, and Short Sales.  It is an excellent resource.  If you would like a copy, shoot me an email requesting the document and I can forward it to you.

Lastly:
Currently there is a bill in Congress, HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007 that would eliminate a provision of the tax code that allows the IRS to tax debt that is forgiven as ordinary income.  Realtors and home builders are supporting this legislation.

Buyer on His Own

Steven Keefe, Broker/Owner
Coldwell Banker Sky Ridge Realty
Arrowhead Home Loans, Inc.
www.mountainmoves.com
steve@mountainupdate.com
909.336.2131

In a recent appellate court ruling a buyers representative  wasn't liable for injuries a prospective buyer suffered when visiting a property alone.  In the case the buyer contacted an agent about seeing a home under construction.  After talking to the listing broker, the agent said that the prospect could inspect the home by entering through an unlocked garage. 

Three weeks later the prospect stopped by the house, and a worker who was on the site invited her to enter the house.  She did not contact the salesperson about the visit.  The workers were using a bucket as a stair step to get into the house as the stairway had not yet been built.  The worker assisted the prospect into the house.  Upon leaving the home, the prospect fell off the bucket and injured herself.  She then sued the builder, the worker and both agents alleging negligence. 

The trial court ruled in favor of the defendants stating that a bucket constituted and open and obvious danger, so there wasn't need to warn the prospective buyer about the danger.  The appeals court upheald the ruling, stating that there was no need for a warning, since any reasonable person would see the dangerous situation and take appropriate action.

Real Estate Professionals Leading Buyers and Sellers to Fraud

Steven R. Keefe, Broker/Owner
Coldwell Banker Sky Ridge Realty
Arrowhead Home Loans, Inc.
www.mountainmoves.com
steve@cbskyridge.com
(909) 336-2131

I was told last week that I was not serving my client because I was unwilling to use “creative” methods to make the deal work.  The people who were lecturing me were a real estate agent and her favorite lender.  The two had got together and developed a scheme utilizing a “silent” second to assist the buyer in coming up with the necessary cash to close.  They had convinced the unsuspecting buyer that their plan was legit and they were trying to convince me of the same.

I see a lot of deals… The structure of the deal being suggested was creative, I am all for creative, but in this case, it was not only creative it was illegal.  You ask how could a Realtor or Mortgage professional suggest an illegal option?  Aren’t these people supposed to take care of the buyer and seller?  Yes they are, sometimes they don’t.  The latest studies show that an increasing number of Real Estate professionals are putting buyers and sellers in harms way by suggesting “creative” alternatives that could land everybody in jail for committing fraud.
 

There are many ways buyers and sellers can get in trouble in a real estate transaction here a a couple examples:

Silent Seconds
The term "silent second" is used to describe self-serving or perhaps fraudulent schemes where house sellers accept second mortgages as part of a sale transaction, without the full knowledge of the first mortgage lender. The "silence" refers to the absence of full disclosure to the first mortgage lender.

The fraud arises when the second mortgage replaces part or all of a down payment. For example, the buyer and seller agree on a price of $200,000; the buyer has a commitment for a first mortgage loan of $180,000, but doesn't have the $20,000 required for the down payment. To make the deal work, the seller agrees to accept a silent second mortgage for $15,000. As far as the first mortgage lender knows, the down payment is $20,000, but in fact, it is only $5,000.

Lender guidelines are established as a result of evaluating risk for default.  When less than full disclosure is provided the “recipe” or mix of requirements is compromised and the lender assumes a greater risk.

Another deception of the first mortgage lender arises when the silent second is used to inflate the sale price beyond the true value of the house in order to increase the size of the first mortgage. Assume the same house as before with buyer and seller agreeing on a true price of $200,000, but in this case the buyer has no down payment. They collude to set a fictitious price of $222,200, on the basis of which the first mortgage lender agrees to lend $200,000. This is 90 percent of $222,200 but 100 percent of the true value of $200,000. The seller agrees to a second mortgage for $22,200.

In this case, the first mortgage lender knows about the second mortgage. What the lender doesn't know -- where the silence comes in -- is that after the transaction is completed the seller will forgive the second mortgage. In this way, the lender is deceived into making a 100 percent loan, believing that it is a 90 percent loan.

Not all real estate professionals have your best interests in mind. Some are focused on making the money and are willing to put you and others at risk in order to make the deal happen and collect the commission. Be careful, ask questions and verify with other professionals if you get involved in a transaction that would be labeled “creative”. You could be led to break the law and not even know it.

Realtor Ethics- Keeping Clients Interests First

Steven Keefe, Broker/Owner Coldwell Banker Sky Ridge Realty
www.mountainmoves.com
steve@cbskyridge.com

Billy Homeowner contacted Joe Realtor to list a vacant lot. Billy said he had heard that similar lots in the vicinity had sold for about $50,000 and thought he should be able to get a similar price. Joe stressed some minor disadvantages in location and grade of the lot, and said that the market for vacant lots was sluggish. He suggested listing at a price of $32,500 and Billy agreed.

In two weeks, Joe came to Billy with an offer at the listed price of $32,500. The Billy raised some questions about it, pointing out that the offer had come in just two weeks after the property had been placed on the market which could be an indication that the lot was worth closer to $50,000 than $32,500.

Joe strongly urged Billy to accept the offer, stating that because of the sluggish market, another offer might not develop for months and that the offer in hand simply vindicated Joe’s own judgement as to pricing the lot. Billy finally agreed and the sale was made to the buyer.

Two months later, Billy discovered the lot was no longer owned by the buyer he had sold the property to, but had been purchased by another buyer at $55,000. He investigated and found that the first buyer was a brother-in-law of Joe, and that the first buyer had acted on behalf of Joe in buying the property for $32,500.

Billy outlined the facts in a complaint to the local Association of REALTORS^®, charging Joe with collusion in betrayal of a client’s confidence and interests, and with failing to disclose that he was buying the property on his own behalf.

At a hearing before a panel of the Board’s Professional Standards Committee, Joe’s defense was that in his observation of real estate transactions there can be two legitimate prices of property-the price that a seller is willing to take in order to liquidate his investment, and the price that a buyer is willing to pay to acquire a property in which he is particularly interested. His position was that he saw no harm in bringing about a transaction to his own advantage in which the seller received a price that he was willing to take and the buyer paid a price that he was willing to pay.

The Hearing Panel concluded that Joe had deceitfully used the guise of rendering professional service to a client in acting as a speculator; that he had been unfaithful to the most basic principles of agency and allegiance to his client’s interest; and that he had violated Articles 1 of the Code of Ethics.

All About Arbitration

By Steven Keefe, Broker/Owner Coldwell Banker Sky Ridge Realty
steve@cbskyridge.com
www.mountainmoves.com

Most real estate transactions proceed fairly smoothly; minor disputes between the parties usually can be worked out with a little negotiation and compromise. However, buyers and sellers sometimes find themselves confronted with disputes that they are unable to resolve by themselves.

Various alternatives exist for resolving disputes. One such method, which is growing rapidly in popularity, is arbitration. In fact, most real estate contracts, including those published by C.A.R., give the parties the option of agreeing up front to arbitrate disputes that might arise between them. This memorandum provides a brief overview of some of the issues parties to real estate transactions may confront when deciding whether or not to use arbitration as a method for resolving those disputes.

Q 1. What is arbitration?

A. Arbitration is the term used to describe a form of dispute resolution that occurs outside of the court system. Basically, in arbitration the parties submit arguments and evidence to a neutral person, known as an arbitrator, who then renders a decision (which is called an "award").

Q 2. What types of disputes can be resolved by arbitration?

A. Arbitration may be used to decide most types of claims, including actions for breach of contract, misrepresentation and fraud. The arbitration agreement in C.A.R. contracts, however, excludes certain matters from arbitration, including matters within the jurisdiction of a small claims, probate or bankruptcy court.

Q 3. How does arbitration work?

A. Since the selection of arbitration to resolve disputes is essentially a contractual agreement between two or more parties, in theory arbitration can be structured and conducted in any lawful manner that the parties agree to.

A typical arbitration, however, starts with the parties to the arbitration agreement selecting an arbitration provider for their dispute. In some cases, this may mean contacting a private arbitration service or using an arbitrator with whom the parties are already familiar. Once the arbitration provider is selected, a hearing is scheduled. The hearing will be similar to a court trial, with the parties able to submit evidence, call and cross-examine witnesses, and make arguments to the arbitrator. In preparation for the hearing, the parties may conduct discovery (i.e., take depositions of witnesses, gather written evidence and documents, etc.). Also, in many arbitrations, the parties will be required to submit formal written statements to the arbitrator in advance of the hearing stating their positions on the dispute.

After the hearing is concluded, the arbitrator dismisses the parties and considers the evidence. The arbitrator may take several days before rendering an award. Once the award is rendered, it is delivered to the parties.

Q 4. How does arbitration compare to litigation?

A. In many ways, arbitration is similar to litigation. For example, the parties may be represented by attorneys, the arbitrator has decision-making powers much like a judge or jury, and the award issued by the arbitrator can be binding upon the parties.

Despite the similarities, there are significant differences. For example, arbitration is not governed by the formal rules of evidence and procedure that are used in court trials. For this reason, arbitration hearings often take less time, and can be less costly, than court trials.

Q 5. Who can be an arbitrator?

A. California law does not require licensing or certification for arbitrators. Therefore, any person can be an arbitrator. The arbitration agreement in C.A.R contracts provides that the arbitrator shall be a retired judge or an attorney with at least five years of real estate experience.

Q 6. How much does arbitration cost and who pays for it?

A. The cost of arbitration will depend on a variety of factors. Arbitration services usually charge an initial filing fee plus an hourly fee for the services of the arbitrator. Other costs associated with arbitration can include attorney fees, discovery costs and witness fees.

In many cases, the filing fees and arbitrator fees are divided equally between the parties. A party who incurs other costs (such as attorney fees, discovery costs and witness fees) typically pays for those costs. C.A.R contracts generally require the losing party to pay the winning party’s attorney fees and costs.

Q 7. Where do I locate arbitrators and arbitration services?

A. Arbitrators and arbitration services can be located by looking in the local telephone directory (e.g., under "Arbitration," "Mediation," or "Dispute Resolution"), by contacting government agencies such as the California Department of Consumer Affairs, or by asking an attorney or a local bar association (association for attorneys) for referrals. In addition, many arbitration providers maintain Internet websites.

Q 8. What are some of the advantages of arbitration?

A. Compared to litigation, arbitration generally takes less time from the start of the process until conclusion. The progress of court cases may take many months or even years. If a trial decision is appealed, that process can take several more years. On the other hand, the entire arbitration process from start to finish can be completed in as little as a few months. This helps make many arbitrations less expensive than litigation (although that will not always be the case).

Arbitration is also private and confidential. For parties whose dispute involves a sensitive matter or who don’t otherwise want their dispute known to the general public, arbitration offers a significant advantage.

Arbitration also allows the parties to choose a knowledgeable and informed person to decide their dispute. For example, if the dispute involves real estate, the parties can select an arbitrator who is already an expert in real estate matters. Of course, if the parties fail to exercise diligence in selecting a qualified arbitrator, this quickly becomes a disadvantage.

Q 9. What are some of the disadvantages of arbitration?

A. The parties to an arbitration do not have the right to appeal the decision of an arbitrator. Although this often shortens the time needed to bring the dispute to resolution, it also leaves the losing party with no way to obtain a different decision. The law does provide for very limited review of arbitration decisions where the arbitrator is biased, commits fraud, or violates other basic principles of fairness, but such a review rarely deals with the merits (substance) of the case. Furthermore, an agreement to arbitrate typically binds only a limited number of parties. (For example, the arbitration clause in C.A.R. contracts only binds the buyers and sellers under the contract.) If the complaining party has disputes with other persons who may have contributed to the dispute (e.g., property inspectors, pest control operators, real estate brokers, etc.), unless those persons separately agree to arbitrate, the complaining party might have to bring a subsequent action in court to get full relief.

Finally, though arbitration is often less costly than court action, it might not be as inexpensive as one expects. The filing fees, the payment for the services of the arbitrator, and attorney fees may be quite significant, depending on the arbitration service selected, the amount of time needed for the hearing, and other factors.

Q 10. Do I have to decide on arbitration at the time that my real estate purchase contract is signed, prior to the dispute?

A. No. You can always agree to arbitrate disputes after they arise. However, at that point, depending on the dispute, the other party may not agree to arbitrate. If not, litigation may be your only option for resolving disputes.

Q 11. Bottom line: should I choose arbitration for resolving disputes?

A. Like any important decision affecting your legal rights, you need to think carefully before deciding on arbitration. By agreeing to arbitration you waive certain rights (e.g., the right to appeal the decision). Waiving these rights may be acceptable to you in light of the benefits associated with arbitration, but the choice is yours to make. If you need assistance in making your decision, there are many information sources available to assist you. In addition, your attorney can provide you with guidance in evaluating the pros and cons of arbitration.