I just authored a post on Rain City Guide regarding a buyer’s potential liability under a federal law, the Foreign Investment in Real Property Tax Act (FIRPTA).  If you don’t have time to check it out, here’s the quick-n-dirty:

FIRPTA requires a buyer to determine whether the seller of real property is a “foreign person” as defined by the act (essentially any non-resident alien).  If the seller is a foreign person, then the buyer is responsible for withholding 10% of the sale price and forwarding it to the IRS.  This insures that the seller pays the tax due on the gain from the sale.

Here’s where it gets really interesting: if the seller is in fact a “foreign person,” yet the buyer fails to so determine and fails to withhold and forward the 10% to the IRS, then the buyer is liable for the 10%.  Ouch!  That’s quite a bite!  The current NWMLS form contracts specifically inform the Closing Agent to make this determination and to withhold these funds on the buyer’s behalf if appropriate.  However, most escrow instructions (which supplement the contract) relieve escrow of this responsibility.  As a result, most Closing Agents don’t determine whether seller is a foreign person and won’t withhold the funds.  So if you’re the buyer, and if the seller is indeed a foreign person, you run a risk of serious liability to the IRS absent this determination and withholding.

At WaLaw, we’re lawyers.  It is part of our job to insure you comply with the law.  Unlike your average real estate agents (I suspect “almost all” is more appropriate) we appreciate this law and the obligations it imposes, plus the penalty if you don’t comply.  When you hire us, you know that you won’t fall into this trap.  Oh, and you’ll save alot of money, too!

First and foremost, a condominium is a form of joint ownership.  With all other unit owners, you own a percentage interest in the entire building typically equal to the size of your unit compared to the total size of the building.  This includes “common areas,” areas that are for the use of all owners.  You own your own unit individually (typically from the “paint in”).  So unlike a house, your neighbors are also your co-owners.  Needless to say, this means that condo ownership requires a degree of cooperation and compromise.  If you’re not OK with that — if your house is your castle — then you may want to rethink your decision to buy a condo.  Assuming a condo is for you…

When you sign a contract to purchase a condominium, the law requires the seller to provide you with a lot of information.  If you’re buying a newly built condo, you are entitled to receive a Public Offering Statement.  If you’re buying a re-sale, you are entitled to receive a Resale Certificate.  Included in both are many of the documents discussed below.  The issues below in bold will be addressed by these required disclosures.

You can download this Condo Buying Checklist as a PDF here.

1. MINUTES: Ask to see the last few months of minutes to see what homeowners are complaining about and to see what the Board of Directors (BOD) of the Homeowners Association (HOA) has had on the agenda lately. Look for current projects underway, any talk of raising the dues and the discussion of future special assessments in the works.
2. DELINQUENCIES: Find out what the current delinquency rate is. Are you living with responsible community members or is the community underfunded?
3. RESERVE STUDY: Ask to see a copy of the last Reserve Study. This is a mandatory annual report showing the status of the property physically and the anticipated costs of maintenance over the next 10-20 years.  A well-run condo will have sufficient reserves to cover these anticipated costs.
4. INSURANCE: Ask for a copy of the Certificate of Insurance. This summarizes the association’s policy. Find out what you are responsible for versus the HOA.  Sometimes the HOA insurance will cover the interior of your unit, sometimes it won’t.  Figure out what is covered by the HOA policy — and paid for by your HOA dues– and you can then estimate your own additional insurance costs.
5. DECLARATION: The condo declaration is the legal document that creates the condominium form of ownership.  It sets forth the rights and obligations of all owners.  It’s a long, dense, legal document, but nonetheless you should review it yourself.  Pay particular attention to the portion dealing with restrictions on your use of your unit.
6. RULES: In addition to the restrictions included within it, the declaration authorizes the HOA to enact and enforce additional rules regarding use of your unit and the common areas.  Make sure these rules are acceptable to you.
7. RENTALS: The declaration will likely spell out any restrictions on renting your unit.  Its not uncommon for a building to limit the number of rentals, and if the building has reached that limit you will not be able to rent.  But even if you’re planning on living there yourself, you still want to look into the issue, because its non uncommon for tenants to be less considerate neighbors than other owners.  How many units are homeowner occupied?
8. PROPERTY: Check it out!  Drive by the community at various times and check out who your future neighbors might be. Does the property look well maintained?
9. MEET & GREET: Talk with future neighbors and ask them, “How do you like living here?  What are the pros and cons?” Of course, it’s always good to ask more than 1 person.
10. MANAGEMENT (included in a Public Offering Statement only): Most condominiums, and virtually all large ones, employ a management company. Who is the current management company, or is the HOA self-managed? Do the homeowners like working with them? How about other homeowners in other buildings also managed by the same company?  Check on-line and research reviews made by people who have worked with that company.
11. PETS: Are pets allowed? Anything other than dogs and cats?  Are there any breed restrictions or other rules you need to know regarding pets?
12. WEBSITE or BLOG: Is there are current website or blog you can refer to for the HOA regarding your community? Many times this is where you will find helpful information (minutes, important documents, reports of delinquencies, financials, etc) and it usually available to review before purchase.
13. DEVELOPER: Is the developer still involved in selling units? Does it have remaining ownership rights to any units or amenities? Also, and particularly for newer condos, does the developer have a good or bad reputation for quality construction?
14. DUES: Every condo owner pays something in dues to cover the costs of joint ownership.  How much are they?  What do the dues cover? Typically they include HOA insurance, landscaping, outside electricity, sometimes garbage/water/sewer, management fees, and reserve account allotment.
15. PRIVACY: How many adjoining neighbors will you have? Are you choosing a lower, middle or upper unit? How will this affect you? The more adjacent units, the greater the chance of there being noisy neighbors, and units above are often the source of noise complaints.   How secure and private is the patio or balcony?
16. PRIOR LAWSUITS: Is there a pending lawsuit? Has there ever been a law suit?  This is important for two reasons.  First, the lawsuit may indicate a problem with the building in general (such as a construction defect) or the community (such as a collections case against an owner for past due assessments).  Second, a lawsuit can be expensive, and if its against the condo there could be a big bill down the road, and if you’re an owner you will be liable for part of it.
17. FHA APPROVED: Is the community FHA approved? This is good to know because most properties need to be FHA approved for loans to be granted. As a general rule, it will be easier to sell your unit in the future if the condo is FHA approved.
18. PARKING: How many parking spaces come with my unit? Where are they located in regards to my actual unit? Are there any additional spaces to purchase if need be? How many total visitor parking spaces are there? Where are they located? Can homeowners park in visitor? What are the policies for guests visiting?
19. STORAGE: Does your unit come with a storage space?  As a general rule, if you’re moving from a house to a condo you’ll need extra storage outside of your unit.

There are a lot of advantages to owning a condo in Seattle, WA, or anywhere else — like never having to mow the lawn again!  But make sure your eyes are wide open when deciding whether and where to purchase, because  otherwise you could get some very unpleasant surprises.

(For more about short sales, see “What is a Short Sale? The Short Sale Process In Washington Explained”. For more about REOs, see “REO or Bank owned Homes Explained: Buying REO Property“.)

WHAT IS A HARDSHIP LETTER?

First, some background: When a lender considers a short sale, it must take into account both the big and the little pictures. As to the little picture — the specific proposed sale — the bank will probably benefit from any short sale that is even close to fair market value of the property. Otherwise the bank will have to foreclose on the property, only to probably take it back at the foreclosure auction. The bank will then have to sell the property itself. All the while, until the property is actually sold and the bank recovers the principal (or a portion of it) the bank is incurring a loss based on the “time-value” of money. Plus, the bank incurs substantial costs in the foreclosure process and again in selling the property to an eventual buyer. These costs are avoided if the bank approves the short sale.

BANKS ENCOURAGE FULL REPAYMENT

On the other hand, the bank also has a big picture concern as well. Quite simply, the bank wants to strongly encourage borrowers to remain good for the debt if they can afford it. Otherwise, the bank — all banks, really — will be even more overwhelmed with defaulting borrowers.

Accordingly, a bank will typically approve a short sale only if the owner has some sort of hardship that makes it difficult or impossible to make the mortgage payments. That is why banks require a hardship letter when requested to approve a short sale.

Thus, a hardship letter is a written statement from the owner about why the owner cannot afford the mortgage. While short sale standards vary from lender to lender, and while they also evolve over time, the hardship letter is generally an important part of the short sale application. Any owner looking for an approved short sale should take the time to draft a compelling hardship letter.

HOW TO WRITE A HARDSHIP LETTER

In drafting the letter, think creatively. Identify any possible hardship that has had a negative impact on your ability to pay the mortgage. Have you lost your job, or are you about to? Has somebody in your family incurred substantial medical bills? Is there any other unusual or unanticipated expense that impairs your ability to make the mortgage payment? Play up those hardships.

That said, there are of course limits. It is a very serious federal crime to make a false statement to a bank. Accordingly, while you can “play up” a hardship, you cannot lie or misrepresent the truth. Its a fine line, and its important to remain on the right side of it.

If you take the time to write a well thought out and compelling hardship letter, you will be taking a big step towards a successful short sale.

As always, this post is NOT legal advice. For legal advice, you must consult an attorney about your specific situation.

Short Sale vs. Foreclosure: What’s the difference and is one better than the other? Many, many people now own property that is worth less than the amount owed on it.  Moreover, many people purchased the proverbial “starter home” within the last five years, and they’re ready to move on to their next home (commonly kids are on the way).  Under these circumstances, an owner can either sell the home and then write a check at closing for the balance owed — OUCH! — or get rid of the home with, hopefully, cancellation of the balance of the debt.

If you’re hoping to avoid the debt without repaying it in full — like most people — then you have essentially two options: You can either seek a “short sale,” or you can let the home go to foreclosure.  There are advantages and disadvantages to each. (For more about short sales, see “What is a Short Sale? The Short Sale Process In Washington Explained”.)

SHORT SALES AND FORECLOSURES SHARE A SIGNIFICANT DOWNSIDE

First, though, there is one disadvantage common to both: Your credit will be ruined.  Your credit score tells potential creditors whether you are a “good debtor,” i.e. whether you repay your debts on time and in full.  Unless you write that check at closing, you will not have repaid this very substantial debt on time or in full.  Your credit score will reflect that outcome.  Generally speaking, it takes credit scores seven years to fully recover from this sort of negative report.

ADVANTAGES OF A SHORT SALE OVER A FORECLOSURE

So what are the advantages of a short sale? First, a short sale will probably have less of a negative impact on your credit score over the long term.  Moreover, Fannie Mae guidelines now prohibit it from buying any mortgage issued to a debtor who had a short sale in the last two years, compared to seven years for a foreclosure.  Accordingly, if you think you’ll want to buy again anywhere from two to seven years down the road, a short sale is better.

DISADVANTAGES OF A SHORT SALE

What about the disadvantages?  There are several.

1. It is hard to sell your home.  It requires a lot of patience and effort, and with a short sale you won’t see a nickel of the proceeds, which all go to the lender.  At the same time, banks are notoriously difficult to deal with in seeking short sale approval.  Plus, most short sales fail, so you will likely invest that effort without getting a good result.
2. To sell the home you only need the lender to release its lien on the property.  In some instances, the lender will do so but will not release you from the debt obligation.  In that instance, you may need to keep paying for a house you no longer own — double OUCH!
3. There’s even a downside if the lender does release you from the debt.  While you won’t have to repay the debt in full, you might be liable for income tax on the forgiven amount.  You will likely avoid that tax bill (the amount of the forgiven debt times your top tax rate) only if you are living in the home at the time of the sale. This is a temporary exclusion from income (until 2013) established by the Mortgage Forgiveness Debt Relief Act of 2007.

ADVANTAGES OF A FORECLOSURE

A foreclosure, on the other hand, may avoid many of the disadvantages that come with a short sale.

1. A foreclosure requires virtually no work.  All you do is stop paying the mortgage, and you can continue to live in the home “rent free” until foreclosure.  You don’t need to even talk to the bank, let alone “negotiate” some voluntary resolution.
2. A foreclosure extinguishes the debt being foreclosed, so you don’t have to worry about continuing to owe money on a house you don’t own. Note that the debt of any second mortgages or other junior lien will survive foreclosure of the first mortgage, so be very careful if you have more than one mortgage.
3. Finally, you are less likely to have any tax liability in the event of a foreclosure.  The law on this issue is still being sorted out by attorneys and courts, so there is no universally accepted analysis of this issue.  That said, a foreclosure will probably not lead to any income tax liability even if the auction price is less than the amount owed.

DISADVANTAGES OF A FORECLOSURE

The downside of a foreclosure?  As noted above, it’s worse for your credit.  Moreover, many people think it is simply wrong to not repay your debts, and a short sale is at least a good faith effort to mitigate the problem for everyone.  Simply allowing the property to go to foreclosure just punts the problem entirely into the bank’s lap.  But I’m a lawyer, not an ethicist so I’ll leave it to you as to whether stiffing your creditor entirely is a disadvantage.

This post simply touches on some of the relevant considerations.  If you’re thinking of either a short sale or a foreclosure, you should consult an attorney or other tax professional about what is best in your specific situation.

First, my favorite article of the month makes a simple and compelling point: House values will stabilize when they return to their historical relationship to inflation.   The fact of the matter is that, historically, house values have increased at the same rate as inflation.  With the recent bubble, values dramatically deviated upward from this pattern. Notwithstanding the housing “crash,” there remains a significant difference between values and inflation, a diference much greater than the historical norm.  The chart to the right illustrates the point.

Accordingly, for housing prices to return to the historical norm, values must drop substantialy further, or inflation needs to catch up.  Since inflation is essentially nonexistent these days (1-2%), housing prices simply must fall further.  Of course, this presupposes that asset values always return to the historical norm.  There is always the chance that we have a “new normal” on our hands, where house values remain significantly above inflation.  But betting against the historical norm is usually not a winning bet.

And of course, that’s not the only reference to house values in the news these days.  Today’s paper had more bad news both nationally and locally: “Home Prices Continue to Fall in Major U.S. Cities.”  As noted in the article by somebody who is paid to know, “The bottom line is, we just have a boatload of loans sitting in foreclosure or close, and we have to work through those loans before we can find a bottom.” And our area is not immune from the “foreclosure crisis” that continues to exert downward pressure on prices.

So as much as I’d like to believe otherwise, its hard to deny the bleak landscape. It is still probably a good time to buy a new home given the historically low interest rates, rates that will not last forever.  And once you factor in the lower interest rate, “overpaying” for a house today — where it subsequent drops in value — does not necessarily mean you will lose money in the long term, particularly if this is your residence and you get the tax benefits of home ownership. But I’d be very wary of anybody who assures you that we have “bottomed” and values will only go up from here.  The fact of the matter is, its rainy and cold outside…..

First, an explanation of the term “REO”: it stands for “Real Estate Owned.” This term is used in a bank’s balance sheet to identify properties owned by the bank other than properties it actually uses (like a branch office). Typically, the bank becomes the owner of such a property when the bank forecloses after an owner/borrower stopped paying the mortgage. At the foreclosure auction, the bank usually bids the amount owed. If somebody bids higher, then that bidder buys the property and the bank is repaid in full. If nobody bids higher, then the bank is the winning bidder and becomes the owner.

Note also that the term “bank” isn’t really accurate. Over the last ten years, more and more mortgages have been sold to Fannie Mae or Freddie Mac, government-owned businesses that buy mortgages originally issued by private lenders. By purchasing these mortgages, the federal government makes it easier and more profitable for banks to lend money. This is one of the reasons why we experienced the housing bubble – lots of easy credit meant lots of buyers, which in turn led to rapidly increasing prices, which led to more buyers who had easy access to credit, etc. In any event, an REO property is more likely to be owned by Fannie Mae or Freddie Mac than any particular bank. But the same rules apply.

Once a bank owns a property following foreclosure, it will usually list the property for sale on the MLS. But right now there are thousands of bank-owned properties on the market. This is a problem as far as banks are concerned for two reasons. First, it’s a basic economic principle that an increase in supply will drive down prices (the ol’ “supply and demand curve” that we would have learned in college if we hadn’t skipped class that morning), and no seller, whether a bank or otherwise, wants to see prices drop. Second, bank-owned homes are generally sold for something less than full market value because the bank would prefer to sell the home quickly and recover as much of its principal as possible. Banks are in the business of lending money, not selling homes. But because of the sheer number of these properties on the market, it is not uncommon for a property to sit off the market for several months after the bank has purchased it.

Eventually, though, the bank will put the property on the market for sale. When that happens, the property will probably be listed at the low end of the market range, again because banks want to sell. Thus, for buyers, REO properties can present excellent buying opportunities.

But like most of the time in life, there is a down side to this otherwise too-good-to-be-true situation. Because banks are not in the home-selling business, but do have a lot of good lawyers, banks will only enter into a contract for the sale of a home if the contract fully protects the bank well beyond the protections of an MLS form contract (the forms used by real estate brokers). And where one side gets additional protection in a contract, it comes at the expense of the other side, i.e. the buyer.

Banks get this added protection by requiring that the contract include a bank-specific addendum. This addendum is generally non-negotiable. While the terms of these addendums can vary significantly, they all achieve the same general result: It is more difficult for a buyer to get out of the contract with a return of the earnest money.

So if you’re thinking of making an offer on an REO property, recognize that you will have fewer opportunities to get out of the contract unscathed. For example, many bank addendums require the financing contingency to expire before closing. In contrast, the standard form contract allows this contingency to remain open until closing. So if you’re buying an REO home and your financing fails on the eve of closing (say, for example, you lost your job unexpectedly), you will probably lose your earnest money, while you would have gotten the earnest money back in a “traditional” transaction without a bank addendum.

What can a buyer do to protect herself if she is thinking of buying an REO property? Well, first and foremost, read the bank addendum carefully. Make sure you know your rights under the contract and when they expire. In addition, you can hire a lawyer, who will at a minimum make sure you understand the risks you are taking. If the bank is willing to modify the terms of the addendum, a lawyer will negotiate those changes.

A short sale is the sale of a home for a price less than what the owner owes on the mortgage, AND the lender agrees to a “short” payoff in exchange for release of the bank’s lien on the property — hence the term. But that definition requires a little more explanation, because some readers might be thinking, “Release the lien? What does THAT mean?”

When you buy a house using money borrowed from a bank, you sign a deed of trust (along with about a thousand other documents! ). The deed of trust pledges the home to secure the debt, so if the borrower does not repay the debt the bank has the legal right to sell the house without the owner’s consent (a foreclosure auction) and to apply the proceeds from that auction towards the debt. Thus, a deed of trust creates a “lien,” a legal right of another besides the owner to sell the property in order to repay a debt. There are lots of types of liens besides a mortgage, such as a contractor’s lien. To “release a lien” means to eliminate that right of another to sell the property.

Why is that important? When you buy a home, you take ownership of it subject to any existing liens. So if you bought a house where a contractor had put a lien on it a few weeks earlier, that contractor would have the right to sell your house to pay the debt incurred by the prior owner — a big deal!! Accordingly, before the seller actually conveys title to the buyer (the legal term meaning transfer of ownership), the seller must satisfy all liens or otherwise insure they have been released.

Back to short sales: Many people use the term to describe any sale where the sale price is less than the amount owed, but that really isn’t a short sale, at least not until the lender agrees to a short payoff. Rather, if an owner gets an offer to purchase for less than the amount owed, the owner/borrower always has the option of bringing money to the table to repay the mortgage in full, i.e. pay the difference between the sale proceeds and the amount owed. If the debt is repaid in full, the lien must be released.

But some people — well, pretty much ALL people — would strongly prefer to not pay money in order to sell their house. (Remember the good old days, when sellers would MAKE money by selling?) Accordingly, if the seller gets an offer to buy for a price less than what is owed, the owner will approach the bank and ask the bank to release the lien even though the loan will not be repaid in full. The lender has no obligation to agree to the request. Alternatively it can agree, but only if the seller continues to make payments on the balance of the loan following the sale. That said, particularly if the property is a residence, most lenders are willing to forgive the unpaid balance entirely. In either event, though, a “short sale” means that the bank has released its lien even though the debt has not been repaid in full.

So why does a “short sale” possibly present a good opportunity for buyers? The seller in a short sale has virtually no motivation at all to get the best price for the property, because 100% of the money is going to the bank. Accordingly, short sales tend to be priced lower in order to simply get an offer that can be presented to the bank. Once it gets to the bank, the bank is less likely to counteroffer or otherwise negotiate aggressively — that is not the bank’s line of business. So, short sales can present good opportunities for buyers — with lots of risks, though, that I will address in a future post.

Finally, as indicated by the title, this post addresses short sales in Washington State. Every state has different laws regarding real property, and moreover I practice (as an attorney and as a broker) exclusively here in Washington. Accordingly, my knowledge of short sales is limited to those in this state. That said, short sales – unlike other aspects of real property law, such as foreclosures – generally do not differ much from state to state as I understand it. Accordingly, the principles discussed above may also apply to your state. But remember: You should always consult an attorney in your area, and never get legal advice from a blog.

While that synopsis may sound relatively innocent, its that actual language used that I find so enlightening. For example, here’s the analysis for “prospects” whose desire for a lower commission really derives from a “fear of change”:

A commission reduction really won’t help with these people, either. We often try to motivate them based on the monetary deal. We have to sell the benefits of change. Identify the worst case situation to prove to them that there is a limited down side. A personal assurance of the next steps and the protection and security you are offering will work well.

You might even build a sense of urgency based on the marketplace, interest rates, or through the fear of loss. Convince them that the window of opportunity is open now and might not be as favorable a few months down the road.

Yeesh, that hardly sounds like a “trusted professional” to me. That sounds more like an aggressive salesperson trying to simply close the deal. And what’s with the “personal assurance”? Is the broker supposed to guarantee some minimum level of success, or a particular outcome? The reality is that, notwithstanding the agent’s — or lawyer’s, or doctor’s, or accountant’s — good efforts, things sometimes don’t turn out well. To promise the prospective client something different up front simply to be retained… well, that doesn’t sound too professional to me at all.

And besides, why discount a consumer’s desire to save money? I mean, Wal-Mart and Groupon are doing pretty well these days, right? Are THEY benefitting from some “fear” in consumers? I don’t think so. But I do think that, by framing the issue in this fashion, this author does a great job of pulling the curtain back on the inner workings of your “typical” real estate broker. They’re salespeople, from start to finish. Consumers forget that point at their peril.

In any event, with the relative drumbeat of depressing news of late, this is looking like an increasingly accurate assessment of the local market. The current conventional wisdom as noted in the article is a “bottoming out” of the housing market by December of this year. But note that this bottom is predicted to occur only in about 75% of the 375 local markets covered by the Case-Schiller Home Price Index. Further, Seattle has historically trailed the “national” market. So perhaps its overly optimistic to think that we will bottom locally in 2011.

Full disclosure: I deleted the “according to Zillow” attibution in the quote above, so really this is just our home town boys delivering the bad news, as picked up by the NY Times. (BTW, the piece includes a nice “urban Seattle” photo — right down to the Volvo parked out front! — that thows some love at local brokerage Gerrard Beattie & Knapp — sweet free media, guys!)