Time To Sell? What About the Taxes?

If you have ever owned property you are familiar with the day that always comes when you think it is time to sell. Then you start thinking about all the appreciation and what you could do with that cash. As you get more excited you know that you will pay some taxes...but it is all at the 5%-15% capital gains rate...right? Sorry Charley...NOT right! In an outright sale of real estate where you have taken depreciation annually (and why would you not?), portions of the gain may be taxed at a rate as high as 25 percent! This occurs because the federal tax code states that a gain on property that is equal to or above the depeciation taken during the life of the ownership, can be taxed at a maximum rate of 25%! Depending on the amount of the appreciation of your property, this can create quite an unexpected tax consequence.

So, as an owner, trying to figure out what to do to not give up a quarter of your gain, you seek other options. The good news is there are other options. The bad news is that they require you to defer getting your hands on all of that cash you are dreaming about....at least by selling th eproperty. There are other ways to get to the cash and we will disucss that later. For now, my next few posts will be on property exchanges and how they can be used to defer and/or avoid this taxation.

Refinancing Looks To Pick Up...These Are The Reasons Why!!

It has been almost 12 months since 30 year fixed rates were this low! As of this morning I am actually able to find 30 year fixed rate mortgages (FRM's) for 5.75% and no points!! The high end of the rates I am finding are at 6.3%. For most of this year these rates have been 100 to 150 basis points (1%-1.5%) higher. It used to be that the old rule of thumb was to look at refinancing anytime you can save 2% in your interest rate or you plan on staying in the new mortgage for two years (to cover your costs of the refi). These rates are making it look possibly favorable to see mortgage lenders looking at a much improved business in 2007!

If you now are in an adjustable rate mortgage (ARM) that you have had for even just a year, you could be paying at least 8.5 percent, up from 7 percent a year ago. These rates are based on the Wall Street Journal Prime Rate to which many ARMs and equity loans are attached.
Depending on the terms of your ARM-shorter adjustment periods or different indexes, your rate may even be higher. Therefore, the reasons to convert to a FRM are stacking up quickly!

Comparing fixed rate mortgages is always easy...you just have to consider the cost of the refinance and decide how long it takes to allow the monthly savings to pay back your costs of refinancing. For example, a $100,000 mortgage refinance might cost 1.5 points, or $1500. Lets say your monthly principal and interest are at 7.5% so your payment is $699 per month. If you can drop the rate to 6.0%, the monthly payment is reduced to $600 per month. If it costs 1.5 points to complete this refinance ($1500), then just consider if you anticipate living in the home-and being satisfied with the new mortgage-for a period to exceed 15 months. If so, everything else being equal, proceed with the refinance.

The other side of the coin is if you have an adjustable rate mortgage (ARM) and your payment has been creeping up. If you have some equity, and the payments are starting to create some pain, you can refinance (no matter what your situation may be on the term) and ask your lender to roll the costs of the refinance into your mortgage balance. Considering, a $1000 increase in your mortgage will cost less than $7 per month, and the reduction of interest in the example above created a $100 savings, you can also create some financial relief by sliding into a fixed rate today.

Refinancing is a tremendous potential financial tool when rates are moving in such a way as to improve your current situation. A real mortgage pro can help you sort out your options. Don't let anybody tell you there are any set of rules...for each family and their unique circumstances, their are options. Get some professional help today.

Let me know if you need to talk to a mortgage professional and I can get you pointed in the right direction.

Slow Home Sales Cause New Creative Options!

The following article is from the Indianapolis Star..November 5, 2006. It provides some additional verification that the housing market, in particular new construction, has significantly slowed in the Central Indiana market.

Buyers' market forces sellers, builders to offer free TVs, cash and other extras
By Madhusmita Bora
November 4, 2006
Sukhdeep Singh, 21, recently landed in Indianapolis, looking for an affordable home.
He found that and more.

The California resident was offered a brand-new refrigerator, part of his real estate agent's commission and an 18 percent discount off the price of a brand-new home.

"The house is good, and the deal is great," Singh said.

And he's seriously considering it, he said.

A slowing market for new and existing homes has agents, builders and sellers doling out lucrative extras. Incentives include money, furniture, new roofs, free basements and flat-screen TVs. Some are even offering as much as $25,000 on referrals that end in a sale.
"I would say that the extent to which incentives are being offered is at an all-time high," said Edward D. Hackett, division president for Centex Homes in Indianapolis.

This week, the National Association of Realtors launched a nationwide newspaper campaign, urging buyers to dig into their pockets and buy that dream house. Sellers such as Elizabeth Faris, Indianapolis, are bracing themselves for lower prices. Three weeks ago, Faris and her husband, James, put their ranch-style home on Michigan Road up for sale. They installed a new roof and painted the house. So far, they've had lookers but no takers. "Each week we are knocking down the price a certain amount to sell it faster," Faris said.

That's increasingly common.

In September, the median existing-home price nationwide dipped 2.5 percent from the previous year, according to the National Association of Realtors. The price of new homes slid 9.7 percent, the biggest skid in 35 years. In the Indianapolis area, new-home prices fell 0.2 percent in August, the most recent data available. The median sale price for an existing home dropped 2.3 percent. "It's a buyers' market, and people are looking for deep discounts," said Beenu Sikand, a Realtor with Century 21 Diversified, who's giving away 51 percent of her commission to clients. "Last year I sold at least 20 homes a month; in October, I sold four."

Builders are taking note. Year-to-date building permits plummeted 22 percent in the nine-county metro area. "I don't believe we've seen a double-digit decrease like this in the last five years," said Rachel Daeger, a spokeswoman for the Builders Association of Greater Indianapolis.

Meanwhile, they're turning to bigger incentives to sell existing homes. At Centex, they are offering discounts on options and base price. At Ryland Homes, they are knocking as much as 40 percent off prices.

And buyers are taking the bait, said Daeger. In October, traffic in the Parade of Homes, a biannual home showcasing event, was significantly higher than it was in the spring, she said.
"I think consumers are finally realizing it is a good time to buy," Daeger said. "It makes us very hopeful."

BUYERS SEEING DEALS
Buyers have more bargaining power in the home market.

What builders are offering• Cash incentives.• Upgrades.• Down-payment assistance.
What Realtors are offering• Commission rebates.• Money for referrals.
What sellers are offering• Lower asking prices.• More significant repairs.• Closing-cost assistance

Got Mortgage?? Better Make Sure You Know Who You Might Be Getting?

One of the worse parts of what we do everyday is when the opportunity presents itself to counsel somebody who has either lost their home to foreclosure, is losing their home , or fearful of defaulting on their loans. What I find most of the time is that these people, short of illness or job loss, directly blame their mortgage lender. In many cases, that is just a poor example of blaming anybody else for your problems...but more and more often, I have found it to be quite plausible. When I start to really look into many of the mortgage notes these people have executed, often in the equation I find that some "too slick" lending procedures have confused these borrowers. Heck, they probably would of confused me with all the paperwork I have experienced everytime I have taken out a mortgage!

Well, in an effort to help, the State of Indiana Secretary of State has put together a website that might be beneficial for anybody to check prior to getting into bed with a mortgage lender (figuratively speaking of course...what you do on your own private time is up to you!).

http://www.indianainvestmentwatch.com/mortgage.html

The Secretary of State, Todd Rokita says"While many elements contribute to Indiana's top state foreclosure ranking, checking on your loan broker's credentials is just one of several steps that aware consumers should take to ensure they are protected in the home buying process,"
Visitors to the Web site can search the Secretary of State's database to ensure their broker is registered with the state.

The site also provides educational material to assist consumers in their money-related decisions.
From the website: the Top 10 Red Flag List for Mortgage Loans:

Shifting the closing date. The borrower's mortgage closing date can shift if the borrower does not have a written commitment from the lender. Homebuyers can find themselves in a default situation if they quit paying their existing mortgage based on an oral promise that the new loan will be closing quickly.

Offer a "free" refinance. Sometimes mortgage brokers will promise "free" refinances of a mortgage in the event mortgage rates drop further from the borrower's present mortgage interest rate. Every real estate closing has costs. While a mortgage broker may agree not to charge a fee, other closing costs may still arise. If such an offer is made, the borrower should get the offer signed and dated in writing.

Total reliance on the loan broker. The lender and the loan broker play different roles in the mortgage transaction. They are usually different, unrelated business entities. The borrower should know the lender's identity and receive a copy of the "locked loan rate commitment" from the lender in writing.

"Pre-approved" and "pre-qualified." These are marketing terms, not legal ones. The only legally binding mortgage loan commitment must be in writing from the lender and must contain specific terms, such as the mortgage loan dollar amount, the mortgage interest rate and the date the mortgage loan commitment expires.

Offer for a "free" real estate appraisal. Mortgage brokers may offer a "free" real estate appraisal under the condition that the borrower closes on a mortgage loan through their company. Borrowers should be prepared to pay for the appraisal if they decide to take their loan business elsewhere.

Falsified income. An unscrupulous loan broker may encourage the borrowers to falsify their income on the mortgage application. This is fraud. A buyer should never present false information. If buyers can't document their sources of income, they are probably trying to buy a property that is not within a reasonable budget.

Loan flipping. This practice occurs when an unscrupulous broker convinces a borrower to refinance repeatedly over a short period of time. All of the closing costs can be included in the total amount borrowed, resulting in the loan broker receiving a new commission and additional fees for closing each new loan.

Over-appraised residential real estate. This occurs when an unscrupulous loan broker, real estate appraiser and/or real estate agent collude to get a property appraised at a value grossly above its market value. If the borrower falsifies income to get the loan and the loan is foreclosed, the lender can pursue charges of fraud against the real estate appraiser, real estate agent, loan broker and the borrower.

Undisclosed pre-payment penalties, balloon payments and rate and terms switched at closing. The previously mentioned loan clauses do not have to be disclosed to the borrower in writing before closing. It is up to the borrower to ask about them. If buyers do not ask, they could end up with a loan much different than what was verbally agreed upon.

Post-closing squeeze for more fees. The HUD-1 Settlement Statement must list all fees paid at the closing table or paid outside of closing. Anyone who calls the borrower after closing and tries to collect additional undisclosed fees is acting illegally. The borrower should also contact the Secretary of State's office to report such attempts.

Finally, the following is noted at the site:
In 2005, investigators from the Secretary of State's office took part in a sweep of licensed loan brokers in various parts of the state. Thirty-two examinations were conducted, resulting in the discovery of 37 separate violations of the Loan Broker Act. As a result of these violations, Rokita's office entered into seven consent agreements totaling $3,300 in civil penalties, eight deficiency letters, two enforcement cases and the termination of three loan broker licenses.

All I can add to that is those numbers are a small drop in the bucket compared to what we routinely see in our office just talking to people who have not lost their homes. Remember...if it sounds to good to be true...it probably is!

The following story will be published in the July 2006 REOMAC newsletters. REOMAC is probably the nation's largest membership group of default servicing companies. The article covers news important to companies who service mortgages in Indiana. JWW

Indiana Cracks Down On Vacant Houses
Joel W. Wilmoth

In high default regions of the country such as my hometown of Indianapolis, local and state governments continue to search for the solution to the problems associated with default and foreclosure. In our community, due to a number of factors vacant abandoned homes have become the issue of the last few years. These factors include the approximate 200 day length of time to complete a foreclosure (derived from the Fannie Mae timeline standard of 215 days and the Freddie Mac timeline standard of 198 days). Initial movements were mostly based in community involvement to recreate areas of high default. Now, as the problems continue to grow, legislative bodies are searching for solutions. A new law in Indiana that will potentially create a mechanism whereby your collateral could become government property without you having much opportunity to do anything about it. As with many legislative acts, if this new law proves successful, don’t be surprised to see similar initiatives in other areas with vacant home problems such as Detroit and Atlanta. Certainly Indianapolis isn't Detroit, which is marred by 30,000 abandoned buildings. But the more than two-decade-long focus on downtown Indianapolis-- which helped the city center avoid the cratering experienced by its Midwestern rival -- will be for naught if the abandoned houses plaguing other areas of the city aren't eradicated. Therefore, the combination of a new legal mechanism, combined with the city’s government leadership goals and initiatives, increases the likelihood that these laws may be aggressively utilized.

The problem begins with an abandoned property that ultimately ends up in the foreclosure process. I sometimes laugh when people ask me about redemption in Indiana. No, we do not have redemption, but we do have a very long foreclosure process that often provides for a deterioration of the mortgage collateral. It also places lenders and servicers in a helpless position if their policies and procedures include a hands off approach (securing and winterizing) despite the long delays. In a four season area, a home not properly prepared, and vacant, ultimately is likely to end up with many additional problems that cause it to become an eyesore to a community, not to mention a significant loss proposition. Indiana cities will be able to speed up redevelopment of abandoned houses after the Indiana General Assembly approved this legislation known as House Bill 1102.

House Bill 1102 removes some restrictions on cities and towns, which formerly made the acquisition process of vacant/abandoned homes last from three to five years. With greater power to seize abandoned houses, city officials will be able to cut that time to less than a year. The approved legislation specifies that real property for which any taxes or special assessments are delinquent from the prior year is eligible for tax sale if a county executive has certified to the county auditor that the real property is vacant or abandoned. With the new law, fines for offenses such as unsafe building code violations -- say, a vacant house is in need of repairs -- will be counted as "special assessments" and given the same weight as unpaid property taxes. So in the future, any unpaid building code fines could trigger a tax sale. The bill does specify that this property must be offered for sale in a different phase of the tax sale or on a different day of the tax sale than the phase or day at which the property is offered for sale. The bill interestingly also prohibits persons who have previously violated the unsafe building laws from bidding at the tax sale.




Under the new Indiana law, errant owners who might once have been able to delay action by the city will subsequently be given far less time to get their properties in shape and pay off their fines before the confiscation process begins and the house is sold at a tax sale. Under existing measures, seizures of abandoned houses by a city are possible only when property taxes are unpaid. Under the new law, abandoned and vacant properties with special assessments would also be eligible to move to tax sale. This eligibility will be under the new shorter timelines and would only occur if the County Executive were to certify these properties.

The law goes into effect in two stages:

Beginning in July 2006, fines levied by cities against negligent property owners will have the same weight as taxes, so if left unpaid, they can trigger tax sales.

Beginning in January 2007, the rules of tax sales and tax sale redemption will change. Historically, a property owner could withhold paying property taxes for three years before their property would come to a tax sale. Under the new law, that time frame will be shortened substantially, to as little as 11 months if the outstanding items are building code violations and it is certified that the property is vacant. After a vacant or abandoned property is sold through a tax sale, the previous owner will have four months to pay the back taxes and resume ownership, instead of the current "redemption" period of 12 months.

Here is a hypothetical example that I see occur fairly regularly in our market.

January 2007- the default and the foreclosure notices arrive at our subject property. Owner is still living in the home but there is evidence of deferred maintenance and possible city violations.

June 2007- Owner files bankruptcy temporarily staying the foreclosure.

September 2007-The foreclosure stay is lifted. Owner has now relocated. All utilities are shut off (if they have not already). Maintenance has been non-existent for months and more citations have accumulated. This is likely when the city takes notice of the vacant property and potentially issues a citation to clean up the yard or board broken windows (as an example).

Now the clock can start ticking. What seems logical is a swift foreclosure, a cleaned up property, and a sale with no further problems from the city. But what if the citations had started in January because the home was vacant but the owner still used the above delaying tactics? Prior to the actual foreclosure sale, the property could be sold at a tax sale and even worse, could have a new owner with no regard for the previous liens. All of this could be completed in a time frame of 15 months! Is this scenario completely unlikely? Or in a city where it is not unusual for us to be handed a new foreclosure assignment only to find when arriving that the home was demolished one year ago-is it a serious threat?

To our servicing partners, I offer two ideas that should be seriously discussed with all parties involved in the default process-beginning at loss mitigation through foreclosure and REO servicing:

1. Pre-foreclosure maintenance of vacant property
2. Automatic requirement to check with the city for any outstanding code violations immediately upon assignment. (since my original distribution of this information in early June, I am aware of at least two servicing companies who have specifically added this requirement to their procedures).

The following web address will take you to the City of Indianapolis web site and specifically the Abandoned Housing Initiative begun in 2003. The passage of House Bill 1102 has now given the city teeth to continue the aggressive actions started with this initiative.

http://www.indygov.org/eGov/City/DMD/Abandoned/home.htm

If you would like a copy of an article from the Indianapolis Star dated 5/29/2006 that discusses how the new law might be enforced, .please feel free to email me at joel@wilmothgroup.com and I will be happy to send you a pdf copy of the article.

(Joel Wilmoth is the owner of the Wilmoth Group. A licensed real estate broker and owner of several businesses over the past 15 years, he founded the REO brokerage that he now partners with his wife Jennifer, known as Wilmoth Asset Services in 1994. The company now serves approximately one third of the state of Indiana and works with many default partners. Joel is an active member of REOMAC and NRBA.)

National Bankers Association Says Indiana Leads USA In Mortgage Foreclosures!



National Delinquency Survey Finds .98% of Indiana Loans Faced Foreclosure in 4th Qtr 2005
_______________________________________________
In what I consider to be an informative measure of what is coming down the pike, the National Bankers Association found that 7575 Indiana homeowners faced a foreclosure suit in the 4th qtr of 2005. This level is a new record for the state and is double the nation's average. If yourperspective is as a foreclosing lender or investor, this index is a measure of what to expect in the future. Indiana foreclosure suits sometimes take six months to a year to complete.

The Indianapolis Star in it's Saturday March 18, 2006 edition highlighted this information as the main front page headline. In a state that is fighting aggressively to fight the ills of the rust belt, this sad bit of news adds a taste of reality to our usual recent diet of good news. Just last week Toyota announced an expansion of it's Lafayette auto plant expecting to add 1000 jobs over the next year. We can only hope that some of these jobs emphasize the usage of new technologies that have not been common with auto plant jobs. Because somewhere in our manufacturing mentality, a large portion of our population was romanced into grabbing the quick buck and shorting their education for the anticipated long term security of the plant. Now, many of these people find that with no manufacturing jobs, all they are trained for are much lower per hour jobs in the service sector. Blockbuster does not pay like Chrylser!

The Star states that "foreclosures in Indiana are driven by factory layoffs, personal bankruptcies, stagnant home prices, and aggressive lending." I agree with this simple finding and also would point out the the sequence listed points out much of the cause and effect that put us in this position...factory layoffs lead to personal bankruptcy. Personal bankruptcy closes down the credit markets and that stagnates home prices. Finally, our free market system naturally fills these credit needs with aggressive lending practices which may ultimately lead to foreclosure. With aggressive lending programs there is usually no room for a hiccup and once you have lived long enough you know that everybody has hiccups! Divorce by itself hits 50% of all families-and that is one major hiccup and in my experience, often the straw that breaks the struggling homeowners back for financial and emotional purposes. That is a pretty high possible rate of problems! Also, don't forget the stress of inadequate medical coverage and the ease of obtaining credit card debt. In 2005 Indiana had a 13.7% increase in bankruptcies over 2004.

Some good employment news does exist in Indiana. Employment is up 1.3% in the last 12 months. These 40,000 jobs are primarily in construction, transportation, and services. Factory employment continues to shrink and with it goes the large incomes that represent a bygone error of doing business. The US Bureau of Labor statistics reports that in the five years ending 12/31/2005, factory jobs decreased in Indiana 17.6%. That is over 100,000 jobs!

Another measure sited in the article is that 2.75% of mortgage loans in Indiana were past due at year end. The only state in worse shape by that measure is Ohio at a sad 3.22%. Now, we have a new element to add to the fire, increasing interest rates and adjustable rate mortgages that are going to escalate payments to already stretched homeowners. This is not California- a refinance is not going to save the day because the chances are high the home you bought in the last few years is not worth a lot more than the day you purchased it.

I always tell people that I associate with nationally that many of the negative statistics for the state of Indiana are not applicable to the Indianapolis metro area. I think that is still the case but the armor is getting creased. Last week, Hamilton County Indiana (Fishers/Carmel/Noblesville) was identified as the 15th fastest growing county in the USA. But, we are seeing more and more foreclosures in these once secure communities. Why? Despite the building boom growth has brought, it has also added one more damper to housing prices, a very adequate supply of affordable and very reasonably priced housing. With the growth and some ensuing population shifts, appreciation in metropolitan Indianapolis for an average home in the 4th quarter of 2005 was 4.9% compared with 12.9% nationally as reported by the US Office of Federal Housing Enterprise Oversight.

So, where is the solutions I see for this condition? It really depends on your perspective. The shift in employment is not going to cease. Interest rate pressures are now adding another mix to the pie. I think there is an opportunity for earlier loss mitigation. This mitigation can start in the default areas of the lenders, but I also think it can be pursued and managed better in the open market. Be willing to work with a Realtor. Train local representatives as to your policies and then ask your defaulting borrowers to contact your representative. Investors, go out into the market with an eye toward helping...not just focusing on the quick dollar turn. With a cooperating lender, you might be surprized at the win-win situation that can develop. I know, I seem to have one or two loss-mitigation cases going in our office at all times and it has a great deal of promise when all parties agree to not point fingers, but to find a creative real estate solution!

Top Ten States For Foreclosure Actions Taken In 4th Qtr 2005
National Bankers Assn.

1. Indiana
2. Ohio
3. Michigan
4. South Carolina
5. Oklahoma
6. Georgia
6. Kentucky (tie)
8. Tennessee
9. Kansas
10. North Carolina

Mortgage Fraud-It Is Not Just The Big Guys Anymore!

I think way to many people take the ideas of creativity, and forget that in life there is this more important thing called character. Combined with our ongoing assurance that we are invincible (you do still feel that way...right? Or is there some other screwy reason you drive with a cell phone in one hand, changing the radio with the other, while trying to read a map...at 65 mph?) I think the idea that bad things happen to other people is pretty common. But, mix in plain old fraud into your creativity quotient and today, you are taking a huge risk.

The FBI (yes the big federal agency that use to have a TV show) is targeting fraud and specifically property flipping. They are focusing on two types of schemes:

1. Inflated fraudulent appraisal on property sold at inflated price and subsequent default after a few payments.

2. The new exotic version known as the "short sale property flip". The fraudster finds home with a pending foreclosure and an appraiser willing to support a deflated value (oh yeah...said appraiser usually ends up with some cash in this deal...he does not deflate values because he does not know better). With a little work convincing the mortgage lender that they are way over advanced, a sale takes place. Then the fraudster gets the same appraiser to raise the price and they sell it for much higher than the market value.

These are both examples of creativity with no character!!! And now the feds are holding back no punches! If you have ever considered strucuturing a deal with lots of creativity, and no character, maybe you might want to consider how you would like to spend the next 30 years in a federal pententiary! That is no exaggeration as a title company closing attorney in Atlanta learned when she was found guilty on 169 counts of mortgage fraud for a $20MM scheme. Now don't write this off because of the size. That is still about 1.5 years per million. I don't know about you but I don't care to spend one day in one of those joints while ruining my professional and personal reputation.

So, remember...creativty with character!!!

They make it look so easy...all the real estate teachers! You know who I am talking about. Whether it is the late night gurus with the mansions, cars, and multiple girlfriends/boyfriends in their pool attire, or if you are in the business, the teachers who want to share their wisdom...the wisdom gained from selling so many......books, cd's, and seminars. Somewhere in this blog we are going to setup a place to really discuss specific gurus. I have some experience and opinions of a few and they are not all critical. I just have the misfortune of seeing so many people parted from their limited dollars hoping for the miracle pill. And the pill does not materialize, but deeper financial problems do. When so much of their time and energy could go toward focusing on two very important concepts:

1. Solving somebody's needs
2. Doing it creatively!

My company's motto is "Creative Real Estate Solutions" and while this blog is not about my company, what I hope is that it can become a resource for everyone who wants to solve real estate problems creatively. I think you will find this blog interesting and possible beneficial if you are an investor, real estate agent, property owner, corporate asset manager, property manager, or just fascinated about real estate and wanting to learn more. Creativity will only rear its head with lots of participation. I am going to find as many ways as I can to get as many different participants as possible. The train may take a little while to get out of the station, but it will and when it does...watch out! Creativity knows no limits in this blog! Creativity is synonomous with brain-storming in my way of thinking. With brain-storming, some neat solutions are suggested. Not all of them work...today! But they might. If not for me, maybe for you. And so it goes. I look forward to our brain-storming together!