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Will 2013 Outpace 2012 for Another Great Year in Real Estate?

It was a great year for real estate. Yes, 2012 was “great” for real estate! We finally saw a marked improvement in sales both in Dane County and the State. Dane County sales were up by over 22%. Homestead Title outpaced the market with an increase of 40% in 2012! In addition, sales related to foreclosures showed a steady decline for the entire year. This is all great news.

In addition, there has been good economic news with lower unemployment and a surge in the stock market. As so often happens, this has corresponded with higher interest rates. Rates on 30 year mortgages ticked up last week. If you haven’t refinanced, NOW may be the time or you might just miss this historic window.

So how does 2013 look? It is way too early to tell, but the early returns hint at another strong year. Anecdotally, things look great: Facebook and twitter are lighting up with Realtors and Lenders celebrating an incredible start to 2013. Reliable statistics aren’t in, but Homestead Title’s early numbers suggest that 2013 is off to an even better start than 2012. Homestead Title’s sales orders are up over 40% from this time last year. In fact, this has been the best January we’ve ever had.

Here’s to a GREAT 2013 in real estate!

 

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CYA Letters and Better Communication

Real Estate Agents would be well served to learn a lawyer’s trick of the trade – the CYA letter. Short for “Cover Your A$&,” these letters serve an important function both for limiting liability and improving communication. Rather than viewing these as obnoxious, overly legal annoyances, Realtors should view CYA letters as tools to better serve their clients.

Scenario

Buyer:        I like the work the seller did in the basement. But I worry about whether it’s up to code. Can you find out?

Realtor:    I don’t know. You would need to ask an inspector and maybe an attorney. We can ask the Seller’s Realtor about permits and whether all the work meets code, but the ultimate determination is a legal question and I’m not an attorney.

This might be a good, safe answer that does not delve into legal advice. But, without more, there is still a risk of being sued or having a licensing or ethics complaint filed against you. A buyer who later has costly problems because of code violations may lash out at anyone and everyone, including the Realtor. The Buyer might misremember the conversation or even fabricate what was said. All of this can be avoided with a simple, follow up letter – a CYA letter.

CYA Letters are Good Customer Service

Anytime a Realtor is asked for legal advice, they should both decline and follow up with an email or letter. This creates a written record that the Realtor did their job and complied with the law (Wisconsin law prohibits Realtors from offering any legal advice – REEB 24.06). More importantly, it is great customer service and provides a clear communication to the client. A good, CYA letter might read as follows:

I want to follow up on our conversation about the basement. As I said, I don’t know whether there might be code violations. I did ask the Seller’s Realtor and we’ll see what she says. I’m not an attorney and can’t offer anything on this kind of question. An inspector or attorney could help you answer this question and I have some great referrals, if you need them. Thanks!

Following up in writing shows a level of professionalism and assures a clarity of communication. And it covers your tail.

By Attorney Peter Zarov. Mr. Zarov is a Wisconsin attorney who represents many Realtors and Brokers.

This post is not intended as legal advice. Realtors, Brokers and other individuals should consult an attorney regarding their specific issues and questions.

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BREAKING NEWS:
On January 1, 2013, Congress extended an important law that exempts many homeowners from paying taxes on cancelled debts. As part of the “Fiscal Cliff” deal, Congress extended the Mortgage Forgiveness Debt Relief Act of 2007 until the end of 2013. This will have a positive impact on distressed homeowners.

Cancelled Debt

If you owe a debt to someone else and they cancel or forgive that debt, the cancelled amount may be taxable.

Cancelled or forgiven debts happen every day in the Real Estate world. Short sales and foreclosures result in substantial, cancelled or forgiven debts. The Bank’s loss may be considered the home owner’s gain – a taxable, forgiven debt. A short sale happens when the proceeds of a home sale are not enough to pay off the mortgage. The bank agrees to take a “short” payoff and may cancel or forgive the shortage.

For the last 5 years, most homeowners were exempt from paying taxes on that forgiven or cancelled debt. The Mortgage Forgiveness Debt Relief Act of 2007 exempted many homeowners from paying taxes on forgiven debt. But, that law was set to expire on December 31, 2012

Taxable Income

If you owe $200,000 on your home but your sale only results in $150,000 in proceeds, you will be “short” by $50,000. You would likely need to count that $50,000 as taxable income to the IRS! In this case, you might owe and additional $12,500 in tax liability. In fact, you may owe this tax even if your house is foreclosed if it results in a shortfall to the bank.

Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act of 2007 exempts many home owners from paying taxes on the forgiven debt. On January 1, 2013, Congress extended the Mortgage Forgiveness Debt Relief Act of 2007 until the end of 2013. This has the potential to save distressed homeowners millions of dollars in “phantom” tax liability over the coming year.


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Scam Alert: It’s Not A Real Bill!

Homestead Title just received a very realistic looking bill from DNS Services. The bill is for “Managed DNS Backup Business Services.” Man that sounds important. Its not – its a scam.


As with many fake bills, this one contains the hidden warning that it is “a solicitation for the order of goods or services, or both, and not a bill…” Other scams involve fake phone bills, yellow pages ads, and printer toner. Don’t fall for the scam. Throw the bill in the garbage.

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If you owe a debt to someone else and they cancel or forgive that debt, the cancelled amount may be taxable.

Cancelled or forgiven debts happen every day in the Real Estate world. Short sales and foreclosures result in substantial, cancelled or forgiven debts. The Bank’s loss may be considered the home owner’s gain – a taxable, forgiven debt. A short sale happens when the proceeds of a home sale are not enough to pay off the mortgage. The bank agrees to take a “short” payoff and may cancel or forgive the shortage.

For the last 5 years, most homeowners were exempt from paying taxes on that forgiven or cancelled debt. Unless Congress acts soon, homeowners will have to start paying income taxes on that debt.

Taxable Income

If you owe $200,000 on your home but your sale only results in $150,000 in proceeds, you will be “short” by $50,000. You would likely need to count that $50,000 as taxable income to the IRS! In this case, you might owe and additional $12,500 in tax liability. In fact, you may owe this tax even if your house is foreclosed if it results in a shortfall to the bank.

Mortgage Forgiveness Debt Relief Act of 2007

The Mortgage Forgiveness Debt Relief Act of 2007 exempts many home owners from paying taxes on the forgiven debt. This law, however, is set to expire at the end of 2012. If it does, it may have a chilling effect on short sales and loan modifications. Many experts and commentators believe Congress will extend the law. It was originally effective until 2009 and Congress extended it to 2012 as part of the Emergency Economic Stabilization Act of 2008. In August, the Senate Finance committee approved a one-year extension, with bipartisan support (this was not a full vote of Congress). Others are more skeptical. A lame-duck Congress has its plate full with the looming “Fiscal Cliff.”

If the law is not extended, many believe the Real Estate market will suffer. Indeed, over 20% of Dane County sales are distressed property sales. These distressed sellers would be faced with another, “phantom” tax just to walk away from their homes.

 

 

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Closing Cost Credits – Buyer Beware!

A simple contract term can cause so much confusion:

“Seller shall provide buyer with a closing cost credit of $3,000 at closing.”

Closing cost credits are often used to help buyers cover their costs or to address contract issues prior to closing. When Buyer’s and Sellers agree on this credit, everyone should be happy. Unfortunately, it is not that simple.

The buyer’s lender must approve all closing credits and they must appear on the HUD-1 Settlement Statement. Problems arise when lenders reject these credits.

Contract Language and Communication

Realtors must draft good contract language and communicate with their Buyers. First, Realtors may provide for a “closing cost and prepaid” credit. Lenders will only allow credits up to the amount of the Buyer’s actual closing costs. Including “prepaids” allows many lenders to increase the allowable credits to include prepaid mortgage interest and tax escrows. Realtors should also avoid excessively large closing cost credits. In Dane County, for instance, it is unusual for closing costs to exceed $3,500. A closing cost credit of $8,000 is virtually certain to be denied. It is also important to communicate with your Buyers and warn them that the closing cost credit requires lender approval. Prepare them for the possibility that the credit may be limited or even rejected.

Avoiding Lender Rejection of Credits

Many Realtors or attorneys include provisions that reduce the purchase price by the amount of any rejected credits. Beware: this can cause delays and the need to re-underwrite a loan. The seller may also credit “prepaid” items to increase the allowable credits. Check with the lender prior to drafting the “closing cost and prepaid credit” provision to make sure it is acceptable. The best practice is to avoid closing cost credits that exceed actual closing costs.

Most importantly, if a lender rejects a credit, there are certain things that are not acceptable:

  • Do NOT have the Seller write a personal check to the Buyer at closing
  • Do NOT ask the title company to write a check to the buyer, and reduce the seller’s proceeds by that amount.
  • Do NOT have the Realtors write a check to the Buyers.

Each of these “solutions” may constitute loan fraud. It is never worth risking a Realtor’s license or an attorney’s practice to assist or instruct their clients in the commission of loan fraud (no matter how unlikely it may seem that there would be any real consequences).

This information is provided by attorney Pete Zarov. This is not intended to constitute legal advice and should not be relied upon in place of individualized legal advice. For more real estate tips, check out Homestead Title’s blog.

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New Rates In Response To OCI Bulletin

Wisconsin title companies recently revised rates in response to State regulatory pressures from the Office of the Commissioner of Insurance (the OCI). There has been a lot of confusion over the recent rate changes. Indeed, there have been suggestions that the new rates have nothing to do with the OCI’s recent Bulletin and that title agents can continue to offer any rates or discounts they wish.

In fact, an OCI Bulletin sent a clear warning about rates and when discounts are allowed. The OCI warned title companies that:

  • Discounts must be made pursuant to a filed rate program.
  • Discounts can only be offered for risk-based reasons.
  • Discounts may not be made for purely competitive reasons.

This is a significant change in how the OCI regulates title rates. The result, however, has not been significantly higher rates. Title companies have filed new rates that are actually lower than previously filed rates. And they filed rate-discount programs that allow rates to remain competitive.

A Short History Leading Up To The New Rate Filings

The state has always required title companies to file their rates. The filed rates must be approved and cannot be “excessive or inadequate.” Over the last two decades, however, stiff competition led title agents to discount their charges from the filed rates on every single closing.  For instance, the filed rates on the sale of an average home ranged between $900 – $1,300. Yet, local title companies in Dane County and Milwaukee discounted from these filed rates, charging anywhere from $400-575. Title companies offered these substantial downward deviations from filed rates for strictly competitive reasons.  Arguably, the discounts were excessive and the rates inadequate.

The OCI Bulletin Set Limits on Discounts

The OCI signaled a significant change in enforcement of the law. The Bulletin reminded title companies that they must charge filed rates and these must be neither excessive nor inadequate. The OCI outlined when and how companies could offer discounts from filed rates, emphasizing that discounts could only be made based upon a “rate deviation program” that is based upon risk factors.

The OCI has made clear that it will no longer allow downward deviations (discounts) from any company’s filed rate based upon “market competition.”  Now, any discount must be (1) documented, (2) based on a filed “deviation program,” and (3) made for risk or actuarial reasons. This is a significant change in policy and enforcement.

New Rates – Lower than Previously Filed Rates

Most underwriters responded to the OCI’s actions by filing new rates that are lower than previously filed rates. They generally allow discounts if the title agency is provided with an older (prior) title insurance policy for the property. The filed discounts range from 10% to 20% of the rate and reflect the lower risk in insuring a property where there is already a policy in place.

The result will be a modest increase in prices in the Dane County market and a drop in rates in many areas of the state. In 2011, for example, a typical $200,000 title policy might have cost about $575. Today, that same policy will cost $665 – $750 (assuming the property had been insured previously). This represents an overall increase of less than 1% of the typical seller’s closing costs. Buyer title costs remain unchanged and refinance rates remain fairly static with lower prices on high end properties.

Overall, rates in Wisconsin are still very low compared to regional and national averages. Homestead Title writes for three underwriters and continues to have competitive rates and incredible service. For a rate sheet, contact us at Home@HomesteadTitle.net.

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