Author Archives: Craig Blackmon

About Craig Blackmon

I am an attorney in Seattle, where I have practiced real estate law for over a decade. I own and operate my law firm, Seattle Property Lawyer, where I help people buy and sell homes without an agent (plus handle other legal issues relating to owning a home). I maintain the FSBO Law Center a web site for "for sale by owner" sellers and buyers. I am a licensed real estate broker and innovator in the real estate industry.

Hope for Short Sales in 2013 – Congress is Working to Extend COD Income Tax Exemption

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This is not legal advice.  For legal advice, consult an attorney, not a blog.  Furthermore, the post below addresses some BUT NOT ALL issues relating to foreclosure, short sale, etc., and the following analysis is cursory and not complete.  If you face a foreclosure or are considering some alternative, you should obtain legal advice.

US-GreatSeal-Obverse.svgThe Senate Finance Committee recently approved extending the Mortgage Forgiveness Debt Relief Act through 2013.  That’s GREAT news for anybody interested in a short sale here in Washington.  If you’re wondering why…

Generally speaking, the IRS considers as income any forgiven debt (Cancellation of Debt, or COD, income).  For example, if I borrowed $50k from you, that would not be “income” subject to taxation because, while I received $50k from you, I had a corresponding liability to you in the same amount.  But if you then released me from that obligation and forgave that debt, at that moment I would have realized $50k in “income.”  Therefore I would need to report this “income” — the amount of the forgiven debt — on that year’s federal income tax return (and of course pay taxes on it).

In 2007, as the housing crisis was getting underway, Congress passed the Mortgage Forgiveness Debt Relief Act.  This act allows homeowners to avoid COD tax liability on debt that was incurred by the purchase of a principal residence.  In other words, if the property is your principal residence, then you will not face income tax liability on the forgiven debt.

Here in WA, there is debate about the COD tax implications of a non-judicial foreclosure.  The vast majority of foreclosures in this state are of this variety.  In a non-judicial foreclosure, the difference between the funds paid at the foreclosure auction and the amount owed is extinguished as a matter of law.  In other words, following a non-judicial foreclosure, the owner/debtor neither owns the house nor owes any money to the bank, regardless of what was paid for the property at auction.  Accordingly, some — but not all — experts believe that a non-judicial foreclosure does not create COD tax liability.

The Mortgage Forgiveness Debt Relief Act expires December 31 of this year.  Thus, if the act is not extended, effective January 1 any forgiven debt, even on a principal residence, will be considered as income and taxed accordingly by the IRS.  Here in WA, the only possible exemption to this liability is the argument that a non-judicial foreclosure does not create COD tax liability.  Thus, an owner/debtor subjected to foreclosure at least has an argument that he does not have COD tax liability after a non-judicial foreclosure.

But a short sale?  As it stands now, beginning January 1 any owner who sells short and is released from the debt will have to report that forgiven debt as income.  There is no question that debt forgiven as part of an approved short sale is subject to COD tax liability absent the “principal residence” exemption.  In other words, only a confused or misinformed owner/debtor will seek a short sale beginning January 1 given the substantial tax implications.  For example, if your house sells for $300k but you owe $400k, you will have to report $100k as income, resulting in a tax bill of an additional $30k or so (depending on your tax bracket).  Is a successful short sale worth that kind of money owed to the IRS?

But — and getting back to where we stared — good news is on the distant horizon.  Recently, the Senate Finance Committee approved extending the Mortgage Forgiveness Debt Relief Act through 2013.  While admittedly a very small step, it is at least a first step towards exending this income tax exemption.  And absent such an extension, short sales will become far, far less attractive.  If Congress can complete the job — a very big IF — then short sales will remain a viable alternative to foreclosure.  But if Congress sits on its hands and lets the exemption expire, short sales will likely dry up dramatically.  Or at least they should…

How to Buy a Home Stress-Free in a Seller’s Market

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There is a lot of evidence out there, both statistical and anecdotal, that it’s a “seller’s market” in the Seattle area. And that is consistent with my own experience as well. The best example? (Or perhaps worst, since this post is from a buyer’s perspective…) I helped make an offer on a home in Mount Baker, the proverbial “tastefully updated bungalow” with lots of nice features. And it got quite a bit of interest. How much interest? Oh, only 13 pre-inspections, 10 offers, and a final sale price 20% over list. POW! Talk about getting punched in the mouth.

In other words, a bidding war. These situations are emotionally trying for any buyer, and are simply too stressful for some. So what to do if you’re a buyer who has no interest in a bidding war?

Tailor your strategy accordingly. First, don’t even look at a listing until it is at least 14 if not 30 days old. At that point, the odds of a bidding war drop dramatically. You are much more likely to have one-on-one negotiating that allows you to keep control over negotiations and gives you the ultimate ability to either buy the house or not.

But that leads to the next, and much tougher, question: How the heck do you find a good house in this market if you only look at old listings? Admittedly, it’s a challenge, but not impossible. First and foremost, don’t just rely on the pictures in the listing to determine if a house is worth a closer look. For whatever reasons, some agents don’t do the best job with the pictures. So don’t think that the pictures necessarily reflect the true condition, layout, and overall “gestalt” of the house. Instead, look for possible homes primarily by neighborhood, space/size, and price. Compile your list, and then go have a look in person regardless of what you might think from the pictures. Yes, you’ll end up touring more homes, but that’s the only way to find that “diamond in the rough” that will work for you but won’t give you a heart attack when making the offer.

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New Case Strikes Down Release Provision in Rescission Form 51

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This post is not legal advice. For legal advice, consult an attorney, not a blog.

Yesterday, Division I of the Washington State Court of Appeals (which handles appeals from King Co. north to Canada on the west side of the Cascades) handed down a decision that addresses the terms of the standard NWMLS Form 51 Rescission. This form is routinely used by agents to formally and definitively rescind one contract before a client enters into another. The Form, drafted by attorneys on behalf of the NWMLS, includes this rather self-serving provision:

RELEASE. The parties agree that the Agreement between them and all other agreements or undertakings between them in respect to the Property are hereby rescinded; and each releases the other and all real estate firms and brokers involved with this sale from any and all present or future liability thereunder and/or in connection with said sale, other than as set forth hereinafter, provided, that nothing herein shall be construed to terminate any existing agency relationships or agreements unless otherwise agreed in writing.

(Emphasis added.) There is no reason to include the release of the real estate firms and brokers involved in the transaction from any liability, other than of course to protect the real estate firms and brokers.

In the case of Hanks v. Grace and RE/MAX, the agent represented both the buyer and the seller. Notwithstanding the instructions from the seller to not present an offer contingent on the sale of the buyer’s home, the agent presented such an offer (albeit one without the correct addendum, the Form 22B, which specifically renders the contract so contingent; instead, buyer simply submitted an offer subject to a 22A Financing Contingency with the “contingent on sale of buyer’s home” box checked). Not realizing that the offer was contingent on the sale of the buyer’s home, seller accepted the offer. This happened in March of 2008.

Three months later, buyers having not sold their house — did I mention this was all happening in the spring of 2008? — the agent decided for reasons known only by the agent to buy the home himself. So they needed to formally rescind the prior PSA, and naturally the agent selected the Form 51 for this purpose.

Needless to say, the agent couldn’t complete the purchase either. Seller eventually sold the home two years later for $158k less than the amount of the original offer. When seller realized that the agent had attempted to get over on her by concealing the contingent nature of the original offer, seller retained counsel. Further investigation revealed a second interested buyer who expressed an interest in making a full price, non-contingent offer at the same time as the original buyers. But the listing agent never so informed the seller.

Following a jury trial on buyer’s claim of negligence against the agent, the agent was found liable and the seller was awarded $195.5k in economic losses and another $170.5k in non-economic (i.e. pain and suffering) damages.

Before the case got to trial, attorney for seller convinced the trial court that the release provision of the Form 51 was void and unenforceable as a violation of public policy. Otherwise, by having seller sign the rescission necessary for a new contract, the agent would have shielded himself from all liability to the seller arising out of his negligent representation. In a nutshell, the law should not — and now does not — tolerate an agent shielding himself unfairly in this fashion. It is not consistent with good public policy.

And the Court of Appeals agreed. It found that the release violates public policy, in part given the role of real estate agents in the purchase and sale of property.

Given this decision, any future attempt by a real estate agent to avail themselves of this shield from liability is likely to be unsuccessful. It remains to be seen if the NWMLS will simply revise the document to elimate the objectionable term. Certainly doing so is consistent with the role agents are supposed to fill and which they regularly hold themselves out as fulfilling, the protection of their client. That protection should not be sacrificed for the self-interest of the broker. Its simply not good public policy.

Buyers, is your Seller a Foreign Person? The IRS and FIRPTA say you better know…

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This post is not legal advice. For legal advice, consult an attorney, not a blog.

A few months ago I posted about the Foreign Investment in Real Property Tax Act (or FIRPTA, pronounced just like its spelled). I didn’t get nearly the response I imagined, only an exchange with Tim Kane, our own escrow contributor. The absence of responses, and the initial nature of Tim’s response, got me to wondering: Am I missing something? Surely other people must appreciate this issue if its as significant as I believe…

Well, I am here to report that IMHO I’m not missing anything. I ran the “Is FIRPTA compliance a big deal?” question by some other attorneys who routinely act as escrow agents. The universal response? “Yes! FIRPTA is a big deal.” Buyers must be aware of and insure compliance with FIRPTA, particularly because the other professionals who typically assist a buyer (the escrow company, the buyer’s real estate agent) either don’t know or apparently don’t care too much about the buyer and the exposure that results from ignoring this federal law.

Oh, and FIRPTA is getting to be bigger deal all the time. With the burst of the “housing bubble” U.S. real property has become an attractive investment to foreigners. “Investment” means that, at some point those houses will be sold; “foreigners” means that, when sold, the buyer had better withhold 10% of the sale price or the buyer may have to pay that tax bill himself. In other words, buyers, ignore — or even be ignorant of — FIRPTA at your peril.

Free Seattle Home Buyer Seminars at WaLaw Realty

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This year WaLaw Realty is once again hosting several free home buyer classes (sellers welcome too!). We’ll be hosting five of ’em, each with their own unique topic (including one specifically for sellers). Our first class is February 15, where we’ll provide our humble opinions as to the current and future state of the housing market. Reservations are appreciated but not required.

You’ll have all of your questions answered, plus we’ll have pizza and beverages (both “adult” and “unleaded”) available so nobody’s stomach growls during the presentation. Oh, and you can check out our new office too. Come learn about the home buying (and selling) process, meet Marc and Craig (founders of WaLaw) and discover how you can save a ton of money when buying or selling a home. Find out why WaLaw is the smart choice for savvy buyers and sellers…

Undisclosed SOC Bonus? There oughta be a law…

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With the new year, I resolved to talk less and do more about the “stacked deck” faced by buyers in the traditional real estate broker system. And since it’s still January…

One of the great benefits of getting my broker’s license has been getting to see how the broker system operates “behind the curtain.” While I’ve seen and learned alot, there is one “sales” tactic that is particularly odious, at least to the exten that it takes place without the buyer’s knowledge. And what is this tactic?

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This is a clear-cut and unequivocal conflict of interest — can there be any reasonable argument to the contrary?

A conflict of interest is a fact of life, and that alone does not disqualify the broker from providing competent representation to the client. But a conflict must not be concealed from the client. Just the opposite: A conflict of interest must be disclosed, or the client is at serious risk of getting screwed. If the client knows about and agrees to this additional compensation, that’s fine. But if the buyer closes on a house that includes such an “SOC Bonus” without knowing of or consenting to it, the buyer has been done a tremendous disservice.

Needless to say, this type of SOC Bonus is relatively common and entirely consistent with MLS rules. No surprise there — the MLS was founded by “seller’s agents” because originally all brokers worked for the seller. So it should come as no shock that the system they developed seriously favors sellers. (Indeed, Ardell has noted previously that the “prime directive” of the NAR is to promote the value of property, and the only way you can do that consistently is by promoting the interests of sellers.)

So what can be done? Why, pass a law, of course! Ironically, an undisclosed SOC Bonus like this one is already arguably illegal under the current law (as a conflict of interest that must be disclosed). But I’d wager that an arguable interpretation of the existing statute doesn’t get much traction out in the real world, and the only solution is to amend the statute to specifically prohibit this practice.

Therefore, I propose an amendment to the relevant statute (RCW 18.86.080) that reads as follows:

(8) If a seller pays any compensation to a buyer’s agent or a dual agent, whether directly or indirectly, the full amount of the compensation must be disclosed to the buyer in writing before or at the time of signing an offer in the transaction.

Whaddya’ say, RCG Community — you got my back on this one?

Is the Seller a “Foreign Person”? Buyers, FIRPTA Says You Better Find Out

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ID-10075952This is not legal advice. For legal advice, consult an attorney in person about your specific situation. Never rely on a blog. [Updated 12/17/14]

The Foreign Investment in Real Property Tax Act (FIRPTA) is a federal law that requires a “foreign person” to pay tax on the gain realized upon the sale of real property owned by that person. However, the law does not make the seller responsible for paying this tax.  Rather, the law requires the buyer to determine whether or not the seller is a “foreign person” (basically a non-resident alien).

If the seller is a “foreign person” as defined by the statute,then the buyer must withhold 10% of the sale proceeds at closing. These funds are to be forwarded to the IRS to insure that the foreign person pays tax on the gain realized from the transfer. If the buyer fails to determine that the seller is a foreign person and thus fails to withhold 10% of the proceeds, the buyer is liable for the 10%. WOW! That’s significant. If you just bought a $400,000 house from a foreigner and did not satisfy your obligations under this statute, you may be liable to the IRS for a cool 40 grand. Ouch.

The NWMLS, recognizing the serious risk to buyers, has included a “FIRPTA” provision in the standard Purchase and Sale Agreement (PSA):

j. FIRPTA – Tax Withholding at Closing. The Closing Agent is instructed to prepare a certification (NWMLS Form 22E or equivalent) that Seller is not a “foreign person” within the meaning of the Foreign Investment in Real Property Tax Act. Seller shall sign this certification. If Seller is a foreign person, and this transaction is not otherwise exempt from FIRPTA, Closing Agent is instructed to withhold and pay the required amount to the Internal Revenue Service.

So that’s good news! The PSA specifically instructs the closing agent, aka escrow, to make sure the buyer complies with this legal obligation.  Whew!

Wait, there’s bad news? Yep. Virtually every escrow company has its own “escrow instructions” that elaborate on the terms of the PSA.  And guess what?  Those instructions relieve the escrow agent from taking any steps to make sure the buyer complies with FIRPTA.  Here is the language from some commonly used escrow instructions:

Seller warrants to Escrowee [i.e., the Closing Agent] that if Seller is an individual, Seller is a non-resident alien for purposes of U.S. Income taxation, or if Seller is a corporation, partnership, trust or estate, Seller is not a foreign entity. The Foreign Investment in Real Property Tax Act of 1980 as amended by the Tax Reform Act of 1984 places special requirements for tax reporting and withholding on the parties to a real estate transaction where the transferor (seller) is a non-resident alien or non-domestic corporation or partnership or partnerships. It is understood and acknowledged by the undersigned that (a) Escrowee will not take an active role in either the determination of the non-alien status of the seller transferor or the withholding of any funds; and (b) Escrowee makes no representations and (c) Buyer and Seller are seeking an attorney’s, accountant’s, or other tax specialists opinion concerning the effect of this Act on this transaction and are not acting on the statements made or omitted by the Escrowee.

So what protection the PSA provides, the escrow instructions take away. “Whew!” is grossly premature.

Obviously, “consulting with an attorney or other specialist” is simply the escrow company engaging in a little CYA.  The closing agent, and only the closing agent, is in a position to obtain the necessary signed certification. The PSA instructs the closing agent to do so.  But the closing agent promptly tells the buyer that it will not do so. If you’re a buyer in this situation, watch out. You could get some exceptionally bad news from the IRS long after you’ve purchased the home.

Not convinced? Check out my follow-up post where I flesh out my opinion with those of several other residential real estate lawyers.

Finally, this is a fantastic illustration of how a buyer can benefit from having an attorney on board from the get-go. At Quill Realty, we provide every client with an attorney (and we pay the attorney’s fee). So if you’re a Quill client, you can rest assured that your attorney will identify and resolve this issue (usually by demanding that the closing agent comply with the terms of the PSA and not those of the escrow instructions, to which they usually agree).  Not a Quill client?  Well, good luck in seeking to eliminate this very substantial post-closing exposure to the IRS…

The Seattle Condo Market: Are Sellers in La-La Land?

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Having looked at several downtown condo listings lately (we have a client shopping for one right now), it seems to me that there is a real disconnect between comp values and listing prices. Based on my purely anecdotal investigation, condos are selling for less than $500/sf; many if not most condos on the market are listed at more than $500/sf. My client was interested in one listed well north of $600/sf, with two recent sales in the same small building (about 20 units), one just above $300/sf and one in the $430’s.

The listing agent and I exchanged emails. I expressed my concerns about the property appraising at a price that would be acceptable to the seller given the list price (and the agent’s admonition that the sellers are “motivated but not desperate”). In response I got this:

I have never in my long real estate career, had a problem with an appraisal–even in today’s market. One yesterday came in at 10% over list. I promise to justify the pricing if we can come to mutual acceptance with the appraiser. I have a way of doing it that seems to work well.

My client just forward me a link to this blog piece about this very topic, which includes this passage:

For just about every condo appraisal, the most suitable comparables are sales from the same building. That can lead to some appraised values that may disappoint some sellers/owners. The biggest item condo owners need to understand is that the appraised value of their unit will be determined by the most recent similar sales available to the appraiser.

So I’m curious to hear the experiences or insight of others: Does there seem to be a disconnect between list prices and “market value”? Or, more directly, has anyone had a problem with a downtown condo appraising for a sale price?

Please note: I am NOT calling ANYONE out…

The CLUE Report: Is it Col. Mustard in the Library with the Rope?

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I’ll admit, at this point I’m pretty much mystified by the frequently-discussed yet rarely-seen “CLUE Report.” For those of you even more in the dark than me, “CLUE” is an acronym for “Comprehensive Loss Underwriting Exchange.” Basically its a national database maintained cooperatively by insurers to track claims made on particular properties, as well as claims made by particular persons. Before an insurer will write a policy on a particular property, it will check this database to confirm that the risk assumed by the insurer is reasonable. The insurer will not write a policy for a property with an existing and extensive claim history because the property is a “lemon” on which the insurer will lose money.

To date, I have typically counseled my buyer clients to call their insurance agent to obtain a copy of the CLUE report for the property. Lately it seems that my clients are unable to do so. Some insurers (Geico) have indicated that they don’t even know what a CLUE report is, apparently because some insurers are not members of the Exchange (the “E” in CLUE). Some insurers (most recently Allstate) have told the client to purchase the report at LexisNexis, but apparently you can only purchase a report for the home you currently own.

So my question to the RCG community: How do other agents address this issue? Do you invest the time and energy speaking with the buyer’s selected insurer to eventually obtain a CLUE report? Do you not even tell your clients about CLUE reports because they are of little or no value? Something in between? And are any sellers taking the advice of LexisNexis (which of course sells the reports) and obtaining a CLUE report to be given to poential buyers? Thanks in advance for any insight you care to provide.

Ardell, I look forward to your insightful and informative response; David, I look forward to a tangential point that illuminates some as-yet-unappreciated aspect of the Real Estates; Ray, I look forward to more rank bashing of my brokerage business model.

“Its a Good Time to Buy”? Not until 2013…

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I caught the recent piece on Seattle Bubble replaying NAR ads over the last few years, each ad more urgent than the one prior in recommending the purchase of a home. The ads raise an interesting question: Exactly when if ever is it really a “good time to buy,” generally speaking? And more to the point, given the current “buyer’s market,” is it a good time right now?

NAR good time to buySeems to me that any thoughtful analysis would say, “No.” Really, in some ways this might be one of the worst times to buy, second only to buying into an existing and already overinflated bubble (say, 2005-08). [Editor’s Note: probably inappropriate hyperbole.] Why? Two factors:

First, its pretty widely accepted that the housing market is going to limp along for the next few years. Values will either bump along the bottom, or even drop a little — or a lot? — further, for the next year or two. So in terms of “timing the market” there appears to be either no loss or possibly — probably, depending on your degree of pessimism — an actual benefit to staying on the sidelines for a year or so.

Second, up until last week, when somebody asked me whether now is a good time to buy, I always pointed out the historically low interest rates. But that rug has now been pulled out from under me, as interest rates will remain at historic lows well into 2013. How do we know? Because the Federal Reserve is holding the federal funds rate at essentially zero percent until then, and mortgage rates are closely related. Admittedly the federal funds rate is not the only influence on mortgage rates, as they are also heavily influenced by the rate on U.S. treasury bonds. But given the likelihood of a Euro-zone collapse — larger by the day, it seems – it appears that U.S. bonds will remain one of the favorite “safe havens” for some time to come. And that means bond yields will remain low.

So, a flat or declining market, combined with historically low interest rates that will remain low for another 18-24 months, means that now is NOT a good time to buy, generally speaking. Do you think we’ll be seeing a dramatically new NAR ad anytime soon? 😉

And now for some backtracking: This entire analysis is focused only on general market trends. As others have pointed out, the question of whether it’s a good time to buy must also take into account unique personal factors. Needless to say, if you’re anxious to put down roots, or you’ve outgrown your current place, or if anything else is going on in your life that makes it a good time to buy NOW, then its yes its a good time to buy. But if you can wait, then you will most probably either be in the same or a better situation a year from now.