2008 List Issue: Law & Ethics
Success in this business is measured by hard numbers—transaction sides, sales volume, days on the market, percentage of asking price. But just as important as how much business you do is how you do business. Keeping it straight means staying on top of the everchanging legal environment.
5 Papers You’ll Need to Renegotiate a Troubled Mortgage
If you have clients facing a potential foreclosure, help them help themselves by assembling the following, as suggested by the Federal Housing Administration.
1. Loan number and recent payment history
2. A brief explanation of their circumstances. Are their financial problems temporary (for example, a cut in job hours or the illness of a family member) or permanent?
3. Recent income documentation, including pay stubs or tax returns
4. A list of household expenses — utility bills, food, insurance
5. A list of other debt obligations — credit cards, car loans
For more advice on avoiding foreclosure, visit www.fha.gov/foreclosure.
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6 Clues a Lender is a Predator
Help your new or refinancing clients protect themselves by making them aware of activities that might indicate a predatory lending practice. Here are some tips from the NAR brochure “Are You Having Trouble Paying Your Mortgage?”
- Excessive service fees. Lender fees of 1 percent are common on many mortgages — significantly higher percentages may be a red flag.
- Teaser rates and balloon payments. Borrowers must understand what their payments will be when the rate is raised.
- Delayed closing. Unscrupulous lenders may delay a closing so that a more favorable loan rates expires.
- Overinflated appraisals. Higher values allow for higher fees to the lender and added cost to the borrower.
- Prepayment penalties and other barriers to refinancing. Penalties for prepayment try to make it too costly for borrowers to get another loan at a more favorable rate.
- Unexpected settlement costs that make the fees charged at closing significantly higher than those disclosed earlier.
To download the free NAR brochure, go to REALTOR.org and search for “predatory lending.”
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7 Dos and Don’ts for Legal 1031 Exchanges
Rochelle Stone and John Mangham of Starker Services Inc. in Los Gatos, Calif., share these tips on how to avoid common legal mistakes in 1031 exchanges.
1. Do know how to count. Like-kind exchange rules allow 180 days to complete the transaction, which includes the 45 days for the identification of a replacement property. Weekends and holidays count, and no extensions are granted, so don’t get it wrong.
2. Don’t assume a second home qualifies for an exchange. Vacation property must be an investment (which means you don’t live there for more than 14 days a year or 10 percent of the time it’s rented) or used in a trade or business to qualify for a 1031 exchange.
3. Do exchange for a property equal or greater in value. If your client exchanges for a property of lesser value, the unspent money will be taxable as capital gains.
4. Do replace your debt. Taking out a mortgage at a lower level during an exchange creates a taxable event. If your clients want a lower mortgage payment, they have to bring cash to the transactions.
5. Don’t ignore recapture. Any depreciation an investor has previously taken must be deducted from the basis of the property before calculating any gain.
6. Don’t forget to set up the exchange before the transaction closes. You need to include a stipulation in the purchase agreement so that the funds from a property’s sale transfer to a qualified intermediary instead of to the sellers during the closing.
7. Do give the buyers and exchangers a refund on any earnest money advanced from their own cash for a property that is later transferred through a 1031 exchange. This refund will come from the intermediary, who will replace the amount with exchange funds.
QUIZ
Test Your Knowledge of 1031 Exchanges
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5 Hot Legal Issues
The legal issues getting the most buzz in real estate circles these days are:
1. The risk of identity theft.
A 2007 study by Javelin Strategy & Research found that the average identity theft victim lost $5,720 to fraud. Access to clients’ confidential information makes brokers attractive targets for identity theft. To protect yourself, institute document management policies for both paper and electronic files. NAR has partnered with the Federal Trade Commission to develop brochures and other educational materials on protecting against identity theft, available at the Government Affairs section of REALTOR.org.
2. Sham affiliated business arrangements.
As a recent crackdown against real estate licensees and title company agents in Minnesota demonstrates, both state-level law enforcement and HUD are ready to play hardball against affiliated business arrangements that function only as shells for illegal kickbacks. Review NAR’s advice in The Letter of the Law section of REALTOR.org.
3. Outlawing rebates and incentives.
While the dozen or so state laws that prohibit real estate practitioners from paying incentives to consumers aren’t new, the recent focus on the legality of such statutes by the U.S. Department of Justice in states such as Kentucky have put this marketing practice under the microscope. Read more about the issue at REALTOR.org.
4. Disclosure obligations when a seller faces financial woes.
As declining home prices make short sales more common, the issue of how, when, and how much real estate professionals must disclose to other brokers and prospective buyers is getting a lot of attention. Do you have to tell cooperating brokers that they run the risk of a bank cutting the offered commission in the MLS? Will doing so breach your duty to a seller? NAR’s Short Sales Issues Work Group plans to have policy recommendations by summer, so stay tuned.
5. The persistence of mortgage fraud.
Current price instability in many local real estate markets provides an easier opening for fraud and makes it more challenging for appraisers to assess value. Brokers and sales associates who are eager to close deals and help pressured sellers may be tempted to turn a blind eye to one price on the HUD1 statement and another on the check. More recent fraud schemes include both foreclosure experts who take the title to the home without satisfying the loan and those who offer fraudulent reverse mortgages to hard-pressed seniors. Remember that even if you don’t profit and you’re only trying to help, it’s still fraud.
Source: NAR Legal Department
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Agency Issues
According to NAR’s 2007 Legal Scan, agency issues remain a perennial worry for real estate brokers, especially:
Pitfall: Believing that the end justifies the means to close the deal
Pitfall: Focusing on whomever hired you first
Pitfall: Getting the listing instead of explaining the agency relationship
- Minimum service agreements
Pitfall: Having to pick up the slack in deals when sellers choose the minimum
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7 Secrets to Successful — and Legal — Landlording
Slower sales are compelling more home owners to rent their properties, at least for a while. If you’ve been asked to help, follow these tips from attorney Kenneth M. Roth.
1. Run renting like a business.
Even if your client is planning to lease only until the house sells, or the tenant is your second cousin, keep leasing on a professional basis. Establishing business rules and policies allows you to maintain objectivity if a tenant makes demands or is late with the rent.
2. Treat everyone equally.
Federal fair housing law, which prohibits discrimination on the basis of race, color, religion, sex, national origin, family status, or handicap, applies when real estate licensees advertise or lease any residential property. Although it’s completely legal to ask questions about a prospective tenant’s rental history, current employment, and financial history, it’s important to ask every applicant the same questions to avoid the appearance of discrimination. If your clients have a problem renting to anyone in a protected class, then encourage them not to rent the home, says Roth.
3. Use the right forms.
Although there are all-purpose leases available at office supply stores, it makes more sense to use a lease tailored to your specific property type and state laws, including landlord-tenant laws. Good sources are your local REALTOR® association or state bar association, says Roth.
4. Make your lease as specific as possible.
Spell out exactly what is expected of the tenant and the owner or manager. Who’s going to mow the lawn? How should emergency repairs be handled? Roth suggests making tenants responsible for repairs of less than $100 and letting the owner cover major repairs.
5. Write out a roadmap for defaults.
Your lease should spell out all the particulars and penalties of rent payment. It should state when the rent is due, where it must be paid, what late fees and interest you will charge, and at what point late payments will result in an eviction notice.
6. Don’t treat security deposits as a potential for profit.
Security deposits are intended to cover only repairs needed because of excessive damage to the property. They can’t be used to cover routine cleaning of a unit prior to releasing or to add upgrades. Also remember that in many states, security deposits must be kept in a separate account and you must pay interest to the tenant. Ask for the first and last month’s rent plus a security deposit, advises Roth.
7. Don’t be fooled by appearances.
A fancy car and lots of bling do not necessarily a good tenant make. Run a credit check on every prospective tenant. Tenants must sign an authorization to permit you to check their credit, and you can charge them for the cost. Also remember to keep credit information confidential. Don’t disclose what you know to others, says Roth.
Roth is an attorney in Florida, New York, and Washington, D.C., and author of The Successful Landlord (Amacom, 2004).
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Code of Ethics Fallacy
Common misconceptions about NAR’s Code of Ethics can lead to unnecessary disputes with fellow practitioners. Example: procuring cause.
Misunderstanding: Showing a property proves procuring cause and entitles you to a commission if your buyer purchases the home.
The real story: Procuring cause is a complex issue, and no one action ensures that you’re entitled to compensation after a sale. Appendix II to Part 10 of the Code of Ethics and Arbitration Manual gives a basic definition of procuring cause as “the uninterrupted series of causal events which results in the successful transaction.” Neither showing the property nor having a buyer’s representation agreement with the purchaser automatically demonstrates procuring cause.
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10 Tax Changes for 2008
Plan now and you’ll be in a better position to know what you’ll owe Uncle Sam this time next year.
1. More money for gas. The standard mileage deduction for business increases to 50.5 cents per mile. Note that mileage rates for medical or moving purposes fall to 19 cents per mile.
2. More money for retirement. You can contribute $5,000 to your IRA ($6,000 if you’re over 50) in 2008.
3. No breaks for sales taxes. The provision permitting taxpayers to deduct state sales taxes — a big plus in states with no income tax — expired at the end of 2007.
4. More tax breaks for retirement savings. Married taxpayers with joint income of up to $85,000 will be able to deduct IRA contributions if they file jointly; individuals with income of up to $53,000 can take the deduction.
5. Higher standard deduction. If you’re one of the two thirds of taxpayers who don’t itemize, you’ll be able to deduct $10,900 as a married couple filing jointly ($5,450 for singles) in 2008.
6. No tax on some capital gains. Joint filers whose taxable income doesn’t exceed $65,100 and single filers with income that doesn’t exceed $32,550 don’t have to pay any tax on capital gains they realize in 2008; the rate for other taxpayers remains at 15 percent.
7. More time to sell a house when you lose a spouse. Taxpayers who lose a spouse now have up to two years after that death to take the maximum exclusion of $500,000 in gain on the sale of a principal residence. The other requirements for the exclusion must have been met before the death.
8. Less money back for some hybrid cars. While buying a hybrid car can still save you taxes, the tax credit has been phased out on many popular models such as the Toyota Prius. Check out the 2008 Model Year Hybrid List at www.irs.gov before you buy.
9. Tougher taxes for kids. Children 18 and under or fulltime students up to 24 years old will pay taxes at their parents’ tax rate for investment income over $1,700. Note that this rate doesn’t apply to wages a child earns.
10. Higher cutoffs for Social Security. The maximum amount of earnings subject to Social Security tax increases to $102,000 in 2008.
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Last-minute Deductions
It’s not too late to save on your 2007 taxes, if you act fast.
- IRA contributions. You have until April 15 to add money to your traditional or Roth IRA. For 2007, you can contribute up to $4,000 ($5,000 if you’re over 50)
- Mortgage insurance premiums. If you acquired a new mortgage insurance policy on a first or second home in 2007 (either through purchase or refinancing) and have an income below $100,000 (for a married couple), you can deduct premiums for this year. If you financed with a VA or Rural Housing Service loan, you may also deduct prepaid interest for future years through 2010.
- Dependent care expenses. If you pay someone to care for a child under 13 years old, your spouse, or other dependent so that you can work or look for work, those payments are deductible regardless of your income.
- Alternative minimum tax exemption. Congress raised the AMT increase to $66,250 for a married couple for 2007 ($44,350 for singles). This is a one-year increase, although a similar provision may be passed before the end of this year.
- Mortgage forgiveness. If on or after Jan. 1, 2007, you had a portion of a mortgage loan on a principal residence forgiven during a loan restructuring, short sale, or foreclosure, you do not have to declare the first $2 million of forgiven debt as income.
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5 Papers You’ll Need to Renegotiate a Troubled Mortgage
If you have clients facing a potential foreclosure, help them help themselves by assembling the following:
1. Loan number and recent payment history
2. Brief explanation of circumstances. Are financial problems temporary or permanent?
3. Recent income documentation, including pay stubs or tax returns
4. A list of household expenses — utility bills, food, insurance
5. A list of other debt obligations — credit cards, car loans
Source: FHA
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5 Foreclosure Laws You Need to Know
Regulations relating to foreclosure differ by state, so check your state’s statutes.
One place to start is a Web site such as www.foreclosurelaw.org.
1. Notification of intent to foreclose. Many states require that a lender notify the borrower in advance (30 days, for example) before obtaining a court judgment to foreclose.
2. Nonjudicial foreclosure. Many states permit lenders to add a clause to a mortgage document that permits the lender to foreclose and sell the property without obtaining court approval.
3. Deficiency judgment. Some states permit a lender that forecloses on a mortgage to file a judgment against the borrower entitling the lender to collect from the defaulted borrower any amount of the outstanding mortgage not covered by the sale price.
4. Right of redemption. Some states (New Jersey, for example) permit a defaulting borrower to satisfy the loan default and recover the property if done within a specified amount of time after the property is sold.
5. Military service. If the borrower or the borrower’s spouse is on active military duty, the Civil Relief Act of 2003 prohibits a lender from foreclosing on the mortgage. In addition, the borrower may qualify for an interest rate reduction or even a temporary suspension of mortgage payments.
Don’t forget the HOPE Now Alliance. This new private-sector program negotiated by the federal government should help borrowers with subprime adjustable rate loans that will reset in 2008 or 2009 avoid foreclosure.
The voluntary plan encourages lenders to help qualified subprime borrowers refinance their loans into an FHA-insured or other more affordable mortgage without prepayment penalties. Lenders may also freeze the interest on ARM products at the introductory rate for five years to assist borrowers who are unable to qualify for refinancing. For more information, go to www.hopenow.com.
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LINKS
A How-to Guide For Consumers
Order the consumer brochure Learn How to Avoid Foreclosure and Keep Your Home. Order copies to distribute from REALTOR.org/store or download it in PDF form for free.
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