Tri-City Area and Real Estate Blog

By Paul A. Smith, TCAJoB

Only July 30, President Bush signed into law a massive housing bill designed to stabilize failing housing markets across the country.  The highlight of the legislation is a $7,500 tax credit for “first-time homebuyers,” who purchase a home between April 9, 2008 and close before July 1, 2008. The measure also includes approximately $15 billion in tax cuts and significant expansion of the low-income housing credit.

But proponents are lauding the 47,5000 credit the loudest because they believe it will move a large amount of potential buyers off the fence about purchasing a home; and those people who felt they couldn’t afford a home before will now consider moving forward because of the credit.

The idea is to create a “trickle-up effect” to jump start the real estate economy by giving incentive for the surplus of renters to take the plunge and buy a house. Sellers then would have buyers and be able to move on and begin purchasing the surplus of unsold high end and new construction homes.

Supporters also believe the bill will eventually lighten the load on banks with a large inventory of foreclosure homes by providing more qualified homebuyers. Naysayers stop short of calling the $7,500 a true credit because of the fact that the amount received would have to be repaid over 15 years, making it in essence a no-interest loan. That calculates out to a $500 minimum payment added to the mortgage and taxes due each year. According to analysts, the average first-time homebuyer will save at most a few hundred dollars a year.

The tax credit isn’t going to help people qualify for a home loan. the banks are still setting the guidelines, and unless the buyer can qualify, the tax credit doesn’t apply. the other stumbling block to the credit is the fact that taxpayers don’t get the money up front. It can only be claimed after a homebuyer files his or her taxes, which most likely does not coincide when they are buying a house and need the cash.

The bill is aimed at low- to middle-income tax payers. High-income earners aren’t eligible for the tax credit, which is worth the smaller of $7,500 or 10 percent of a home’s purchase price. the credit starts to phase out for married couple with income over $150,000 and ends completely at $170,000. For singles, the credit i phased out from $75,000 to $95,000.

On the plus side, the definition of a “first-time homebuyer” is somewhat liberal, meaning people can qualify even if they’ve owned homes before. the legislation defines first-time buyers as someone who has had “no ownership interest in a principal residence during the three-year period” before a home was purchased.

The tax credit carries a cost of an estimated $4.8 billion over 10 years - nearly one-third of the bill’s total incentives. The government’s hope is that the credit will get people into homes now and give them time to sort their finances out.

Mid-Columbia keeps national trend at bay

Emma Kramer, 3, likes to talk about her family’s new house, particularly the room she’ll call her room. “She just wants to have a bedroom that’s purple,” said her mom, Tracie. The Kramer family, including Tracie’s husband Kraig and their other daughter Erika, 1, recently moved from Huntsville, Alabama, for Kraig’s job with Bechtel.

They started looking for a house online before they moved and checked out 20 or 25 homes once they arrived at the beginning of July. A four-bedroom home in west Kennewick caught their fancy. “We wanted to have space for the family, for the two kids” and for company, Tracie Kramer said. “We wanted to have a decent sized yard for the kids to play in. We wanted something that was relatively low maintenance. This is the couple’s fourth home and Tracie said she was pleased with the selection in the Tri-Cities, though homes seemed more expensive than in Huntsville.

They didn’t have problems selling their home in Alabama, and though homes here seemed to have been on the market longer than in Huntsville, Tracie said she thought the local housing market looked “pretty steady.” The bicounty housing market has slowed some since last year, including a 16 percent drop in home sales through the first six months of the year.

There were 1529 sales during the first six months of the year, according to mid-July information from the Tri-City Association of Realtors. That’s compared of 1820 during the same time last year. Permits for new home construction are down about 14 percent through June, from 833 last year to 716 this year, according to the Home Builders Association of Tri-Cities.

Uncertainty at Hanford always affects the housing market and once the federal Department of Energy awards a prime contract for Hanford services, such as security, information technology and utilities there is an expectation of real estate activity to pick up.  Some people moving here are finding difficulty selling their properties in markets that they’re leaving.  There is a general perception on the part of the consumer that the market is much less vibrant than the actual 16 percent drop in home sales.

Glenn, Crellin, director of the Washington Center for Real Estate Research, said “the Tri-Cities market is probably marching to its own beat.” The area’s housing market didn’t experience big run-ups and it’s not seeing big declines like other parts of the country, he said. “It’s certainly a market that doesn’t warrant any panicking,” Crellin said.  Sales prices continue to rise as well.

The average sales price in June was about $199,000 — a 1.5 percent increase over $196,100 in June 2007. For the first six months of the year, the average sale price was $187,700 — up almost 1 percent from $186,400 during the same time last year. Tight credit requirements likely are affecting some buyers. “Credit standards across the board…are all much tighter than I’ve ever seen them,” said Mark Runsvold, branch manager for CLS Mortgage in Kennewick.

He said he’s a little concerned that even people with stellar credit and incomes that support buying a home aren’t able to get zero-down loans, which are still in demand. The company’s purchases and refinances are down slightly compared to last year and it’s a bit of a nerve-wracking time to be in the mortgage industry, he said.

But overall, CLS is staying busy and has hired a couple of new employees since last year, Ronsvold said. Home inventory, another indicator of market health, was about comparable with the beginning of July last year, at just more than 1,400 homes. That points to a fairly balanced market, officials said, which is anything in the five-to-seven month range.

Last quarter, Crellin said the Tri-City market had a 7-8 month supply. That compares to the 9.5 month supply for Washington. Though expensive gas and food prices aren’t helping the local housing market, buyers will prioritize a home purchase over buying other things. And with continued growth in local industries such as wine and medicine, he thinks the market will have a strong second half of the year.

Ingrid Stegemoeller, Tri-City Herald

Financial crimes are one of the fastest growing areas of criminal activity in the United States and one of the fastest growing areas of financial crimes is mortgage fraud. Fraud involves two parties: one makes a false statement of fact material to the business involved and party relies on that statement to their detriment. In mortgage fraud, false or inaccurate information in connection with a mortgage application is provided and that information causes a lender or another in the chain of approving and funding that loan to make the loan or to make the loan on terms and conditions different than if the true facts were known.

Mortgage fraud includes a whole category of illegal business dealings. The different schemes that may be used include, but are certainly not limited to, property flipping, equity skimming, application fraud, credit or income misrepresentation. Mortgage industry professionals and law enforcement break these different schemes into two groups.

1. “Fraud for Housing” in which a borrower will knowingly provide false or at least inaccurate information regarding his or her qualification for the loan. This might be something as innocent sounding as fudging a little on their income levels or employment in order to qualify for the loan or for better terms on a loan. Although we would like to see everyone be able to obtain the American Dream of home ownership, real estate agents must be careful when counseling purchasers to avoid any suggestion that enhancing certain facts may assist a buyer in qualifying for the necessary mortgage. The desire to be helpful can not override good sense and honesty. The REALTORS® Code of Ethics requires members to treat all parties to the transaction honestly, including those providing the financing for the purchase.

2. “Fraud for Profit” which is sometimes referred to as “industry insider fraud” because it typically requires at least the cooperation, if not the participation, of an appraiser, real estate broker, mortgage broker or other real estate professional. Such cooperation or participation does not always require any action on the part of the real estate professional. It can be implicit through the real estate professionals failure to disclose or correct a representation made by someone else which the professional knows to be false. The consequences for the housing market differ only as to degree. The latter group causes far more in losses to the mortgage industry and ultimately the public because the people involved are not trying to stay in the property and never intended to make the payments required by the mortgage. Often their schemes will involved multiple properties and parties. They are not motivated to commit mortgage fraud solely by the money that can be taken from a property. When they have done that or the threat of being caught increases they will often disappear. Individuals who provide false information to the lender to help secure their own housing lack the same kind of bad motivation and usually intend to make the payments to stay in the housing. But if they default on the loan because they really were not qualified, the community is still left with foreclosed housing and the individuals with damaged credit and credibility.

Mortgage fraud is accomplished through the use of false documents, identity theft, straw buyers, and sometimes the witting or unwitting assistance of real estate professionals. To protect themselves and their clients, real estate agents must be able to distinguish between legal and illegal mortgage practices. There are a number of different ways in which the real estate agent may inadvertently become involved in these schemes or involve their seller clients. Agents may be asked to interfere in the appraisal process, alter or not include parts of the purchase agreement that is provided to the  lender or title company, intercept verifications of  income or employment history or help out by hand carrying verifications provided by the buyers to others working with the buyer. Any of these  activities could be a part of mortgage fraud scheme.

Some common examples of mortgage fraud as described by the FBI include:

Property Flipping - Property is purchased falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is that the appraisal information is fraudulent. the  scheme typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, title company employees are common in this scheme. A home worth $200,000 maybe appraised for $400,000 or higher in this type of scheme.

Silent Second - The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage is usually not recorded to further conceal its status from the primary lender.

Nominee Loans/Straw Buyers - The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee’s name and credit history to apply for a loan.

Fictitious/Stolen Identity - A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: The applicant’s name, personal identifying information and credit history are used without the true person’s knowledge.

Inflated Appraisals - An appraisal acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

Equity Skimming - An investor may use a straw buyer, false income documents, and false credit reports, to obtain a mortgage loan in the straw buyer’s name. Subsequent to closing, the straw buyer signs the property over to an investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments and rents the property until foreclosure takes place several month’s later.

As demonstrated in each of the foregoing descriptions, a key element of the problem is the imbalance of information. One side, normally the borrower or someone working with the buyer, conceals information from or affirmatively misleads the lender. Anytime an agent suspects this may be the case, further investigation is warranted to rule out any involvement by the agent or their unwitting client in a fraudulent transaction.  There are several clues which may alert the agent that there may be a problem.

One of the most important documents in detecting fraud is the original sales agreement and any addenda to that agreement.  It is the document which the real estate agent is most likely to be involved in preparing. Thus, care must be exercised in preserving its accuracy. things to be sure of:

• The property is clearly identified.
• All parties to the transaction are identified and have executed the agreement.
• The signatures are legible or properly identified.
• All riders and addendum’s are attached.
• There are no blanks or inconsistent information in the purchase and sales agreement.
• It accurately reflects the consideration to be paid by the buyer for the property.

Other possible red flags:

• Significant sales price adjustments that are not supported by comparable market data possibly accompanied by request that list price in MLS be altered to reflect appraised value.
• Required use of a particular appraiser.
• Down payment maintenance assistance programs that charge excessive fees or that attempt to place restrictions on how their participation is reported in contract documentation, including the HUD1.
• Large seller contributions, possibly in the form of provisions for large decorator or improvement allowances.
• Mortgage brokers who refer prequalified buyers to agents.
• Statement that the buyer will occupy the property is questionable. For example. the buyer is retaining old property or there is unrealistic commute to the buyer employment.
• Buyer has very limited credit history and existing history is with high rate consumer finance companies.
• Credit history indicates the repayment of a prior obligation did not include any interest payments.
• Unrealistic income for occupation.
• recent drastic increase in income due to a raise or a new job.
• Sales contract, appraisal and title work disagree with respect to seller’s name and appraisal shows property or comps previously sold in past year.

If these warning signs are present in your transaction, bring the situation to the attention of your broker. While fraud isn’t involved every time one of these warning signs appear, the few minutes it will take to decide between innocent and fraudulent can save you and your broker time, money and maybe even your license, and reporting fraud will protect the communities in which you do business.

Mortgage Fraud is more than a just a possibility for real estate professionals. Read the following fraud profile which describes one broker’s experience and lesson. An agent was asked by a friend to help in the acquisition of a distressed property. This friend was in the mortgage brokerage business with her husband. The agent successfully assisted her friend in the purchase. Unbeknownst to the agent, the buyers arranged a simultaneous closing for the same property to another buyer for double the original purchase price. The issues of fraud were as follows:

1.   The second buyer was a straw buyer whose loan qualifications were “enhanced”.

2.   A fraudulent appraisal was obtained to substantiate the inflated second sale price to the lender funding the loan.

3.   The simultaneous closing was doctored to allow the high LTV loan on the second transaction to close first in order to fund and close the first transaction.

4.   Participation of the escrow closer is not documented but the closing sequence certainly should have raised questions.

5.   Not surprisingly, the straw buyer did not perform on the loan and the lender took a large loss.

Outcome: The mortgage broker served Federal prison time. Unfortunately, his name has come up again following his released from prison. the agent was not prosecuted only because there was no evidence that she had any knowledge of the fraudulent second sale to the straw buyer.

Even though the date for filing a tax return is past, many people file early because they are in line for a refund. And with the federal government finalizing the economic stimulus refunds, there is another check on the way starting this month for more than 130 million households.  Why not consider using your tax refund from the IRS along with the stimulus money as the down payment on a new home?  If you add those two together you could have a large chunk of money. it can give a lot of people entry into the housing market.

In the IRS’s filing update of March 1, the average return to that point totaled $2,637 as compared to $2,578 over the same week in 2007. That is an estimated increase of 2.3 percent. And as of the same date, the IRS direct deposited 37.8 million refunds, as compared to 35.7 last year.

More people are getting more money back quickly. Adding to the excitement this year is the economic stimulus package signed into law last month. According to the IRS, to receive a payment, taxpayers must have only a valid Social Security number, at least $3,000 of income and file a federal tax return. If you’ve already filed your 2007 return, you need to do nothing more. the IRS said the money will be direct deposited for those who chose that option for their refund or mailed beginning in May.

Eligible single people will receive up to $600, married couples with get $1,200, and parents will receive an additional $300 for each eligible child younger than 17. there are other details on the stimulus package and payments, including a question and answer section available at the IRS website, www.irs.gov.

A Money Management International survey indicated only one third of people receiving a refund plan to save it, while almost half plan to use to to pay obligations like debts or car repairs. About 10 percent will take a vacation with the springtime windfall. Nearly half of those surveyed say they will put the money toward a major purchase such as a new car or a house.

Many first-time homebuyer mortgage programs offer borrowers a chance to purchase a home with as little as three percent down, while others available in today’s market require no down payment at all. With mortgage rates still low, and housing prices attractive her in the Tri-Cities, now could be the perfect time to use that refund and extra payment as a down payment on a home. This money is supposed to be used to stimulate the economy and why not use the money for a home, an investment that will grow in value and give you some return?

If you already own a home, one of the most prudent ways to spend the “extra money” might be using the cash to refinance your mortgage. Rates remain low, so if you’ve been looking at refinancing, your refund offers a piece of change to put toward closing costs. Another suggestion is to put that money toward your mortgage payment. Extra principal payments along the way, can cut down the length of the loan.

Limited personal use OK’d for homes in 1031 exchange

By Tom Kelly, Inman News

 The Internal Revenue Service has handed investors and second-home owners a new gift in the form of a safety net that provides a “safe harbor” for taxpayers who wish to swap the property via a Section 1031 tax free exchange even though they have enjoyed personal use of the property.

Revenue Procedure 2008-16, which goes into effect March 10, 2008, officially allows limited personal use of an investment property and will not prevent a dwelling unit from qualifying as property held for trade or business or investment use for purposes of the tax-free-exchange rules.

Many “second homes” are actually investment properties because their owners rent them out a majority of the year. The IRS has steered clear of any personal-use language regarding a tax-free exchange, but a new court case sparked a need for clarity “in the interest of sound tax administration.”

In Moore v. Commissioner, the taxpayers exchanged one lakeside vacation home for another. Neither home was ever rented. Both were used by the taxpayers for personal purposes. The taxpayers claimed that the exchange of the homes was a like-kind exchange under Section 1031 because the properties were expected to appreciate in value and thus were held for investment.

The tax court held, however, that the properties were held for personal use and the “mere hope or expectation that property may be sold at a gain cannot establish an investment intent if the taxpayer uses the property as a residence”.

“While the IRS is fully aware that many people use their investment properties for their own vacations, the agency is now saying it will not challenge a 1031 exchange just because there was personal use of an investment property.” according to Rob Keasal, real estate tax specialist in the accounting firm of Anderson ZurMuehlen. “It’s the personal-use language that is new.”

According to Section 1031 of the tax code, no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of like kind that is to be held either for productive use in a trade or business or for investment.

Personal residences can’t be exchanged fax-free under Section 1031 because they aren’t held for productive use in a trade or business or for investment.

In light of the Moore case, the IRS has taken a more lenient approach to exchanges. It provides taxpayers with a safe harbor(and an indirect checklist) under which a dwelling unit (real property improved with a house, apartment, condominium, or similar improvement that provides basic living accommodations including sleeping space, bathroom and cooking facilities) will qualify as property held for productive use in a trade or business or for investment for Section 1031 purposes even through they occasionally use the dwelling unit for personal purposes. The IRS won’t challenge whether a dwelling unit qualifies under Section 1031 as property held for productive use in a trade or business or for investment as long as other exchange rules are met.

Strict personal-use rules of the investment property as a”second home” still apply. The period of the taxpayer’s personal use of the dwelling unit cannot exceed the greater of 14 days or 10 percent of the number of days during the 12 month period that the dwelling unit is rented at a fair market value.

The Moore case flunked the Section 1031 tax-free exchange test for a variety of reasons, according to the tax court. The taxpayers never rented or attempted to rent the properties. And, they did not offer the replacement property for sale until they were forced to do so by the need for liquidity in connection with the division assets incident for their divorce. In addition, they failed to claim any tax deductions for maintenance expenses or depreciation connected with the properties and claimed interest deductions on both properties as home mortgage interest rather than as investment interest.

“Although the taxpayers hoped that both properties would appreciate, the tax court found in Moore that the taxpayers’ purpose in acquiring and holding the properties was to provide personal vacation retreats for their family”, Keasal said. “You will not pass the exchange test by banking on appreciation alone. While the new guideline does provide for personal use, the IRS is clear that property has to qualify as an investment to be a candidate for a tax-free exchange.”

Don’t be afraid to use your lake place or ski condo even though it’s an investment property and you plan to exchange it for another investment property down the road. If you limit your personal use, you will be sailing into the IRS’s new safe harbor.

If you’re planning a picnic on the Columbia River, you don’t check the weather forecast for Florida. Yet that’s just what some business reporters do when they’re describing the home market in Washington. Instead of information about our state’s home prices and mortgages, they tell you what’s happening everywhere else.

Here’s what’s really happening in our state:The value of homes in Eastern Washington is continuing to rise faster that many other places in the U.S. Home values in in the Wenatchee area shop up faster than anywhere in the nation. The news was similar in Benton County, where home prices increased 14 percent in the fourth quarter of 2007 -  on of the highest increases in the state, according to the Washington Center for Real Estate Research. In fact, 22 Washington counties experienced price increases over the previous year. Purchasing a home is still one of the best investments you can make.

The national mortgage forecast doesn’t apply to us any more than the national home market forecast does. That’s because the biggest influences on home prices are local market factors, like economic and population growth and the resulting demand for homes. The population in many areas of Washington is increasing much faster than the supply of middle-prices homes. When the supply of anything is limited, its price goes up. As long as people need a place to live and population grows faster than the supply of typical homes, home prices also will continue to rise.

Local land use and building rules also affect markets, producing price fluctuations that national real estate reports don’t’ reflect. In our state, for example, counties and cities have to identify areas in which the population will be allowed to grow and where homes and businesses may be built. When those areas fill up, homes again become scarce and prices rise. 

           We do have one thing in common with the other real estate markets: people want and need affordable home choices. The best way to find out what those choices are is to ask someone who really knows the local market -  local Realtors. Our communities are more than just business locations. They’re where we live and where we raise our families along side friends and neighbors. We literally make it our business to be experts on the local home market so we can help our neighbors find a home that fits their needs. If you want the fact, we can help We’re lucky to live in one of the few places where the home market is strong and stable. Home prices in our state are still rising. Foreclosures in Washington  remain less that 1 percent of all home loans, the same or less than 10 years ago.

Washington Realtors are working hard for state and local policies to protect the vitality of our market and expand home choices, particularly for middle-income families. Next time you hear the national news forecast doom and gloom for our home market, remember that the sun is shining here.  

By the Numbers:

>$ 60.5 billion: 2006 housing impact on state economy

>$ 10.4 billion: Resale activity in 2006

>$ 16.6 billion: Value of new single -family homes in 2006

>$ 3 billion: Value of new multifamily homes in 2006

>$ 30.5 billion: Occupancy expenses in 2006

Washington’s real estate market

>$ 1.83 million: Number of single-family homes in Washington

>$ 144,630: Existing homes sold in 2006

>$ 49.2 billion: Total price of home resales in 2006

>$ 25,900: New homes built in 2006

>$ 14.6 billion: cost of new home construction in 2006

*numbers are latest available.

Tri-City Association of Realtors by Bill Prussing, President.