Tri-City Area and Real Estate Blog

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Two policy aspects concerning residential real estate are also impacting commercial building in the Tri-Cities and statewide. The first is related to contractor registration and is covered under RCW 18.27. It requires all contractors to be registered prior to beginning work on a building.

It had the consequence of turning any home improvements, including work done by the owner or property developments, into contracting work, said Brian Lewis, a real estate attorney with K&L Gates Law Firm in Seattle. “In order to put an improvement on a property, RCW 18.27 says you must be a registered contractor,” Lewis said. “It adds development to a list of activities which require a contractor.”

Improvements can include standard home additions, such as a shed or renovated bathroom - work often done by the homeowner, who would now need a contracting registration. Any improvements over $1,000 require registration, as do projects lasting fewer than 12 months, both of which are changes. While the revisions are intended to protect consumers, they could have the effect of opening them up for trouble, Lewis said.

The law was changed in 2007 to protect homebuyers and to define them from home “flippers,” who buy a house only to renovate and sell it for a higher price. The issue is that RCW 18.27 was not intended to engage in the development of property by the owners. The intent of this was to give the consumer protection from ‘flippers.’

The issue is that the rules were not meant to deal with property development or for people planning to remain in a home for more than 12 months. According to RCW 18.27.114, any contractor working on a project for four or fewer residential units or structures above $1,000, or of a commercial building when the bid or contract price total $1,000-$60,000, must provide the customer with disclosure statements and registration.

The other recently incorporated rule on property is a seller disclosure statement, known in Washington as a Form 17, which is used on residential purchases to verify property condition during the sales process. It is a multiple-page document in which the seller is supposed to reveal all known information about the property. Problems arise for the Form 17 when an unimproved property with a nixed or residential zoning distinction is sold.

Typically, commercial real estate does not deal with the form. If no form is provided, the buyer can rescind in the deal up until closing until one is shown. The intent of the legislation there is that certain environmental conditions are not getting disclosed, and this would provide the same amount of disclosure for empty lots as for developed ones.

For residential home purchases, a completed Form 17 has been required since 1995.

More homeowners facing foreclosure are turning to short sales as a way of getting out of a troubling financial situation and with the shaky real estate market, more banks are accepting short sales from troubled borrowers.

At the beginning of November, there were about 1,600 homes on the market in the Tri-Cities and about 30 of those are seeking bank approval for short sale. With the average cost of foreclosure around $38,000, the short sale is one way banks can cut their losses, and it’s a growing trend that was relatively rare a few years ago.

A short sale occurs when a homeowner sells a home for less than its current mortgage. The bank or mortgage company agrees to discount the loan balance due to economic or financial hardship of the mortgage holder. The homeowner sells the mortgaged property for less than the outstanding balance of the loan and turns over the proceeds of the sale to the lender. In some cases, but not always, the lender writes off the remaining portion of the debt.

Although Benton and Franklin counties didn’t see big spikes in the real estate prices before the nationwide bubble burst, the area is seeing a slowdown. While sales are slow, notice of trustee sales, the first step in the foreclosures prices are up 5.5 percent for the year.

Unfortunately, many homeowners facing foreclosure aren’t aware of the options available to them and if they file bankruptcy, reasonable options they did have disappear. To make matters worse, more homeowners than ever will likely face foreclosure in 2009.

Existing home sales prices plunged 18.5 percent in the West region in September, according to the National Association of Realtors, driven by rising foreclosures and distressed sales, like short sales, which represent 35 percent to 40 percent of total sales nationwide, and as many as half the homes are in California, Nevada and other former bubble regions.

Whatever the reasons for pursuing foreclosure, homeowners needs to be careful and make sure they know and understand all of their options. In June, a new state law went into effect that was intended to protect homeowners facing foreclosure from equity skimming and foreclosure rescue scams. The law, proposed by Attorney General Rob McKenna, requires those buying ‘distressed’ homes to provide homeowners with a written contract completely describing the terms of the sale - and giving the homeowner the right to cancel the transaction for up to five days following the sale.

Because licensed real estate professionals are not exempted from the law, as they are in similar statutes in other states, the Realtors may have to limit their involvement in distressed sales, or face unanticipated liabilities. Homeowners can receive up to $100,000 in damages for violations of the law. Normally, real estate buyers and sellers have different goals, so under the law, foreclosure or short sale buyers could be sued if they later resell the property at a profit. That fear is keeping real estate investors who delve in the foreclosure market at bay. But the law likely will help homeowners facing foreclosure receive better advice. Realtors, by law, are not allowed to negotiate short sales.

In spite of the gloomy national economy. Tri-Citians still are buying cars, clothes and eating out in large enough numbers to generate healthy sales tax revenue for city governments.  Kennewick’s taxable retail sales of about $365 million in the second quarter of this year were up 2.82 percent from the same period in 2007.

Pasco’s taxable sales also increased from April to June this year, up to about $246 million. That was a 5.9percent increase over the second quarter of 2007. But Richland’s taxable sales fell more than 5 percent, which Gary Ballew, city business and economic development manager, said was largely caused by the end of the Highway 240 construction project. The city’s taxable sales dropped to about $204 million in the second quarter this year from almost $216 million in the same period a year ago.

Tri-City sales were generally stronger than elsewhere in the state. Mike Gowrylow, spokesman for the Washington Department of Revenue, said statewide total taxable retail sales declined 2.4 percent for the period to $29.1 million. Though Tri-City taxable sales overall showed growth in the second quarter this year, there were signs of slowing. Last year, second-quarter sales showed an annual gain of 9.5 percent in Kennewick, more than 11 percent in Pasco and 12.7 percent in Richland.

The slowdown didn’t immediately hit second-quarter revenue receipts from the sales tax that the state paid to area cities. Receipts are for prior months and can include adjustments that the state makes based on updated sales information. Second-quarter retail tax receipts in Kennewick were about $3.15 million, up from $2.94 million in the same quarter last year. Marie Mosley, Kennewick’s executive director for support services, said the city’s sales tax revenue grew 11.5 percent in April, 7.6 percent in May and 2.7 percent in June this year when compared with the same months in 2007.

In Pasco, retail tax receipts increased from about $1.96 million in the second quarter of 2007 to more than $2.1 million in the second quarter this year, up about 7 percent. And Richland collected $1.85 million in sales tax from April through June 2008, up from $1.71 million in the same period last year. While the area economy has been strong, Tri-City officials say they are bracing for a potential decline in taxable sales receipts as they prepare budgets for the next two years.

Retail sales tax, which includes revenues from direct and indirect retail trade and use tax on goods purchased in other states, supplements the utility and property taxes collected by local governments. Retail sales tax revenue is more volatile, said Gary Cruthfield, Pasco city manager. He compared it to commission income, while receipts from utility and property taxes are more stable like salary. Auto sales still were holding well in Pasco in the second quarter, but contraction in construction activity hurt the city’s retail sales revenue, said Cruthfield.

New construction spending in Pasco was worth $180 million in the 2004-05 fiscal year but has dropped in the current fiscal year to about $100 million, he said. The loss of each $10 million in construction spending means a proportional loss of about $100,000 in sales tax revenues for the city, he said.

Also, once Chiawana High School is built, sales tax revenue from that project will dry up, Cruthfield said. he said although the Tri-Cities is doing well ion the face of a general economic downturn, it’s good to be prepared so the city’s next budget will be based on 93 percent of the previous year’s sales tax revenue.

Mosley said of the $81 million in projected revenue in Kennewick’s 2009-10 budget, about $30.5 million is expected to come from retail taxable sales. While she has noticed a minor drop in third quarter sales tax revenues. Mosley thinks new economic developments will take care of any potential shortfall in the months ahead. Mosley said the city’s second-quarter sales of auto, electronics, appliances, building materials, garden equipment and supplies and clothing and accessories were improved over the first quarter.

But she said people weren’t buying big-ticket items such as trucks and SUV’s. She also suspects Richland’s new Target and Kohl’s stores contributed to the slowing of clothing sales in Kennewick. Mosley said a slight dip in sales tax revenue doesn’t mean “doom and gloom” for the Tri-Cities, “but we know we can be vulnerable if there’s any downturn”. Ken Nelson, Kennewick’s economic development director, said a new hotel and a branch of HAPO Community Credit Union that are being built at Southridge should boost sales tax receipts. He also expects retail sales to pick up during Christmas. Richland’s Ballew said sales tax revenues are up to the third quarter by about 2.3 percent compared to last year. he said Kohl’s and Target are helping drive up retail sales in the city, as are construction projects at Pacific Northwest National Laboratory. he added, “We’re doing pretty well locally”.

The Real Estate and Lending industries are in fact going through a necessary correction.  The industries became saturate with fly-by-night companies looking to make a quick but short monetary gain, without offering any real value.

Contrary to numerous reports in the media, mortgage funds are still readily available. The credit markets are tight, but it has yet to have any real significant impact on the availability of mortgage financing. Although 100% loans are all but gone, 3% down loans are still available, even for buyers with less than perfect credit. Most of the reports your are hearing about the rapidly disappearing mortgage products have to do with loan programs that were very common in coastal areas.

There has never been a better time to purchase real estate. With inventories at a higher than average level and extremely low interest rates this truly is a wonderful time to move-up or purchase a vacation home. For first-time home buyers there is a window of opportunity that has never before existed to take advantage of a $7500 tax credit.

Interest rates may be on the decline in the next few months. Economic conditions are ripe for improvement. Interest rates can and do move swiftly so it is imperative that your mortgage professional notify you of market conditions.

By Ilyce Glink, Inman News

Q: What are the best strategies to minimize the tax liability on a rental? We bought a single-family home and lived in it for a couple of years, and then rented it for the last six years. We’d like to sell it but are concerned about a hefty tax bill. I own another home that we use as an office. Can I roll the gain from the first property to pay down the note on the office?

A: The rental property you used to use as a home is now considered an investment property by the IRS.

As an investment property, you can either pay the taxes owed upon the sale of the property, or defer the payment of real estate taxes due upon the sale. If you choose to defer the taxes you owe, you’d utilize Section 1031 of the Internal revenue Code. This section allows a rental property owner to sell the property and defer paying taxes upon the sale, if the property owner sets up a tax-deferred exchange, also called a like-kind exchange or Starker Exchange.

Unfortunately, a like-kind exchange would require you to buy a replacement property for the home you are selling. It would not allow you to sell the property and use proceeds from the sale to pay down the debt on one of your other properties.

You could sell only your first property and buy a replacement property or replacement properties. That replacement property or properties must have a value equal to or greater than the property sold, and you would have to adhere to strict time limits in purchasing the replacement property.

Upon sale of the investment home, you would have to set up an exchange through a company that specializes in 1031 exchange. All proceeds from the sale of the property would have to be held by that company.

You would then have 45 days from the date you closed on the sale to find and designate a replacement property, and you’d have to close on the purchase of that new property within 180 days of the date of the sale.

In some instances, the 180-day time limit may shrink. Be sure you choose a knowledgeable and reputable 1031 exchange company.