Blackacre 2.0closing | Blackacre 2.0

The Tax Man Cometh: NY Reverses Position and Makes Title Abstracts Taxable

Kathleen A. Scanlon — Fri, 30 Jul 2010 14:00:18 +0000

[SinglePic not found]Supposedly to be in line with recent judicial case law, the New York State Department of Taxation and Finance has reversed its previous position and now declares that the sale of Title Abstracts are subject to sales tax in New York. This new ruling will take effect September 1, 2010. The memorandum issued by the Department reads in pertinent part:

Abstracts of title

Previous correspondence from the Tax Department indicated that sales of abstracts of title were not subject to sales tax. To better reflect controlling judicial case law, the Tax Department has changed this policy. Therefore, beginning on September 1, 2010, the sale of an abstract of title to real property is the sale of a taxable information service. This includes the sale of an abstract of title to either a prospective purchaser of real property or to an attorney representing a prospective purchaser. But, opinions of title offered by an attorney are considered legal services and are not subject to tax. Therefore, the sale of an abstract of title to an attorney for use in conjunction with rendering an opinion of title or providing other legal services is a retail sale subject to sales tax as described herein. Treating the sale of an abstract of title as the sale of a taxable information service is a change to the Tax Department’s previous policy on sales of abstracts of title. Any statements issued by the Tax Department regarding its previous policy with respect to abstracts of title are revoked and can no longer be relied upon.

It is still unclear as to what parts of a title abstract are subject to the sales tax and the New York State Land Title Association is in contact with the New York State Department of Taxation and Finance to obtain guidance and clarification on the matter.

Home Buyer Tax Credit Extended to Sept. 30th

Kathleen A. Scanlon — Fri, 02 Jul 2010 08:44:47 +0000

So Congress finally got its act together and passed a bill extending the closing deadline for claiming the federal home buyer tax credit for real estate buys until September 30, 2010. The extension will be retroactive so that the thousands of buyers and sellers who have been mired down by small sales or the lengthy mortgage approval process will not miss out on the credit.

The Legislation – HR 5623, the Homebuyer Help and Improvement Act of 2010 — was passed by the Senate on Wednesday was just awaiting Obama's signature. Homebuyers eligible to claim the tax credit who were under contract by April 30 now have until Sept. 30 to close the deal. The National Association of Realtors data indicates that New York is the 4th highest state with pending closings that could miss out on the tax credit if the deadline were not extended.

The loss of the home buyer extension has impacted mortgage applications. The Mortgage Bankers Association reported the beginning of June that demand for buy loans was down 35 percent from a month ago as homebuyers have yet to return to the market following the expiration of the homebuyer tax credit on April 30th.

REO Fraud: A Study In How NOT to Flip an REO

Kathleen A. Scanlon — Tue, 16 Feb 2010 03:31:08 +0000

So I have been playing around with a new feature added to Property Shark: Deep Owner Search. You can type in a person’s name, a corporation name or an address and see what properties are associated with that information. From there, you can also search that person’s associates and so forth. Since I have practiced real estate law for the past 15 years, I have a lot of names at my disposal so I search to see what everyone has been up to.

One of my searches led me to a couple of REO property flips involving a corporation represented by the same attorney. All the properties are located in Brooklyn. One of the transactions, the spread was over $320,000! Nice profit, isn’t it? So how did they do it? Buyer took out a conventional mortgage of $635,000 and closed the beginning of November 2008. Most, if not all, conventional lenders have seasoning requirements. Did this corporation buy the property and hold for 90 days? Nope. Now I am sure you are wondering – well how does she know? I know, because all of these transactions are part of the public record and, if you know what to look for, it is honestly simple to discern the methodology. These particular parties are stupid. But, they also had to be aided by the title company. So what did they do?

Take a look at this snapshot of one of the transfer tax documents – the RP5217 – that I copied straight from the ACRIS system:

Now look at the crossed-out dates (this one is such a particularly poor job, but it closed). I propose that it did, in fact, close on September 10, 2008. Look at the CRN number on the bottom of the form (circled in red). The CRN number starts with the year, month and day the property is supposed to change hands and is inputted by the drafter. These transfer tax returns are usually prepared within days of closing. This vast time difference would never occur. The parties needed to back date the transaction because of the bank’s seasoning requirements. Also, they needed to back date it far enough that they could avoid any additional value requirements for transactions taking place within 180 days of acquisition.

Suffice it to say this is only one of this buyer’s reo transactions and they rest follow the same trend. It is all laid out there in the public record. This kind of trend would certainly supply law enforcement with enough probable cause to obtain a warrant to secure the documents from both the first and the second closings. Perhaps there will be a show check, fake income documents and other indicia of fraud – who knows?

Now question yourself, if I can find this blatant evidence of REO fraud, who else could be looking?

Don’t Believe the Hype: FHA’s Temporary Waiver of 90 Seasoning Rule

Kathleen A. Scanlon — Sun, 17 Jan 2010 17:05:18 +0000

On Friday, January 15, 2010, HUD Secretary Shaun Donovan issued a press release, as part of HUD’s Neighborhood Stabilization initiative, temporarily waiving FHA’s 90 Day Seasoning Rule. Amazingly, HUD is cognizant that the seasoning guideline is having a negative impact on alleviating the problem of abandoned and blighted homes:

“In today’s market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.”

The online real estate community was buzzing yesterday as news of this waiver spread quickly. The investor “gurus” are, of course, rejoicing and spreading the news far and wide, without a careful read of the Waiver itself. The intent of this temporary policy change is to allow investors to take title to a property, rehab it and sell it quickly. It is not a panacea for those investors who pick up a property at a discount, seeking to flip it for a profit in a “back to back” or “double” closing. For those types of transactions, the 90 day seasoning rule is a non-issue if you utilize a land trust correctly.

HUD’s Mortgagee Letter 2006-14 clarified the Rule and Regulations set forth in 24 CFR 203.37a concerning the eligibility of properties for FHA insurance and the rules governing sales of property. As I have discussed in a previous blog post, Legal Analysis of FHA’s Seasoning Requirements, the real estate and mortgage industry routinely misunderstands and applies these eligibility rules incorrectly and it appears that the trend is continuing with this new Waiver.

FAQS:

1. Does it have to be a property bought through a small sale, bank auction or an REO to be eligible under the Waiver?

No. There are no requirements in the Waiver concerning the status of the property itself. It is not necessary to demonstrate the distressed nature of the property.

2. So I can get a property under contract, do a contract with a potential FHA buyer and close with my FHA buyer the same day or the day after I buy the property?

No this transaction would not be eligible for FHA insurance. The waiver is really of the requirement that the real estate contract be executed on the 91st day after the investor takes title to the property. The requirement that the investor own the property is still in effect and therefore Contract Vendees and Assignments of contract are still prohibited. Further, an application for an FHA mortgage cannot be submitted to a Lender for consideration without a fully executed Contract. Therefore, Back to Back Closings will be impossible.

3. So I can close a week after I take title?

Virtually impossible for several reasons. I venture that there are nearly no Lenders in this post-bubble market that will take an application for an FHA mortgage and be in a position to close a week later. I am going to stretch that to probably 30 days. This is certain if your sale price to your FHA buyer is 20% or more higher than your acquisition price (do the math – its not that hard to hit that number – especially in certain areas of the country where housing prices are below $50,000). If the sale price exceeds the 20% threshhold, the investor will have to document the increase in value with supporting documentation and/or a second appraisal and the Lender will have to obtain a Property Inspection Report (see paragraph 2 of the Waiver). This report will not be ordered prior to application submittal and as discussed previously, that doesn’t take place until there is a fully executed Contract of Sale.

4. I found this fantastic property that my buddy picked up 2 months ago for $120,000.00. He rehabbed it and I am in contract to buy it from him for $220,000. I want to flip it to an FHA buyer for $250,000.00 can I do it?

You will have to wait until the 91st day after you close title to enter into a Contract of Sale with the FHA buyer. The Waiver will not apply if there is a history of prior flipping activity in the 12 month chain of title (see paragraph 1(c) of the Waiver).

5. In April, the Treasury’s Small Sale Program goes into effect and there should be a lot of distressed properties coming on to the market. The Waiver is going to be a huge help in moving those properties!

No, it isn’t. Apparently, government offices do not communicate with each other before issuing rulings – one of the requirements under the Treasury small sale program is that the Contract include a representation that the Purchaser will hold the property for 90 days post-closing. Perhaps the Treasury will revise its Directive and remove this offending language (which, as I had discussed previously, is extremely small-sighted).

Conclusion

Investors should rejoice as finally they are receiving the recognition they deserve: properties are moving because of their hard work and without the proper incentive, it wouldn’t happen. Instead of being the black sheep of the real estate community, investors are a major part of the solution. This Waiver is what investors need to get the properties rehabbed, sold and occupied to ameliorate the problem of abandoned and blighted homes. It is not a license to flip and should you wish to engage in that type of activity, you will not be able to use this Waiver to accomplish your goals.

Buyer $5,000 Short – How to Close the Gap…from a NY Point of View

Kathleen A. Scanlon — Thu, 12 Nov 2009 16:37:56 +0000

Inman columnist Bernice Ross posted an brilliant article, in response to a Seller’s question, on what to do if your buyer is $5,000 small for the deal. As a New York real estate lawyer, I wanted to add my two cents as to a rather innovative way to close that gap.

New York is one of the only states that imposes a mortgage tax upon a purchaser. Depending on the county and the size of the mortgage, this tax can range anywhere from .8% to 2.8% of the buy price. This tax can be honestly substantial and severely impact a purchaser’s buying ability. But, there is an exception to the implication of this mortgage tax and that is for continuing liens. Most real estate industry professionals are aware of this exception and refer to it by the document name, CEMA or MECA, which is a necessary part of the process. Also, they are often under the mistaken impression that it is only available in a refinance. Not so…you can effect a CEMA transaction on a buy. The procedure is as follows: the Seller’s current Lender assigns the Note to the Purchaser’s new Lender and the remaining principal balance (“ancient money”) is combined with the “new” money, advanced by the Buyer’s Lender, to form a new mortgage in favor of the Purchaser’s Lender. There is no mortgage tax due on the “ancient money”. So, for example:

Buyer needs a mortgage of $400,000.00 to buy a home in New York City for $450,000.00. Seller’s remaining principal balance is $300,000.00.

With CEMA Without CEMA

$100,000 x 1.8%= $400,000.00 x 1.8% =

$1,800 mortgage tax $7,200 mortgage tax Savings of $5,400.00!

Also, not only is a Purchaser exempt from paying mortgage tax on the continuing lien, the Seller is exempt from paying transfer tax on that amount as well for a net savings of $4,200.00 to Seller based on the example above.

Total monies saved in our example – a whopping $9,600.00!!! Now, the caveats: not every mortgage lender will assign the note, many charge a fee and there is a fee to prepare the CEMA documents and record them. But, these fees are often miniscule compared to the amount of potential savings. Also, it can take some time to get the assignment documents from the Seller’s Lender so this option needs to be investigated at the outset.

A CEMA is an brilliant way to reduce substantial closing costs on both sides and make a deal happen, without other parties taking a cut in their hard-earned fees and commissions. It just takes a small knowhow and some time.

Why Retain An Attorney for a Real Estate Transaction? Ask Maria Espinosa

Kathleen Scanlon — Sun, 21 Jun 2009 17:29:48 +0000

CNN recently posted a video on their website detailing the “shocking” tale of a woman who paid her mortgage but whose home is being foreclosed upon, jumping on the fraud bandwagon and telling the tales of homeowners preyed upon by the real estate & banking industry. The video leaves out more than it tells, in an obvious attempt to manipulate the truth for their tale.

Maria Espinosa, a Nevada realtor, apparently bought her home, without counsel and without purchasing an Owner’s policy of title insurance. It appears that a previous owner in the chain of title had a VA mortgage that was never satisfied and as such, brought an action to foreclose. She sought redress from Chicago Title who advised her to retain a lawyer and visit the ALTA website, wherein the message was to potential home buyers to buy title insurance so that if there is a title claim, the title company will not only insure the property but pay to defend such title. Ms. Espinosa finally retained an attorney who admits he has only 18 months of experience in real estate and foreclosure defense who just states “he has never seen anything like this before”.

I learned of this video through the New York State Bar Association Real Property List Serv’s forum wherein my esteemed colleagues brought up a valid point yet again – why would anyone, who is about to make one of the largest buys of their life, choose to do so without retaining a real estate attorney? This topic is discussed, ad nauseam, on the listserv but is often not publicized…until today and here on my blawg.

I am amazed at the mentality of the realtors and abstract companies of other states who are so resistant to attorney involvement, nevermind the

Federal Trade Commission, which for years has lobbied heavily against having attorneys involved in residential
real estate transactions. But, it has become clear, in light of the collapse of the Housing Market, that the rationale was to keep the people blind to the greed of those certain mortgage brokers and bankers, realtors, appraisers and title companies who made fortunes selling homes riddled with toxic mortgages and funded with fraud, kickbacks and the like. They told those people, “We are saving you money”, “It is like buying a car” or “The attorneys are just trying to control everything and get rich in the process”. What they didn’t tell them was “We want you at the closing table with NO ONE to look after your interests” or “We want you to take out a loan you can’t afford or know”.

Numerous times I have engaged in discourse, in various internet forums, with members of the real estate industry who had been vocal and derisive of attorney involvement in real estate transactions. I heard their closing horror tales of deals falling apart because of the lawyer’s failure to prepare contracts in a timely manner or instructing their client to not go forward etc. While I agreed with them that retaining any attorney for a closing was not conducive, I argued that the retention of a real estate attorney was a necessity and would eliminate their apprehension. A real estate attorney has a far different focus than the average litigation attorney and the expertise to close a transaction without issue. Most importantly, the real estate attorney is the only party who only represents the interest of the buyer or seller and probably one of the least of the expenses paid at closing, especially compared to the thousands of dollars paid over to the realtors.

In New York State (particularly downstate), it is customary to retain attorneys for real estate transactions. And it shows: New York had a 23% decrease in foreclosures in 1st Quarter 2009 as compared to 1st Quarter 2008 and compared to a 24% increase nationally!

So, while I am sympathetic to the plight of Ms. Espinosa and others out there in the same position, I can’t help but shrug my shoulders and say it all could have been avoided or at the very least, addressed with no out of pocket expenses, had she had a lawyer at her side when she bought that home.

Now You See It…Now You Don’t – is HUD Squashing Tax Credit as Down Payment Program????

Kathleen Scanlon — Mon, 18 May 2009 13:02:00 +0000

I blogged last week about FHA's new plot to allow prospective purchasers to monetize the first time Home Buyer's $8,000 tax credit and use it as a down payment on the buy of a home. The Secretary of HUD made statements at a NARS meeting about the revolutionary plot and HUD drafted a Mortgagee Letter (ML 09-15) describing the plot more in depth (which I personally viewed and read on their website).

But, ML 09-15 has disappeared from HUD's website and we are left wondering if HUD is already pulling the plug on this plot…

FHA Limits on Cash Out Refinances drops to 85%

Kathleen Scanlon — Fri, 03 Apr 2009 14:56:53 +0000

Just a heads up on some of the changes that came into effect this past Wesnesday, April 1, 2009, complements of the Mortgage Currency staff:
FHA just released ML 2009-08 – Limits on Cash Out Refinances – going to 85% with case numbers after April 1, 2009. The news is that the 95%’s cash out refi’s are going away – for now!
Plus the 85% will be figured on the Combined LTV!
* New Subordinate Financing: New subordinate financing + new FHA first mortgage + any new junior liens cannot exceed 85% CLTV.
* Existing Subordinate Financing: May remain in place, subordinate to new FHA first mortgage, with no regard for CLTV.
* Modified Subordinate Financing: Newly modified existing subordinate financing that has to be re-executed at closing with new FHA loan is not considered a new subordinate lien. It is treated as existing subordinate financing.Other Reminders
* Delinquent borrowers are not eligible * Must have owned the property at least 12 months
* If owned less than 12 months, value based on the sale price or appraisal–the lower of the two
* Two appraisals required when loan amount exceeds $417,000 (before UFMIP) and is in declining area
* No co-signers or non-owner occupants can be added to meet credit underwriting guidelines

Mortgage Talking Points

Blogged with the Flock Browser

Tags: FHA, guidelines, cash-out, refinance, mortgages

IRS Tax Lien Stopping your Refinance or Sale? No More!

Kathleen Scanlon — Thu, 18 Dec 2008 01:24:46 +0000

The IRS's willingness to subordinate or even release Tax Liens is monumental and will provide relief to those homeowners trying to refinance or sell their properties to get out from under their often bone-crushing debt. I cannot tell you how many closings have been postponed or adjourned indefinitely because of an IRS Tax Lien popping up in title.
- Kathleen
IRS Speeds Lien Relief for Homeowners Trying to Refinance, Sell
Carrie Bay | 12.17.08
The Internal Revenue Service (IRS) yesterday announced an expedited process that will help prevent a federal tax lien block on the refinancing of mortgages or the sale of a home by financially distressed homeowners.
If taxpayers are looking to refinance or sell a home and there is a federal tax lien filed, there are options, the IRS said in a press statement. Taxpayers or their representatives, such as their lenders, may request that the IRS make a tax lien subordinate to the claim by the lending institution that is refinancing or restructuring a loan. Or, under certain circumstances, taxpayers or their lender representatives can petition the IRS to fully dismiss its claim if the home is being sold for less than the amount of the mortgage lien, the IRS clarified.

The process to request a subordination or dismissal of a tax lien takes approximately 30 days after the submission of the completed application, but the IRS said it will work to speed those requests in the wake of the economic and housing downturn.
“We don’t want the IRS to be a barrier to people saving or selling their homes. We want to raise awareness of these lien options and to speed our choice-making process so people can refinance their mortgages or sell their homes,” said Doug Shulman, IRS commissioner.

“We realize these are hard times for many Americans,” Shulman said. “We will ensure we have the resources in place to resolve these issues quickly and homeowners can complete their transactions.
”Typically, a federal tax lien is an involuntary lien on real estate for nonpayment of income or property taxes, and takes priority over bank liens securing the same property, placing the lender at a less than advantageous position in attempting to collect a debt from a delinquent borrower who also owes taxes. In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution’s, if the IRS determines that doing so will ultimately help with the collection of the tax debt – a process called subordination.

Taxpayers or their lender representatives may apply for a subordination of a federal tax lien if they are refinancing or restructuring the mortgage. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments, the IRS clarified, since lending institutions generally want their lien to have priority on the home being used as collateral.
Taxpayers or their representatives can also apply for a certificate of discharge of a tax lien if they are giving up ownership of the property, such as selling the property, at an amount less than the mortgage lien. The IRS may also issue a certificate of discharge in other circumstances if the taxpayer has sufficient equity in separate assets, can substitute other assets, or is able to pay the IRS its equity in the property. Without a tax lien discharge, the borrower may be unable to complete the homeownership change and the ownership title will remain clouded.
The IRS also urges people to contact the agency’s Collection Advisory Group early in the home sale or refinancing process so that it can start work on their requests. People sometimes delay informing lenders of the tax liens, which only serves to delay the transaction, the IRS said.

Currently, there are more than 1 million federal tax liens outstanding tied to both real and personal property. The IRS issues more than 600,000 federal tax lien notices annually.

For additional information on the IRS' lien relief for homeowners and their lenders, click here.

DSNews.Com Default Servicing In Print and Online – Formerly REO Magazine

Blogged with the Flock Browser

Tags: taxlien, refinance, mortgage, refinance, small sale, real estate, closing, subordination, release, claim, IRS, Internal Revenue Service, tax

Jack of All Trades and Master of None: Attorneys Wearing Multiple Hats in a Transaction

Kathleen Scanlon — Thu, 01 May 2008 17:19:36 +0000

One of the perks of passing the New York State Bar Examination and subsequently being admitted to the bar as an attorney is
the ability to obtain a real estate brokers’ license by merely filling out a
form and paying a fee. As a matter of fact, an attorney can really act as a
real estate broker, without obtaining a formal license, in certain situations. Until
recently but, I have not encountered many attorneys acting as a real estate
broker in a transaction. Perhaps it is a phenomenon being driven by current market
conditions – real estate attorneys fighting to survive in the post subprime
meltdown market. But it is a troubling
new issue that I am experiencing as of late, especially in the small sale arena.

n a typical small sale, the shorted Lender is presented
with a preliminary HUD-1 settlement statement which itemizes all of the closing
costs that the distressed seller must pay as well as the remaining monies
available for loan payoff. The shorted
lender must approve these closing costs and typically will allow the payment of
a real estate commission of 3 to 6% where attorney fees are often limited to $1000-$1500. So, many attorneys who are negotiating small
sale on behalf of the distressed seller are opting to collect a real estate
commission instead of legal fee. The
troubling aspect is the attorney who wishes to act as both the real estate
broker and the attorney for the distressed seller, which is a clear violation
of the New York State Attorney Ethical Code.

The Nassau County Bar Association committee on professional
ethics has held, unequivocally, that it is an unwaiveable conflict of interest
for an attorney to act as a real estate broker and represent any of the parties
to the transaction. Opinion No.: 07-01(Inquiry No.): 745. Nassau County’s ethics committee “is consistent with N.Y.
State Bar Op. 752 (2002), as well as other opinions pre-dating DR 1-106(A),
which conclude that an attorney’s business interest in a real estate
transaction prevent the attorney from representing the legal interests of a
party to the transaction. (See, N.Y. State Bar Op. 753 (2002))”.

While it is sorely tempting to act as real estate broker and
seller’s attorney in the transaction as it would appear, at first blush, that both
roles share common goals and fiduciary duties and the novice attorney may not
realize that such is impermissible. Should you encounter this situation, you might gently point out that the
attorney must make a choice and abide by it. Chances are, the attorney will choose the role of real estate broker in
these hard times. Make sure,
but, they limit themselves to that role.