by Elizabeth Hurd

The March, April and May issues of Arizona REALTOR® included numerous articles on short sales, REOs, foreclosures and loan modifications. In the June issue, AAR included a quiz to help you determine how much you learned about these hot topics. Find out the answers here!

Q: Do Arizona’s anti-deficiency statutes apply to all properties?
A: No.  For the anti-deficiency statutes to apply, the property at issue must be a duplex or a single family residence; the real property must be two and one-half acres or less; and the loan at issue must be a purchase money mortgage.
A purchase money mortgage is one where the loan proceeds are used to acquire title to the property. A refinance of a purchase money mortgage is also considered a purchase money mortgage for purposes of the statute. A HELOC that is obtained after the close of escrow is generally not considered a purchase money mortgage.
Assuming all three of these requirements are met, the Arizona anti-deficiency statutes apply. What this means is that the lender’s remedy will be limited to regaining possession of the real property at issue through a foreclosure process or otherwise. If the anti-deficiency statutes apply, even if the amount due to the lender exceeds the value of the property, the lender may not pursue the borrower for the difference or deficiency.  The anti-deficiency statutes can be found in A.R.S. Title 33, Chapter 6.1.

Q: Does the Mortgage Forgiveness Debt Relief Act of 2007 exclude any debt forgiven through foreclosure or a short sale from being treated as 1099 income for tax purposes?
A: No.  The Mortgage Forgiveness Debt Relief Act of 2007 (Act) created limited circumstances under which sellers facing a foreclosure can be granted a relief from this requirement if they are able to work out a solution with the lender such as a short sale, where part of the debt is forgiven.  To be afforded protection under the Act, the debt must be considered qualified principal residence indebtedness.  Also, the total debt must be less than $2 million (or $1 million for married couples filing separately).

Q: In a short sale, when do the time periods in the contract begin to run?
a) Upon delivery of the accepted offer to the lender
b) On the date the offer is accepted and signed by both parties
c) Upon delivery of the Short Sale Agreement Notice to the buyer

A: The date of the seller’s delivery of the Short Sale Agreement Notice to the buyer is deemed the date of contract acceptance for purposes of all applicable contract time periods. In other words, although the parties have entered into an enforceable contract, the time periods do not begin to run until the seller has delivered the Agreement Notice. In the event that the seller and lender are unable to reach an acceptable short sale agreement, the seller must notify the buyer and the contract is cancelled due to the unfulfilled short sale contingency. 

Q: My buyer wants to make an offer on a short sale property.  Do I have to lower my commission?
A: No.  As a cooperating broker, you are entitled to the amount of commission specified in the offer of cooperation.  You may enter into an agreement with the listing broker to accept half of whatever commission the lender will allow, although this is not required.  If the listing broker refuses to pay the amount of commission specified in the offer of cooperation, you may pursue them for the balance. 
Commission agreements should be handled professionally at all times.  Understand that the listing broker is in a difficult position, making an offer of cooperation when the lender might come back and condition their acceptance on a lower total commission.  Since you are aware of this possibility before making the offer, it would be wise to come to an agreement beforehand regarding how any commission reductions will be handled.
Note: A.A.C. R4-28-1101(D) states: “A licensee shall not allow a controversy with another licensee to jeopardize, delay, or interfere with the initiation, processing, or finalizing of a transaction on behalf of the client. This prohibition does not obligate a licensee to agree or alter the terms of any employment or compensation agreement or to relinquish the right to maintain an action to resolve a controversy.”

Q: I represent the seller in a short sale transaction.  We have received multiple offers on the property.  Must we submit every offer to the lender?
A: No.  All accepted offers must be submitted to the seller.  Once the seller has accepted an offer, it must be submitted to the lender.  Unless otherwise prohibited, the seller may accept subsequent offers as backup offers.  However, once accepted, these backup offers must be submitted to the lender as well.

Q: Are all REOs sold “as is”?
A: Yes.  The bank/seller will normally not offer any warranties or guarantees.  However, in some limited circumstances, the lender may be willing to negotiate a price which allows for needed repairs.  If this is a concern for the buyer, they should submit an inspection report together with estimates on the cost of needed repairs.  There is no guarantee the lender/seller will agree to reduce the price.

Q: Can anyone qualify for a loan modification under Obama’s Making Home Affordable Plan?
A: No.  The Program, effective March 4, 2009, includes many restrictions. The Program is only available for owner-occupied properties, and therefore no investors will qualify. Furthermore, the maximum loan amount for a single family residence is set at $729,750.00.  The plan includes a few different scenarios under which a home owner may qualify to modify their existing loan.  The home owner should talk with their lender honestly about their situation.  The lender will be able to determine if there is a modification option available, based on the information they provide.

Q: Is a foreclosed home owner allowed to remove appliances from the home after foreclosure?
A: Yes.  Appliances, unless they are considered fixtures, are normally classified as personal property and belong to the home owner.  However, any appliances built-in, such as a built-in microwave or range hood, would likely be considered fixtures and stay with the property.  Some foreclosed sellers have been known to “strip” a property after foreclosure.  However, foreclosed home owners should be advised that removal of fixtures constitutes criminal theft pursuant to A.R.S. §13-1802. The lender can file criminal charges accordingly.
Note: The lender may also be able to file a civil lawsuit against the previous owners for “waste” due to the wrongful removal of the fixtures.

Elizabeth Hurd is a curriculum writer who has written continuing education courses for real estate agents, including AAR courses for rCRMS and GRI.

Note: This article was edited on 3/8/10. Under the question that begins, “Q: I represent the seller in a short sale transaction….,” the first portion of the answer was changed from, “A: No.  All accepted offers must be submitted to the lender.” to “A: No.  All accepted offers must be submitted to the seller.”

By Bob Corcoran

You just have to love real estate. Even when times are turbulent, a smart agent can still make a good living in the business. Oh sure, you hear some agents and brokers whining about the market and how bad things are. But there are plenty of other agents singing a much different — and a much happier —tune.
 These agents are tapping an often untapped source of extra income, real estate owned (REO) properties — properties that go back to the mortgage company after an unsuccessful foreclosure auction. And yes, you’re absolutely right; the demand has skyrocketed because of the recent explosion of defaults and foreclosures.

I personally think you could call REOs — Really Excellent Opportunities! That is exactly what they are. Here’s the gist: banks are in the money business, not real estate. They don’t keep real estate on their books; they want cash on their books. So the banks are looking to sell these foreclosed properties. And there you have it: business just waiting to be plucked. Low hanging fruit ready for the taking for the ambitious agent who likes to make a little extra money.

Hmmm. Let me rephrase that – sometimes a lot of extra money. One of my clients, whose business is solely in the REO market, had a commission income in 2006 of $590,000. She finished 2007 with a commission income of more than $2.5 million. And this year, she’s looking to double that.

The only catch — and I mean the only one — is that, yes, REO sales can be a little more complicated because you’re dealing with a bank instead of just one seller. But that’s precisely why I started offering my REO Quick Start Program, to eliminate the complications, and to make it simpler and easier for agents and brokers to take advantage of REOs. Some of your early considerations should be:

• Having funds available to care for and maintain the REO properties
• Hiring help to handle REO work
• Creating an effective REO team
• Staying in contact with REO departments for new business
• Focusing in on the most profitable zip codes
• Streamlining the REO process
• Developing REO specific scripts
• Targeting investors as buyers for REO properties
• Handling the costs of fixing up properties
• Crafting effective marketing strategies for REO listings
• Continuing your normal business of taking residential listings while maintaining REOs

Another service banks pay agents and brokers for is the BPO — Broker Price Opinion. Basically it’s your paid opinion of what a defaulting property is worth. The bank pays you to assess the property and assign it a market value.

I know some agents have found it easier to start with BPOs and then move into the REO market. They use BPOs as a way to get to know the players at the bank. That’s certainly an option and I say go with what you feel most comfortable with. But the key message here is this: a lot of money is being left on the table for brokers and agents.

Best of luck to you! 

Bob Corcoran is a nationally recognized speaker and author, founder and president of Corcoran Consulting Inc. - CorcoranCoaching.com, 800-957-8353. Sign up TODAY for your complimentary business consultation. www.CorcoranCoaching.com/bpw.php

The Internal Revenue Service (“IRS”) has recently provided information to taxpayers about the possible tax consequences resulting from a home foreclosure. The general rule is that when a lender forgives a portion of a loan, the amount of debt cancelled constitutes taxable income for the taxpayer. The IRS website highlights the exceptions to this rule, so taxpayers can consider their options before their property is foreclosed by the lender. The IRS also recommends that the taxpayer may want to consult with a tax professional, as devising a structure to limit the taxes resulting from a foreclosure is a complicated process. Some of the exceptions are:

• debt is discharged in bankruptcy
• an insolvent taxpayer (defined as a tax-payer whose debts exceed his/her assets) may not have to recognize all of the discharged debt on his/her tax return
• cancellation of qualifying farm debts
• cancellation of a nonrecourse loan

If the taxpayer’s property is foreclosed, the taxpayer will receive a Form 1099-C from the lender. The IRS urges taxpayers to review the Form 1099-C to make sure it is accurate. If the taxpayer is unable to pay the taxes arising from a foreclosure, the IRS describes the process for making an “Offer-in-Compromise” to the IRS, which may relieve the taxpayer of a portion of the debt and/or create a payment plan for the taxes.

To read the Q & A on the IRS website, go to www.irs.gov/newsroom/article/0,,id=174034,00.html.

By Bob Corcoran
You just have to love real estate. Even when times are turbulent, a smart agent can still make a good living in the business. Oh sure, you hear some agents and brokers whining about the market and how bad things are. But there are plenty of other agents singing a much different — and a much happier —tune. These agents are tapping…

By Ron LaMee, AAR VP Information Services

On February 7, Kathy Lunak (AAR TM Manager) and I were guests on Real Estate from A to Z, a real estate-focused radio show airing on KFNN 1510am. Our hosts, Bill Ashker and Bill Zervakos, asked us to come on to discuss AAR’s TM (transaction management) program, which will be celebrating its first year in March. You can hear the entire show on their website. I had hoped the “Bills” would send us soft pitches, but they asked some probing questions. I think we handled them well, but judge for yourself.

Although I could talk at length on TM, my purpose in writing this article is to acquaint you with Real Estate From A to Z. Each week, Bill A and Bill Z invite industry experts to discuss issues that are important to Arizona real estate professionals. Previous guests have included former Commissioner Sam Wercinski, representatives from ARMLS, risk management and E&O experts, and our own Michelle Lind and Barb Freestone. I’ve listened to some of the past shows posted on their website and found interesting, useful information in every one. AAR has seen the value in this information and we have decided to help sponsor this great show.

Give it at listen: KFNN 1510am radio, Saturdays from 9:00 to 10:00 a.m.

We need the help of one thousand Arizona REALTORS® to provide realistic market information to the media. Starting in April, AAR will release a monthly Arizona Real Estate Market Report based on real observations from REALTORS® across Arizona. You are invited to participate, with a chance to win one of five $100 gift cards that will be given out every quarter. Here’s how it works…  

Each month, our panel members will be directed to an online survey asking them to rate the current market (“strong,” “stable,” “weak”) in several areas. Next, you’ll be asked to predict how the same areas will rate in six months. Lastly, you’ll get a chance to answer a monthly question about some facet of real estate. To thank you for your assistance, AAR will randomly select five participants each quarter who have responded two out of three months to receive the gift cards.

Interested? I invite you to visit this link to view a sample market survey. If you want to become a regular panel member, enter your contact information at the end of the sample survey or send an email to Ron LaMee

A new rule approved by NAR’s Board of Directors aims for calm when lenders cut commissions
By Robert Freedman

Are lenders getting more responsive to short sales? The view of real estate professionals is mixed, with some saying yes and others saying no, depending on the lenders they work with and where they are.
But one aspect of short sales that has proved troublesome across the board is compensation.

Some MLSs have a rule requiring listing agents to let their colleagues know if a listing is, or is potentially, a short sale, and thus subject to a possible last-minute change in the commission by the lender.

To encourage the adoption of such a rule by MLSs that don’t have one, the NAR Board of Directors in May approved model language for a rule specifying that if you know there might be a short sale, you say that, and put the selling agent on alert that a lender might want a change in commission rate. The goal of the new language is to make at least this one aspect of short sales less painful. Under the model language, MLSs can choose to make disclosure optional or required.

“The amount of time it takes lenders just to get back to you on your loan application is the real problem with short sales, and we can’t control that,” says Colleen Badagliacco, ABR®, CRB, chair of NAR’s Multiple Listing Issues and Policies Committee. “But this rule at least helps eliminate the conflict that arises when lenders come back and want to give us a haircut on our commissions.”

It’s not uncommon for lenders to demand a cut in real estate broker commissions as a condition of approving a short sale. Lenders reason that they’re being asked to accept a payoff of their original loan less than what’s owed.

For practitioners, conflict can arise when there’s no indication in the MLS that the property is, or is potentially, a short sale, and the buyer’s representative finds out only at the last minute.
If, under the offer of compensation, selling agents receive, say, 2.5 percent, listing agents can find themselves in a squeeze if the lender insists on limiting total commissions to, say, 2 percent.
Conflicts like this typically end up in arbitration. Although the rule passed by NAR is voluntary, Badagliacco thinks many MLSs will adopt it for their members.

Far less certain is the direction of lenders in speeding their processing of short sale applications. 

Robert Freedman is a senior editor of REALTOR® magazine. He can be contacted at rfreedman@realtors.org

By Richard V. Mack, Esq.

Short sales and foreclosures are becoming common place in our market. We are consistently asked questions by owners and agents alike about the Arizona anti-deficiency statutes and the tax consequences of a foreclosure or a short sale and deed in lieu. This article answers the two most common questions we receive.

When do the Anti-Deficiency Statutes Apply?
For the anti-deficiency statutes to apply, three requirements must be met:

1. The property at issue must be a duplex or a single family residence;
2. The real property must be two and one-half acres or less; and
3. The loan at issue must be a purchase money mortgage.

A purchase money mortgage is one where the loan proceeds are used to acquire title to the property. A refinance of a purchase money mortgage is also considered a purchase money mortgage for purposes of the statute. A HELOC that is obtained after the close of escrow is generally not considered a purchase money mortgage.
  
Assuming all three of these requirements are met, the Arizona anti-deficiency statutes apply. What this means is that the lender’s remedy will be limited to regaining possession of the real property at issue through a foreclosure process or otherwise. If the anti-deficiency statutes apply, even if the amount due to the lender exceeds the value of the property, the lender may not pursue the borrower for the difference or deficiency.

What are the Tax Consequences of a Short Sale or a Foreclosure?
Generally, when a lender is unable to collect the full amount due on a note, this forgiveness of debt constitutes a taxable gain for the borrower. The theory is that the borrower is paying less than the full amount originally received when the loan was funded. Thus, where a lender is collecting less than the full amount due on the mortgage, either through a short sale, a deed in lieu of foreclosure or because of the anti-deficiency statutes, there will typically be a taxable gain for the borrower. The taxable gain is the difference between the amount owed to the lender and the amount received by the lender. Many lenders have been and will be issuing a Form 1099 to borrowers for this debt forgiveness. Under certain limited circumstances the Mortgage Forgiveness Debt Relief Act of 2007 may eliminate the consequences of this gain.

The information set forth in this article contains general rules only. It should not be construed as legal or tax advice. If you or your clients have any specific questions based on their specific circumstances, please consult your legal and/or tax advisor.

Richard V. Mack is a shareholder at Mack Drucker & Watson, P.C. He is a State Bar of Arizona Board Certified Real Estate Specialist and AV rated by Martindale Hubbell. Mr. Mack practices commercial litigation with an emphasis on real estate litigation.

From Combs Law Group

In one of the largest jury verdicts awarding a brokerage commission in Arizona history, a Scottsdale real estate agent was awarded a commission of $420,000 against a brokerage firm who had listed a large office building in north Scottsdale.

The facts are as follows:

A brokerage firm named Cavan Commercial LLC ("Cavan Commercial") had a 6% listing agreement on a large office building in north Scottsdale. Cavan Commercial and a real estate agent named Chris Wyatt entered into a 3% co-brokerage agreement if Chris Wyatt's client Buyer A purchased the office building. Four days later Buyer A signed a purchase contract to purchase the office building for $14,000,000. The $100,000 earnest money was paid 1/3 ($33,000) each by Buyer A and his two investor partners who Chris Wyatt had introduced to the designated broker of Cavan Commercial at a meeting three months earlier in Cavan Commercial's offices.

A few days after the Purchase Contract had been signed by Buyer A, Buyer A and his two investor partners formed a limited liability company ("LLC"), and assigned the purchase contract from Buyer A to this LLC. Buyer A and his two partners subsequently got in a dispute, and Buyer A agreed to transfer his membership interest in the LLC to his two investor partners.

For Section 1031 tax purposes, at the time of closing the LLC assigned the purchase contract to the two investor partners as individuals. The transaction closed. Immediately after the transaction closed, the two investor partners transferred the title to the office building back to the LLC.

Although the escrow commission instructions at closing prepared by the title company provided for a 3% commission to Chris Wyatt, this provision for Chris Wyatt's 3% commission was crossed out by Cavan Commercial, who revised the escrow commission instructions to provide for the entire 6% commission ($840,000) to be paid to Cavan Commercial.

When Chris Wyatt complained and requested his 3% commission, the designated broker for Cavan Commercial said ®sue me.® Chris Wyatt did. Almost four years to the day after Chris Wyatt had introduced Buyer A and his two investor partners to the designated broker of Cavan Commercial, the commission dispute was tried before a jury in Maricopa County Superior Court. After a three-day jury trial, the jury deliberated less than one hour and awarded the entire 3% commission of $420,000 to Chris Wyatt. (Wyatt v. Cavan Commercial, LLC; CV2006-01270; Jury verdict November 14, 2008.)

Chris Wyatt was represented at the jury trial by John Skiba, with assistance from Chris Combs and litigation paralegal Lisa O'Brien. Don Martin, a former president of the Arizona Association of REALTORS®, testified as an expert witness on behalf of Chris Wyatt. Cavan Commercial (renamed Logan Commercial LLC prior to the setting of the trial date) was represented by two lawyers from a national law firm.

Note: During the questioning of prospective jurors before the trial began, one of the prospective jurors was a real estate agent, and in response to questioning from Cavan Commercial's lawyer, the real estate agent said that she did not know if she could be fair because she was tired of seeing real estate agents being "cheated" out of their commissions. Although she was honest, she was immediately excused as a juror!

Combs Law Group is the author of the Legal Hotline. Visit their website or contact them at 602-957-9810.

By Scott W. Hyder

My client, having tried to sell his home for over a year, smilingly described his potentially great deal. Conventional financing being unavailable, the prospective buyer agreed to a "carry-back" sale: the seller would be the lender. The buyer would pay a down payment and monthly payments on the loan amount at 8% interest, with a balloon payment of principal due in seven years. The seller imagined making 8% interest, and in the worst-case scenario of buyer default, he could get the house back. Sounds great, right?

Maybe — had the seller considered the downsides? First, the seller himself still owed $250,000 on the house. Second, the seller still risked foreclosure if he defaulted on his loan — having owner-financed the buyer did not protect him. The wonderful deal now looks much more complicated.

Seller financing can be a good idea in some cases, if the seller understands the risks. Many sellers would desperately like to sell their homes as in the good old "lender financed/booming market" days, but the realities of this challenging market make selling much more difficult now.

Seller "carry-back" financing offers a creative alternative that can appeal to both sellers and buyers. In a typical carry-back, the property seller accepts from the buyer a down payment and monthly payments of principal and interest, with a balloon payment due at later date. If payments stop or the buyer otherwise defaults under the agreement, then the seller can foreclose (like any typical lender) and repossess the property.

Carry-back deals can present complications. The seller who still has loans on the property must still comply with all loan terms or face foreclosure for default — regardless of whether the new buyer holds title. Also, most commercial loans have a "due on sale" requirement prohibiting or restricting the owner from selling the home without the lender's consent while the loan is still in place. Depending on the circumstances, a commercial lender may give permission; occasionally a seller decides to ignore the requirement and assume the risk.

The buyer in a carry-back deal faces risks, too. Even if the buyer makes timely payments, the seller could abscond with the money to Jamaica, conveniently forgetting to pay the lender. No government "bailout" addresses trips to Jamaica, so the seller's existing lender could foreclose on the new buyer's property.

To protect against that risk, the prospective buyer in a carry-back deal should make sure the seller's commercial loan is paid as required also. One solution is an escrow: the new buyer pays into an escrow instead of directly to the seller. The escrow agent would first pay the seller's existing loan payment and then forward any remaining amount to the seller.

In any carry-back deal, the seller faces the risk having to foreclose if the buyer defaults. Like a typical lender, the seller would have to go through the entire foreclosure process. If the buyer retaliates or has simply not maintained the property, the seller may end up repossessing a property in poor condition. Homeowner insurance can provide some protection if the seller is named as an additional insured on the buyer's policy.

As would any prudent lender, the seller should take necessary precautions and investigate the prospective buyer to determine the risk. This means obtaining consent forms and reviewing tax returns, pay stubs, credit reports, banking accounts, criminal records and so on.

An alternative to the carry-back sale is the "lease-purchase" deal: the tenant-buyer occupies and pays rent with an exclusive option to purchase the home at a later date at a stated price. Such deals can work, but there are legal and business risks to recognize, and the landlord-seller must comply with all landlord-tenant laws, such as the Arizona Residential Landlord and Tenant Act.

Creative transaction structuring takes time and money. Normally, buyers pay these costs as "closing costs" in a typical lender-financed sale. Although carry-back sellers could require buyers to pay these costs, a buyer in dire straights likely has only enough money for the down payment. The costs could thus be "rolled in" to the total loan amount.

Remember: Most agents, brokers and title companies lack the qualifications to properly advise the participants about the issues and risks. Sellers especially should consult an attorney experienced with secured real estate transactions. The attorney can assist with background checks, due diligence, and drafting and recording the documents. The business and legal risks, including the agent's and broker's liability, could be enormous if anything goes wrong. Proceed with caution.

© Scott W. Hyder, 2008. Scott Hyder is an attorney in Phoenix. You can reach him at 602-923-7370 or scott.hyder@cox.net or visit his scott.hyder@cox.net or visit his website.