Eminent Domain Seizure of Underwater Mortgages: How it Works (And Why it Won’t)

This article was originally published on the Seattle Homes Blog:

Eminent domain seizure underwater mortgages

Eminent domain has become a popular topic in real estate circles recently as a number of local governments are contemplating using the power in a new way.  Cities like Hayward, CA and North Las Vegas, NV have recently considered measures that would attempt to seize underwater mortgages and lower their principal balances, under the guise of preventing foreclosures in their local markets.  Seattle is the latest city to begin studying the possibility.

Eminent domain has traditionally been used by governments to condemn and seize a property and, in most cases, is only allowable when the public good will be served by the taking.  Property owners must be compensated for the loss, meaning the seizing entity must pay fair market value to the property owner.

In the latest proposals, eminent domain would be used not to seize the physical property itself, but the mortgage attached to the property.  While a homeowner is the affected party in a traditional home seizure, in these cases banks, lenders, and investors are the mortgage owners and would be the concerned stakeholders.  “Mortgages” in many states are actually deeds of trust, but for simplicity’s sake we’ll call them all mortgages, and their owners investors.

Local governments are proposing to partner with corporations that specialize in the mortgage seizure process, and to use their investors to finance the purchase of those mortgages and their resale.  There are numerous legal and practical challenges facing this process, but here is how the process would likely play out if approved:

Step By Step – The Eminent Domain Mortgage Seizure Process

The city government condemns a mortgage on a home that is underwater.  In this case, the home is worth $200,000 (the city’s valuation), and the mortgage on the home has a $300,000 balance.

By law, when seizing property through eminent domain, the city must pay the investor back the fair market value of the property.  In this scenario, that property is the mortgage, not the home itself.  Proponents of this process have posited that the market value of a mortgage is 80% of the home’s current value.

In this case, the city would pay the investor who owned the mortgage $160,000.  To raise that $160,000, the city needs a financier.  They partner with a mortgage seizure specialist corporation.  This corporation has investors ready to make loans to the city and facilitate the process.

The corporation’s investor partners loan the city $160,000, which the city pays to the original investor.  The city now owns the mortgage.

The corporation’s investors now “refinance” the city’s mortgage at $190,000.  This new mortgage can be retained by the corporation’s investors, or packaged and sold with other loans as securities.

The city now has enough money to pay back the original $160,000 loan, plus a $30,000 margin for paying transaction expenses and profits to all of the necessary parties.  The corporation is paid a flat fee, the new investors get equity profit plus interest, and the city takes a cut as well.

Of course, the homeowner must technically agree to this new mortgage on his/her home.  When approached with the proposition of a $110,000 reduction in mortgage balance and a new position of $10,000 equity in the home, the home owner naturally agrees.

Who Determines Market Value?

While the process sounds like an innovative idea, there are a plethora of problematic issues.  The first is obvious.  Everyone profits, except for the original investor, who is paid only about half of the amount of his original mortgage balance.

The problems start when determining the value of the home itself, since the mortgage’s valuation is based on the home’s current value.  The city, which stands to profit from this process, is determining the value of the home.

While the condemning city is clearly not an independent analyst for the valuation, it is also likely not an able analyst.  City officials are far less skilled at property valuation than independent, full-time real estate professionals.  An unrelated appraiser would be the logical person to make this valuation but, in this case, the city is naming its own price.

A Mortgage’s Value is Much More Than the Home it is Tied To

Our next leap in logic is the belief that a mortgage is only as valuable as the home to which it is secured.  To demonstrate the folly of this idea, one of the mortgage seizure corporations, in partnership with Hayward’s city government, recently sent out letters soliciting the sale of underwater mortgages from the mortgage owners of over 600 local homes.  Not surprisingly, all offers were rejected by the original investors.  85 percent of those mortgages had on-time, current payments coming in, even though they were technically under water.  The investors were still seeing a healthy return on their mortgage investment, even when the home’s value had sunk significantly below the mortgage balance.

The value of a mortgage is not just in the value of the home or the principal balance, but in the likelihood of long-term interest payments being received.  Lenders lend money to earn interest.  Without a proper analysis of the present value of a mortgage based on its long-term repayment, a valuation process has little credibility.

Setting aside the lack of attention to interest payments, the valuation of a mortgage at 80 percent of a home’s value should cause plenty of raised eyebrows as well.  It is widely know that mortgages are being made up to 97 or even 100 percent of a home’s value.  These are mortgages backed by investors who understand their worth, and can easily demonstrate a mortgage’s market value far above 80 percent loan-to-value.

Hands In The Mortgage Cookie Jar

This process hits its lowest credibility point when the straight-faced participants refinance a mortgage on the same property at a higher loan balance.  The very same set of characters tell the original investor “Your mortgage is worth X,” while telling their own investors “This mortgage is worth X + Y.”

If it weren’t so obvious and financially irresponsible, it would be comical.  The entities in this process will be required to prove in a court of law that they’ve paid fair market value to one group of investors, and repeatedly, successively, resold those same assets to other investors at higher prices in a short time period.

Unfortunately for proponents of the eminent domain process for seizing mortgages, this is where the rubber meets the road.  Without that profit margin, there is no mortgage seizure corporation running the program.  There are no investors on the back end lending money to the city.  There is no one to refinance the mortgage later.  No one is willing to make this process go forward without shorting the original investor, because when you pay fair market value, there are no ill-gotten profits to spread around.

If The City Gets What It Asks For

There may still be some cities that push forward with this process, even with all of its legal problems.  As Seattle has gotten a recent taste for the seizure madness, the less-than-convincing mantra has been “Let’s just test the courts.”  While neither Seattle nor any of the other cities have officially started using eminent domain in this way, there are many proponents pushing the cause heavily.

A lack of foresight on these issues would likely cause a municipality far more headaches than the relief it might find through a few foreclosure rescues, however.  There will be lawsuits from investors and banks, some of which have already been filed and are waiting for an official opponent.

The nation’s largest lending institutions are weighing in with serious concerns.  HUD, which supplies FHA insurance, has said that it will likely not insure any new loans that are created through eminent domain seizure.  FHFA has said that it may limit or stop Fannie Mae and Freddie Mac from lending altogether in cities which approve this process.  Those two statements alone should send chills down the spine of a city leader concerned with the valuation of local homes.  Add in private investor reluctance to take on a risky market and a city would see vast repercussions, from sinking sales to diminished home values due to the lack of access to financing for its local residents.

The Gift That Gives Back

To add personal damage to the community issues, real estate professionals familiar with short sales will quickly see the similarities in tax concerns.  The IRS often looks on debt forgiveness as income or a gift, for federal tax purposes.  The result of the mortgage reduction could, without further legislation, create a taxable six-figure income gain for the homeowner, for which they might owe tens of thousands of dollar in the following year.

Practicality and the Current Reality

Maybe the most interesting concern is whether or not the process would even have an effect on underwater homeowners in the end.  The likelihood is that every single transaction would include legal challenges from at least one opponent.  Not only would the individual investor/mortgage owner contest the seizure, but larger groups of bond holders would as well.  Many mortgages are bundled in large groups as securities, and the removal of any of those individual mortgages from the bundle would damage the value.  Many individual bondholders would be financially affected by a single transaction, making the seizure of this class of mortgage either an invitation to a multiparty suit, or totally off limits to the city.

In some markets, the determination of market value can be subject to a jury trial.  This would be a city’s worst nightmare, eating up massive amounts of time and local court budgets for every single seizure.  Every loss in court would be a net negative to the city’s budget and one more homeowner who couldn’t be helped because the profit margin on the transaction naturally disappeared under scrutiny.

In the bigger picture, real estate value appreciation is being seen nationwide.  We’ve erased years of losses, and the number of underwater homeowners shrinks by the month.  Foreclosure numbers are dropping as homeowner confidence grows and more people decide to keep paying their mortgage until they reach an equity position once again.  By the time any of these seizure processes begin to get legs under them, they may be focused only on a tiny percentage of homes that are still underwater.

Eminent Domain and the Necessity of Clear Public Utility

In the end, the groups proposing to seize mortgages may be missing the most basic element needed for the use of eminent domain powers.  There must be a “public good” that is created through the use of eminent domain.  Good ideas, vision, and purpose do not suffice.

For this process to provide a legally-necessary positive public outcome, the proponents would need to show that:

1) they would be able to reduce a significant number of homeowners’ mortgage balances,

2) those reductions would prevent a significant number of homeowners from being foreclosed upon who would have otherwise lost their homes if the city had not intervened,

3) the city’s greater housing situation would be perceptibly improved by those specific homeowners’ improved plight,

4) the collateral damage to the local real estate market from restricted access to lending for the city’s home buyers and sellers would not negate the potential positive impacts of the mortgage seizure process.

This is not an easy thing to demonstrate, and it should not be.  The use of one of our government’s most onerous powers over individual private property rights should, and does, have a very high bar to clear before it can be exercised.  With the current proposal for the use of eminent domain to seize underwater mortgages, we’re still a far cry from clearing that hurdle.

2013 Seattle Real Estate Stats Review: Home Prices Up 13%, Sales Up 12%, Condos Up 17%

This article was originally published on the Seattle Homes Blog:

2013 was one of the strongest years the Seattle real estate market has seen in a long time.  With double digit gains in almost every category of total sales figures and median home prices, the greater Seattle metro took back a large portion of the equity that had been lost during the real estate downturn that began in 2007.

Total home sales for King County in 2013 stood at 30,976 closings, according to the NWMLS database.  Houses made up the bulk of that figure with 24,400 sales, compared to 6,576 condo sales

Residential King County Sales and Median Home Prices, 2012-2013 (Houses and Townhomes)

Seattle real estate 2013 statistics

Those sales represented a 12 percent increase in total home sales compared to 2012.  The condo market had a slightly larger gain with 14 percent year-over-year gains.

Median home prices in the Seattle market had similar increases.  The December 2013 median price of a house in King County was $421,000, around 13 percent higher than one year earlier.  Median condo sale prices this December were up a surprising 30 percent over the same month in 2012, while the full year’s median price gain was closer to 17 percent.

Condominium Sales and Median Condo Sale Prices, King County 2012-2013

Seattle Condo Sales - Median Prices, 2013 Statistics

The continued strengthening of the technology employment market in the Puget Sound region shows no signs of slowing down, and the real estate market reflects that.  Seattle and its surrounding cities will likely show a moderated growth pattern for 2014, as prices and sales grow at a slower pace.  The overall trend will still be one of fairly strong buyer competition but increasing inventory to lessen demand a bit from the ultra-tight market we saw in 2013.

Chinese Real Estate Rush to Accelerate in Seattle? Canada Cuts Off “Buy a Green Card” Immigration Policy

This article was originally published on the Seattle Homes Blog:

Vancouver, British Columbia has been a favorite international destination of Chinese real estate investors for decades.  Immigration laws in Canada have allowed for wealthy foreign investors to “buy” citizenship through a direct investment in the domestic economy, and Vancouver was the poster child for Asian investment.

That investment appeal is now shifting South toward Seattle, as Canada’s immigration policies have abruptly changed this year and altered the benefits of buying in these two nearby cities.  Canada has ended their policy of granting citizenship to foreign investors, while the United States has recently streamlined its investment program, allowing for an easier route to a “green card” for foreigners.

The U.S.’s EB-5 program has been in existence for years, but its application and review process had previously been painstakingly slow.  Created to generate job growth, its applications numbered only in the hundreds per year and investors were wary of being tied up in bureaucracy.  Recent changes to the program promise to cure those bottlenecks, though, and as applications are now rising into the thousands per year, it appears that the timing couldn’t be better with the change in international interest.

In the simplest terms, the EB-5 requires foreign investors to:

  • Make a $1,000,000 investment
  • Create or preserve 10 jobs locally

There are some exceptions, but these rules apply to most applicants.  The applicants receive in return:

  • Conditional permanent resident visas for applicant and dependents
  • 2 years to prove the creation of those jobs and the investment

As thousands of applications pour in every year now, the numbers will likely balloon as Chinese investment shifts to the Puget Sound region.  Real estate prices are significantly lower in Seattle than they are in Vancouver, and the ability to buy a luxury home, get a world-class education for your children, and live in a healthy, beautiful, and safe area like Greater Seattle is unmatched.  Foreign home buyers on the Eastside already make up a significant portion of the buying market today.  The trend will likely accelerate moving forward if the immigration policies of the two countries continue on their current courses.

Real estate brokers, fall into line: It’s time to let the MLS lead

This article was originally published on Inman News:

The power balance in the real estate world is shifting faster than ever. Travel titans, search engines, investment oracles and government entities all want to change the way we do business. Most just want to control a larger piece of the pie.

Real estate brokerages are often too focused on their day-to-day business of attracting and retaining agents to give an appropriate share of their attention to the greater direction of real estate. The reasons are fairly simple. Brokerages are deemed successful by their ranking vs. local competitors as opposed to the greater health of all brokers in their region. The ability of a broker or agent to increase sales production and income often comes at the expense of competing agents and brokers, especially in a down market.  This is not necessarily a negative, but the reality of competitive business and our natural motivations in these roles.

Then, there is the MLS. The multiple listing service could be called the referee for our regional activities. Some practitioners love the MLS for its standardization of practices. Some hate it for its plethora of rules impeding their business. Some brokers appreciate the MLS’s creation of a level playing field vs. other companies. Many brokers feel disdain for any organization that seeks to override its regulatory authority.

The nature of these differing opinions exemplifies the strength and value of the MLS to our industry. Whether it’s a parent, teacher, CEO or government regulator, any authoritative entity should wield enough clout to create useful standards. If it lacks the strength to create regulations that benefit its constituents as a whole, it is useless. At the same time, if its decisions lack the support necessary to regulate member policies, it is impotent.

An uncommon position of power

MLS organizations are in a uniquely powerful position in our industry today. The MLS is supported in some way by Realtor organizations, diverse brokerages, volunteer agents, and MLS staff. Their overwhelming strength is the nearly ubiquitous control of our most precious asset in the new media age: the real estate listing.

Think about the biggest names in real estate news today. You’d be hard pressed to name a single one that could drive significant revenue without some attachment to real estate listings. The listing itself is the tangible piece of media that changes an online real estate experience from a puff piece into a consummation.

The primary driving profit factor in real estate-related ventures is the idea of the sale. Interest in real estate media is driven by the current or long-term desire to buy, sell, remodel and live in a home. All other real estate-related media and data is merely window dressing to the sale. Charts, graphs, social interaction and idea boards are just small talk until the real estate listing and the potential of a sale is introduced.

The value of a listing

It’s clear that real estate listings can be used to create great wealth, even for those with no part in the creation of the listing or the sale of the associated property. Publicly traded portals have scraped, copied, subscribed to and been fed listings of every variety to keep their content valuable.  Pioneering brokerages have added every piece of extraneous media possible to their listings to make them stand out. The battle for search engine rankings on individual property addresses highlights the very specific nature of the individual listing’s monetary value.

While investors and technologists have scrambled to gain more and more control over the marketplace for, and dissemination of, real estate listings online, most brokerages have had a less visionary approach. Some have expressed a bit of creativity, but the vast majority have taken a back-seat approach and reacted to the changes as they came. Fearing their competitors more than the changing market, the very nature of brokerage competition seems to have stagnated much of the potential innovative power of the real estate brokerage and its agents.

In the meantime, the technology entrepreneurs within the agent community seem to be leaning more toward unified solutions from MLS organizations. As the power and duties of the MLS have begun to slowly grow, many brokers are balking at the changes out of short-term self-interest. If we are truly being strategic about the long-term agent-centric real estate model, though, all brokerages must take a long look at the need to focus on the strength and value of our listings. We also need to empower the only organization that allows us to provide those listings in a professional and powerful way.

Give the MLS teeth

The MLS needs wider latitude and governance of the creation, display, dissemination and retention of real estate listings. While those responsibilities are technically available to an MLS today, the reality is that large brokerages seek to retain more autonomy by cutting their MLS off at the knees and handicapping its ability to make big decisions.

Brokerages need to allow the MLS the ability to negotiate on our behalf from a position of power. Whether that means negotiating a revenue model for listing syndication, restricting that dissemination, or creating new and creative ways to improve our processes, the MLS needs the flexibility to work as our voice in the industry. Mistakes will be made, but as MLS organizations across the country collaborate over the most effective processes, the efforts will become streamlined and our ability to direct industry momentum will continue to strengthen.

The MLS should be our power broker at the negotiating table with any search engine or portal that wants to profit from our labor but doesn’t feel the need to follow our rules. With all brokerages’ influence behind the same face, we put ourselves in a far better position to negotiate listing standards that benefit the consumer and create reasonable financial concessions where appropriate.

Current listing display agreements with third-party vendors include onerous terms giving full licensing and usage rights in perpetuity to any and all associated companies. Agents and brokers are signing agreements every day that give them no recourse with these marketing “partners” because they believe they have no other other choice. Frankly, because our industry response has been so disorganized, they currently don’t.

The broker must cede more power to the MLS

Brokers will argue that they’re already doing a good job of dealing with listing media on their own. They are wrong.

Multiple brokers forging different agreements with the same portals is like multiple buyers competing for a home. Everyone undercuts everyone else. There is no uniformity of goal. It’s every man for himself.

Brokers provide invaluable services to agents, but those are services of business support, competitive differentiation and regulatory oversight. Whether it’s through marketing, administrative foundation or training, brokers are mercenary business support structures that agents will happily pay to do business with. They are a necessary and hugely beneficial part of our profession. What they are not are unified voices for the betterment of all agents.

Brokers have proven this themselves.  They continue to make private deals with portals to secure advertising positioning over and above competitors.  They’re more interested in usurping their counterparts than creating a clear market picture for the consumer.  That’s a logical business strategy, considering their responsibility is to their agents and their clients.  It also illuminates their inability to be a strong negotiator for the agent community as a whole.

New industry, new rules, new strategy

MLS organizations across the country are beginning to forge new ideas that are good for consumers and profitable for real estate professionals. While brokers grimace, new rules, standards and services offered by MLS organizations are widely appreciated by agents. These organizations have set many regions on the pathway to standardized forms, better consumer advocacy, and liability protections for practitioners.

While thousands of brokerages dangle wide-ranging listing publicity policies around for the nearest takers, our MLS boards are the only organizations that can truly provide a common, consistent voice for the people who actually create those valuable listings — the agent and the client. Whether or not the MLS’s decisions include revenue generation, wide distribution or strategically limited exposure, the MLS needs the support and strength to make these decisions in the name of its members and subscribers.

For our industry’s agents and brokers, we have two clear choices: Concede a bit of our autonomy to strengthen our long-term voice, or continue to claw at each other for that next sale, while our disorganization allows others to determine our direction for us.

The Real Syndication Battle: SEO. Are Brokers Giving Away Online “Real Estate”?

This article was originally published on Geek Estate Blog:

[Pre-emption of syndication flack:  I syndicate.  Most brokers do.  Many value the additional exposure in the current situation.  This isn’t a blanket condemnation of syndication.  It’s merely an analysis of the SEO byproduct of that action.]

The real estate industry is buzzing about Edina Realty and ARG pulling their listings from syndicators.  The announcementone strong view, and a different response.

Most of the arguments about syndication are ignoring the elephant in the room.

Real estate brokers and syndication sites are battling for SEO.

9 out of 10 home buyers today are online.  The first business to grab a consumer’s attention is likely to get that consumer’s business, or generate revenue through the online traffic.  Buyers and sellers create income for whichever business has the most-accessible presence online.

All real estate companies are in competition.

Brokerages, individual agents, vendors, and syndicators collaborate in many useful and productive ways, but we are all in competition for the consumer’s dollar.  Brokers owe a high level of professional representation to our clients, while maintaining a competitive and sustainable business model at the same time.  When we disregard the competitive nature of our business, we lose focus in our decision making.

When you give away your listing, you give away SEO.

Unique content online is king for SEO.  Own a unique piece of online real estate, and you own the traffic and revenue that come along with it.  The more times you duplicate and syndicate that content, the more diluted it becomes, and the less-valuable your share of it becomes, in terms of SEO.  An individual listing is a unique and valuable piece of online property.

Who is #1 when buyers search for [Your City] real estate or homes for sale?

Is it a national syndication site?  Quite possibly.  When buyers search for your listing, “123 Main St ,City State”, they also probably find the syndicator first.  Why?  Because you gave it to them.  Thousands of real estate brokers give their SEO to that site every day.  Brokers create thousands of links to syndication sites’ listings, and effectively encourage their clients/consumers to do the same.

Is diluting your listing’s SEO good for your client?

Who is best to receive the inquiry from a buyer?  Better yet, who would the buyer want to receive his/her inquiry?  Trulia doesn’t know where Seattle homes are in the neighborhoods of Inverness or Arroyo.  Realtor.com can’t find Newport Shores or Surrey Downs, because it doesn’t list homes for sale in Bellevue in those neighborhoods (yes, I am pushing my own SEO right now).  A local agent would know, but they’ve all given their rights to that traffic away through SEO dilution.  It doesn’t matter who is “best”.  All that matters is who is “seen”.

Listings create consumer traffic.  Consumer traffic creates revenue. 

It’s true that these large sites currently have far more national traffic than most brokers’ local sites.  That traffic comes from brokers’ listings. Listings are the holy grail of online real estate.  Consumers certainly like maps and research features, but in the end their #1 goal is to find a home.  Without listings, a website is just an informational resource, without a solution to the home buyer’s ultimate need.  [Zillow has an amazing real estate website.  It used to generated its revenue through beverage advertising.  Until real estate brokers’ listings and corresponding agent ads grew the revenue significantly, this company was not in a position to have the big, successful IPO they they had last year.]

Who should consumers find when they search for homes in your neighborhood?

That’s debatable, and really outside the SEO topic.  Most real estate brokers know dozens of local associates that they respect for their knowledge of the local market.  Unfortunately for them, they all point their web traffic to a national aggregator who may or may not.  Collectively, they’ve told the consumer to ask a syndication site.

Real Estate SEO will determine the direction of our industry in the long-term.

The companies that are successful selling real estate online will continue to gain greater power and influence over consumers, brokers, and even legislation that affects the real estate industry.  As a handful of companies gain larger shares of the market, more brokers are taking notice, but far too few are focusing on the source of that power.

SEO is your real estate online.  It is much like real estate in the physical world. 

Those who own the best real estate have usually worked hard for it, paid well for it, and will protect it fiercely.  The more they acquire, the more powerful they become.  Those who disregard its value and allow their real estate SEO to be acquired by others will see their influence wane and, over time, fail in their efforts.

In the end, brokers will decide on their own what is in the best interest of their clients, and their business.  The answer is not as cut-and-dry as many might assume.  Page views, traffic, experience, local knowledge, and a host of other factors will determine what is best for each individual’s clients.

Bottom Line:  Buyers will search.  They will find listings.  If they’re not at the syndication source, they’ll find them at the broker source.  The key is not in pointing as many people as possible to just any web site.  The key is pointing the right people to the right listing source.

Zombie Titles: When Foreclosures Become Walking Dead Homes

This article was originally published on Realtor.com:

Americans learned all kinds of new real estate terms during the housing downturn. Short sales, non-judicial foreclosures, and sub-prime mortgages are just a portion of the real estate bust lexicon that is now a part of everyday conversation. Add “zombie titles” as the latest dark moniker on the list.

Zombie titles are hanging around the necks of many Americans’ financial futures. Robo-signing and MERS title issues are already top-of-mind for real estate pros, but for more and more consumers who have defaulted on a loan, these issues are coming to the forefront of their personal finances.

What is a zombie title?

Title is a legal document that assigns ownership and responsibility for a piece of real estate to an owner. When a homeowner defaults on a loan, the lender begins the foreclosure process to take back the title to the home. The foreclosure process can take anywhere from a few months to a few years between the first notice of default and the lender’s scheduled auction/foreclosure sale. Often, the homeowners move out of the home during this time period, believing that it will be sold.

It usually is. However, sometimes the lenders get caught up in legal/financial issues that delay their ability to actually conduct the sale of the home. Sometimes they just change their minds and never push foreclosure through to closing.

Enter the zombie title. Homeowners Joe and Jane have suffered the financial consequences of the foreclosure process, their credit is ruined, and they don’t own a home (to their knowledge). They moved out of their home two years ago when their lender scheduled a foreclosure sale date. Out of the blue, their local city government begins sending them fines for not keeping up their property. They thought the bank had sold it off already. The house has been deteriorating for years, and might be boarded up or inhabited by squatters. This half-dead home is still haunting Jane and Joe financially because the zombie title is still in their names.

Zombie neighborhoods

These kinds of homes are a blight on neighborhoods. A single unkempt home on a nice street can be a financial and mental burden on an entire community. The owners won’t pay for improvements, because the lender could come back at any moment and force the foreclosure sale through. The lender, HOA, and city can rarely fix up the home themselves, because it is still legally the private property of the homeowner. When properties sit vacant for long periods of time, they deflate nearby real estate prices and increase the likelihood of crime in, and near, the property.

Stay in the home?

Because of this, many real estate professional are advising homeowners who are in foreclosure to stay in their homes until the sale of the home has closed. Staying in the home is currently the only way to keep it secure and in good condition.

This advice will protect some homeowners from potential liability, but it really doesn’t get to the crux of the issue. The owners will be in an open-ended legal and financial limbo, and there seem to be no repercussions for the lender that began the foreclosure process but never followed through. The zombie title will continue to hang over their heads until the lender, at its own discretion, decides to finish the sale.

Limits on foreclosure timelines?

The foreclosure process is messy, and it’s difficult to put a straightforward timeline on the process. Some types of foreclosures take longer than others.

However, it would make sense to have a set of guidelines so that homeowners know whether or not their home is going to be sold. If a lender schedules an auction, sheriff’s sale, or another kind of foreclosure sale, that lender should be required to finish the process within a set amount of time. Whatever that timeline is, it should be clear to the homeowner that they will not be dragged down into an endless financial mess.

Put the zombies out of their misery

Foreclosure is hard on everyone. It is certainly a time for renewed emphasis on responsible lending and credit behavior. Homeowners who lose a home to foreclosure will spend years re-learning those lessons as they rebuild their credit. In the meantime, they should also get closure from their lender before they start rebuilding. Leaving a homeowner’s title in a zombie state will only serve to drag the homeowner and the community into more needless financial losses.

Open real estate agent data generates vast new liability for ‘pocket listing’ brokers and agents

This article was originally published on Inman News:

A new twist in the expanding market of pocket listings and private listing associations may start to cause real estate brokers to reconsider their positions on the practices. Scrutiny over “whisper listings” has led to questions of potential financial liability for real estate agents, and their brokers, who regularly involve themselves in these transactions.

A panel last week at Inman News’ Real Estate Connect conference in New York discussing pocket listings showed little difference in opinion on the quality of service being delivered by practitioners who pocket-list homes. The forum participants included many executives from the largest MLSs in the country. The featured broker/agent speakers included Shaun Osher of CORE in New York City, and Danai Mattison of the Mattison Group in Washington, D.C.

Their views on pocket listings were refreshing and unequivocal. Osher was particularly frank. The main takeaway: There is no place for “premarketing” or “coming soon” in an MLS-accessible market. If a home is being marketed in any way, it’s for sale. Limiting its exposure puts an agent’s personal financial gain at odds with a client’s financial return.

Possibly more striking was the conversation with Neil Garfinkel, a partner with the law firm AGMB in New York. In his personal opinion, those who engage in pocket listings are opening themselves up to potential litigation. A former client who felt they were led into a practice that didn’t maximize their financial return, and didn’t fulfill the agent’s standards of duty, will at some point be the bellwether for pocket listing litigation in the industry. Real estate licensee duties can be fiduciary or statutory depending on the state, but almost always call for a high standard of care for a client’s well-being.

While the liability discussion on that day centered on a single former client suing their personal agent, there are a number of much larger issues that seem to collide at this one point. As real estate brokers and agents battle over opening large sets of agent production data to the public, the executives of most of the largest real estate companies seem to be signing on to the idea (Realogy’s and Re/Max’s CEOs concurred at Connect). It’s becoming clear that the dissemination of agent sales data is becoming a question of “how” as opposed to “whether.”

This new look into the practices of real estate agents and their brokerages will allow consumers to see everything their professional service providers do in a new light. Individual sales and practices will be boiled down into averages, probability and patterns.

For the agent or brokerage heavily involved in pocket listings, it may be the biggest liability they’ve ever encountered. The sales production they’ve been touting for years will now be scrutinized against the backdrop of nonexistent MLS-recorded sales. Off-MLS sales, known to be attributed to these agents, will be dredged up from public records and contrasted against similar homes that were exposed to the broader market. Class-action lawsuits and fair housing violations are just the start of the new potential threats that will need to be analyzed by a real estate broker entering this new world of “transparent” production data.

We’ve all heard the flimsy elevator speech as to why certain clients are better served with pocket listings. In reality, anonymity, exclusivity and other past concerns have all been overcome by the newest MLS rules and technologies. Even if those arguments held water for a unique few clients, pocket listings are clearly an unsavory practice when serving the vast majority of home sellers. So what happens when it becomes statistically clear that an agent is advising the majority of his or her clients to limit the exposure of their listing? When a publicly visible pattern of repeatedly pocket listing clients’ homes is now available online, the spotlight on the agent, and the brokerage, will begin to get a bit hotter.

Consider a “boutique” brokerage whose agents, across the board, almost exclusively practice pocket listings. The owner or managing broker of this office will inherently be assumed to approve of, or even encourage, limiting the listings’ exposure. This demonstrably repetitive practice will be available for every disgruntled, poorly served or financially troubled ex-client of the firm. There is a very real opportunity for a group of former clients to bring litigation against a broker, without having to prove the details of an individual transaction. The broker — and its agents — will have digitally written their confession in the form of a long-term record of off-market production statistics.

Fair housing violations have always been considered a potential red flag in pocket listing transactions. When an individual agent pocket-lists, he may or may not be limiting a home from any number of protected classes or groups, but it’s difficult to prove in a one-off transaction.

As open production data surfaces, however, the brokerage that repeatedly limits which groups of the buying public have access to their listings will be under an enormous amount of scrutiny. There will be, without a doubt, organizations dedicated to crunching this data and matching past transactions to buyers and sellers, attempting to determine if a certain class of citizens is being excluded in practice. The potential of being labeled as a fair housing violator should be enough for most brokers to immediately re-evaluate their agents’ policies.

As for financial liability from former clients, the potential runs from painful to career-ending. A single client suing for the refund of commissions paid would be a significant strain on the business. An entire class of clients bringing suit could bankrupt a brokerage in short order.

There’s nothing to say that the financial pitfalls couldn’t be heavier. The amount of equity a homeowner lost in a pocket listing could far-and-above outweigh the agent’s commission. If the client was truly wronged, this loss in equity could reasonably be considered as the amount an agent or broker must recoup for the seller. As the open data pool gets larger, analyses based on neighborhood comps will contrast open market sales and pocket listings, unearthing disparate sale prices and projections of losses (or profits) based on one practice versus the other.

It’s likely that a brokerage with a regular pattern of pocket listings will have a record that shows lower final sale prices than those garnered by comparable homes listed on the MLS. It won’t require a “he said/she said” client vs. agent level of proof. There will be a long-term statistical testimony of a brokerage’s approved practices, the industry’s knowledge of that practice’s deficiencies, and a data-driven picture of the clients’ losses.

Of course, this vast picture of liability could be overblown if the data reveals pocket listings to be a boon to home sellers. While the overwhelming industry consensus casts a great amount of doubt on that scenario, it is possible. Still, there’s far more downside potential to taking that position as a broker. Having your company’s pocket listing practices justified by data merely allows you to continue doing business as usual. If the data turns the other direction, the vultures looking for deep pockets will start circling quickly.

In the end, the publication of agent production data, done in a responsible and ethical way, could force some unintended positive changes on industry practices. If more consumers are advised by their agents and brokers to get full exposure in their local markets, home sellers’ personal financial outcomes will be enhanced. At the same time, an increase in public listings will expand and improve the quality of closed sales data used by brokers, appraisers, banks and others. Raising the level of real estate’s professional practices, improving clients’ returns and increasing overall sales data quality are just a few more reasons the industry is leaning toward a more accessible future.

Why You Can’t Find That Home For Sale on Zillow or Trulia

This article was originally published on the Seattle Homes Blog:

I talk with home buyers and sellers every day.  Most are in the initial stages of deciding if the market is right for them.  They’re searching on Google for real estate sites with local home listings and prices.  The first search results they receive are often big, national websites that aggregate listings and look great.

These usually include sites like Zillow and Trulia.  While consumers gravitate to these sites because of the high-end user experience, very few realize that they’re missing a huge portion of the market.  It seems counter-intuitive, but for all of the programming horsepower of the largest nationwide sites, there are actually far more timely and accurate listings on the average real estate agent’s site than there are on these monstrous property portals.

Zillow Trulia Seattle HomesBig Portals Have Fewer Real Listings, More Duplicates and Expireds

To cite just one example, a recent study compared agent websites to portals in the Seattle market.  While agent websites with a regular MLS feed had 100% of the agent-listed homes available, on that same day, Zillow had just 72% available on their website.  Trulia only had 63% of those same homes.  Consumers searching on these sites for homes were literally missing out on 30% or more of the market.

How can this be?  It all comes down to where real estate listings are created and how they’re distributed.

Agent Websites Receive Direct Feeds While Portals Patch Together Secondary Sources

Real estate agents create and enter their “for sale” listings into the local MLS database.  Those listings are available for the public to see, the very same day, on the website of every real estate agent that signs up for the listing feed.  It’s fairly simple.  The day the listing goes live, it shows up on the agents’ websites, and the day it’s sold, it goes away.  There are no outdated listings or duplicates, just the raw list of homes for sale, straight from the MLS.

With a big property portal, on the other hand, there are a multitude of different sources being pulled in to attempt to construct a full market picture.  Some agents send their listings directly to the portal, some brokers do it for them, some indirect feeds are pulled in, and some listings are just never submitted to the portal at all.

The inefficient process creates delays in the display of new home listings, and a backlog of sold and expired listings that remain on the portal websites long after they should be gone.  The inventory of listings on a portal site balloons with outdated listings, while the newest homes often show up days or weeks after they’ve already been on the market.

Serious Home Buyers And Sellers Are Using Their Agents’ Websites For Listings

While it’s clear why a consumer would enjoy browsing homes on a beautifully-designed portal website, it’s also important that real home buyers and sellers are informed about their choices.  If you’re truly looking to buy a home, or to assess your chances of selling, you need to see the entire market picture to make a good decision.  Portal websites’ beautiful graphics and charts notwithstanding, inaccurate data in an attractive format will not overcome missing out on that perfect home, nor will it help you find the right set of comparable homes to make a good decision for your sale.

So, if you enjoy browsing real estate on a national portal’s website, just remember that while the local information and statistics are interesting, the listing portion of the site is merely an advertising platform, not the full picture of homes for sale.  If you’re a serious buyer or seller, use an agent’s website.  Whether it’sSeattleHome.com, SeattleCondo.com, or your favorite local REALTOR®’s site, you’ll feel much more secure knowing you can see that perfect home on the first day it’s available.  In a market where many homes are selling within a week, you’ll never miss out because you were looking in the wrong location.

The Case for a REALTOR® to Lead Realtor.com®

This article was originally published on Realtor.org:

Realtor.com®’s president, Errol Samuelson, has been hired away by Zillow. I’ve met Errol and he’s a nice guy, very smart, and very successful. Business is business. But, naive as it might be, there’s plenty of disappointment from the REALTOR® community. It comes from a belief that we have a common cause greater than just our businesses. Whether we’re aligned with NAR or realtor.com®, we believe in unified goals that are good for the country as a whole, and create significant loyalty to our brand.

Like I said, it sounds silly to an outsider. Why wouldn’t a top executive, who clearly received a more lucrative employment offer for a position he saw as a step up, take that proposal? In the world of publicly-traded real estate ventures, you could be selling soda ads one day, and interviewing the president the next. The landscape changes drastically every year, and when your skills are in business management and strategy, you’re always looking for the next challenge.

And still, there’s a bit of an empty feeling from the REALTOR® masses when an exit like this happens. It’s just another day at the office when your insurance company’s CEO changes companies, or your old business partner switches brokerages. But when someone leaves the REALTOR® fold to work for a direct competitor, it ignites much stronger emotions from the membership. A quick scan of discussions online makes it clear that this isn’t just some job change. Reactions range from frustration to outright anger. This is someone who did a good job and likely had no direct contact with most of the commenters, but many take his departure so personally as to feel betrayed.

As simple-minded as it sounds, I can’t help but feel a bit of the same disappointment. Real estate agents hop between companies like mercenaries until we find the right fit. We don’t feel remorse for changing our workplaces, because it’s simply a business decision. At the same time, those of us who are advocates for the REALTOR® brand would be incredulous if our associates left the membership. Your career is your business, but your commitment to supporting REALTOR® causes is ours.

It’s in that spirit that I’d strongly advise that the next head of realtor.com® to be someone with REALTOR® experience. This wouldn’t be a current salesperson, of course, but there are countless REALTOR® practitioners and executives whose past or current careers include law, business management, technology, and marketing. Whether the candidates have been the head of a technology-driven brokerage or a forward-thinking MLS organization, they need to have spent their time, and their money, supporting the organization whose online brand they’ll be charged with leading. A REALTOR® who has volunteered their hours, and invested their own funds into our causes, will be someone who understands the crazy notion we have of a common mission.

Clearly, it’s not up to me, nor is it up to REALTOR® membership in general. The folks making these decisions at Move, Inc., have shareholders to answer to, and probably many worthy candidates within their current ranks. Still, we’ve just begun opening up the relationship between NAR and realtor.com® in a more significant way this past year than we’ve seen in a decade. It’s been a bit rocky, but strengthening that cooperation will require increasing the trust level that the general REALTOR® population has in the partnership itself. Hiring “one of us” would certainly shrink the mistrust hurdle in a significant way.

Saying it out loud, though, it’s probably just wishful thinking. The portals are in a marketing arms race, open advertising space for agents is increasingly scarce, and the market cap valuations of these companies point to a cutthroat struggle in the next few years to weed out a competitor or two. Most companies would look for the next technology executive with the greatest capacity to generate advertising revenue, while keeping those pesky agents just satisfied enough that they don’t complain too often.

Hopefully, this company isn’t just “most companies.” There’s an army of 1 million REALTORS® looking to spend their money in the most efficient way, but they also have a strong preference for the home team. It’s not impossible to garner that loyalty, and provide a superior product at the same time. REALTORS® love their brand. They want to love realtor.com®. They just hope that going forward, there’s not just a joint vision but a shared loyalty. When “our people” become their people, the entire organization will find more success, and the loyalty will be a two way street.

The Top 10 Real Estate Tax Deductions

This article was originally published on Realtor.com:

As the deadline to file income taxes approaches, it’s time to take a new look at the changing tax landscape for homeowners. The dynamic atmosphere in Washington, D.C. hasa different effect each year on which tax breaks are proposed, rescinded, changed and extended for taxpayers who own a home.

Many of the tax benefits homeowners enjoy have been protected and extended through the 2013 tax season but they will expire next year if Congress doesn’t act.

Disclaimer – This is only an informational summary of current tax issues in the news. If you need tax advice, please contact a tax attorney or CPA

1.  Mortgage Interest Deduction

Homeowners who itemize their deductions can deduct the interest paid on a mortgage with a balance of up to $1 million. While there is some movement to limit the total itemized deductions for taxpayers with higher incomes (more than $400,000), the current deductions hold for all tax brackets. Americans save around $100 million every year by deducting mortgage interest on their tax returns

2.  Home Improvement Loan Interest Deduction

The interest on home equity loans used for capital improvements to your home may be tax deductible. On loans with balances of up to $100,000, the interest is tax-deductible for a homeowner who uses the loan to make improvements such as adding square footage, upgrading the components of the home or repairing damage from a natural disaster. Maintenance tasks, like changing the carpet and painting a home, usually don’t count.

3.  Private Mortgage Insurance (PMI) Deduction

Homeowners who make a down payment of less than 20 percent are usually paying some sort of Private Mortgage Insurance. PMI (sometimes abbreviated as MIP or just MI) can be just a few to hundreds of dollars per month.

If your mortgage was originated after Jan 1, 2007, and you have PMI, it can be a tax deduction. The deduction is phased out, 10 percent per $1,000, for taxpayers who have an adjusted gross income between $100,000 and $109,000 and those above that level do not qualify. This deduction won’t be available next year unless Congress renews it for 2014.

4. Mortgage Points/Origination Deduction

Homeowners who paid points on their home purchase or refinance can often deduct those points on their tax returns. Points, also called origination fees, are usually percentage-based fees a lender charges to originate a loan. A 1 percent fee on a $100,000 loan would be one point, or $1,000.

On a home purchase loan, taxpayers can deduct the entirety of points paid in the same year. On a refinance loan, the points must be deducted as an amortization over the life of the loan. Many taxpayers forget about this amortized benefit over time, so it’s important to keep good records on the deduction of points on a refinance.

5. Energy Efficiency Upgrades/Repairs Deduction

Homeowners can deduct the cost of building materials used for energy efficiency upgrades to their home. This is actually a tax credit applied as a direct reduction of how much tax you owe, not just a reduction in your taxable income.

Ten percent of the total bill for energy-efficient materials can be used as a tax credit, up to a maximum $500 credit. Insulation, doors, new roofs, water heaters and other items qualify for the energy efficiency credit. There are individual limits for certain items, such as $150 for furnaces, $200 for windows and $300 for air conditioners and heat pumps.

6. Profit on Sale of Real Estate Deduction

If you’ve sold a home in the past year, you’re likely aware individuals can claim up to $250,000 of profit from the sale tax-free and married couples can claim up to $500,000 tax-free. The home must be a primary residence, meaning you must have lived in the home for two of the past five years. A homeowner could potentially claim this tax break on multiple homes within a fairly short time frame, but each tax-free sale must occur at least two years apart from the previous tax-free transaction.

Also new for 2013 isn’t a deduction, but a tax enacted by the Obama administration. Some individuals—those with an AGI more than $200,000—may be subject to a 3.8 percent tax onsome income from interest, dividends, rents and capital gains.

7. Real Estate Selling Cost Deduction

For those lucky folks whose profits on the sale of their home might exceed the $250k/$500k limits, there are still some ways to reduce the tax burden. The costs of selling a home can be claimed as tax deductions.

By adding up all of the fees paid at closing, capital improvements made to the home while you owned it, money spent to make repairs to damaged property and marketing costs necessary to sell the home, you can add a significant figure to the cost basis of your home. This basically raises the original price you paid for the home. Your cost basis begins with the original price of the home, and then adds in the improvement and selling costs.  When the new cost basis price is compared to your selling price, it reduces your potentially taxable profit on the home.

8. Home Office Deduction

Starting for the 2013 tax year, tax filers who work at home can use the IRS’ new simplified option for deducting home office expenses. With this form, you can get a $5 deduction for each sq. foot used as an office, with a maximum of 300 sq. feet. The office must be the primary office location where you get the majority of your work done, and it needs to be used exclusively for business (it can’t be in your bedroom). You should be realistic with its size anduse—start stretching the truth and you could increase your risk of being audited.

9. Property Tax Deduction

While it may sound strange to have a tax-deductible tax, the overall effect is that you don’t pay income tax on money that was spent on property taxes.

Homeowners should only deduct the amount of property tax actually paid to their local municipality for the year. This is not necessarily the amount you paid to your escrow account, and should not include any other city or county fees that might potentially be on the same bill as your property taxes.

10. Loan Forgiveness Deduction

The Mortgage Debt Forgiveness Relief Act of 2007 made forgiven debt on some mortgages not taxable. For example, a homeowner makes a short sale of their primary home at $100,000, but they owe $150,000 on their mortgage. The lender forgives the extra $50,000 owed, but the government views it as $50,000 in taxable income as a gift from the lender to the borrower. The Mortgage Debt Forgiveness Act temporarily relieved the taxpayer of that burden, up to $2 million, or $1 million if filing separately. The act applies to primary home sales made from 2007 through 2013, but it will expire next year if Congress doesn’t act.

IRS-suggested disclaimer: To the extent that this message or any attachment concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  This message was written to support the promotion or marketing of the transactions or matters addressed herein, and the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax adviser.