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Issue 012/December 2012
The Road to 2015 Recovery on the Horizon: Real Estate By The Numbers
Page 16
8
Do the Hustle The untold story of the Bank of America billion dollar fraud case.
24
Three Popular Lending Scams and How to Avoid Them
28
California's Homeowner Bill of Rights
38
Ten IRS Tax Rules Every Real Estate Agent Should Know
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CONTENTS
Issue 12
December 2012
Publishers Robert Pegg robert@thenichereport.com David Pegg david@thenichereport.com MANAGING EDITOR Rick Roque Rick@thenichereport.com
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Associate Editor
The Road to 2015 Recovery on the Horizon: Real Estate by the Numbers. by Rick roque
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Do the Hustle Brian Mahany The Untold Story of the Bank of America Billion Dollar Fraud Case.
Three Financial Mistakes That Can Substantially Affect Your Credit Score Ethel Wilson
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Bank of America Accused of Loan Servicing Mistakes
Homeowner 28 California's Bill of Rights Mitchell Reed Sussman
Tips for Reducing 30 Five Your Property Tax
24
Bank Lending Still Tight Corey Ann Curwick Investors earn 9% lending on real estate.
Three Popular Lending Scams and How to Avoid Them Corey Ann Curwick
26
Three Steps to Developing a Focused Lead Generating Web-Site Ariel Dagan
ACCOUNTING MANAGER Shawna Ingram shawna@thenichereport.com
Advertising Director Jessica Grizzle
Jessica@thenichereport.com
Advertising sales Hilary Bateman hilary@thenichereport.com
Assessment
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Brian mahany
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Cathy Johnson info@thenichereport.com
Jerry Davidson
Hard Lesson for a Real Eastate Investor Who Bought a "Meth House" Corey Ann Curwick
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Ten IRS Tax Rules Every Real Estate Agent Should Know
Production Manager Henry Suchman henry@thenichereport.com
Production Assistant Dawn Exner dawn@thenichereport.com
Cartoonist Martin Bradford
Jana Olson
DEPARTMENTS
06 33 35
note from the Editor service provider classifieds Advertiser DIRECTORY
COLUMNISTS & Contributing Authors Corey Ann Curwick Ariel Dagan Jerry Davidson Brian Mahany Jana Olson Mitchell Reed Sussman Ethel Wilson TheNicheReport.com
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note from the Editor
Real estate agent & broker Edition
What Do the Housing Market and Charles Barkley Have in Common? I write this sitting next to Charles Barkley, one of the top NBA players of all time, while flying to Miami, Florida. I am speaking at a housing/banking conference and Charles is commentating the NBA game – Miami Heat versus San Antonio Spurs. Aside from his role as commentator of NBA games, Charles is an investor in residential real estate, of all things. “Best time to buy investment properties is today – Arizona, Nevada, Texas etc., I’ve loaded up on properties – it should yield me a pretty good return on my investment when the market ‘rebounds’ in 3-4 years.” Despite the pun, he is one guy who not only recognizes the opportunity to buy property, but also gets the timeframe of when the market will rebound. I was impressed! Charles is an avid supporter of President Obama. We discussed the future of the economy and the housing market. I was quick to point out that bankers/housing professionals like me were relatively indifferent to the outcome of the presidential race – as it pertained to the housing market itself. I explained the very few policy differences between the candidates – beyond the rhetoric – and how bankers were actually BETTER off in the short term with President Obama, clearly a response he didn’t anticipate. Anyhow, like Charles, many consumers aren’t aware of the very few differences between the candidates. From an investor’s standpoint, President Obama will provide a stable framework for the housing markets in the short term but is likely to do more harm over the longer term. If the government has greater involvement in the housing market, the industry itself will never quite adjust to a new ‘market normal’. The housing market will remain artificially inflated in light of subsidized mortgage rates or federal regulatory burdens placed upon the housing professionals themselves. If only housing professionals can get out from underneath the burden of the Federal Government, then the market itself can re-adjust. If this remains in place, a new entitlement will be created – an entitlement to buy a house, and of course, the obligation and requirement to lend. Having the government overly involved in the housing market is a double-edged sword, and for the housing industry, is not good for business because there won’t be any business to have. It will gradually become a government function to lend and purchase a home and there won’t be a need for the private sector – think student loans. We Know Who Is President: Now What? So, once again, now we know. Americans have spoken loud and clear. President Obama won a second term as the President of the United States. This is the only fifth time a Democratic candidate has won two successive presidential terms. Prior to President Bill Clinton, you have to go back to Franklin Roosevelt, Wilson and then Cleveland. So, President Obama has achieved yet another noteworthy accomplishment – but now he has to grow the economy. Knowing who is president isn’t the source of the economic malaise. The source of our economic challenges is uncertainty, and it begins with whether or not we as a country fall off the Fiscal Cliff, when automatic tax increases and spending reductions take place within the Federal budget. I’ve outlined clearly how this will impact the economy; given the congressional deadlock it appears that politics may trump policy. We will see. With the many regulations that the administration has proposed, implemented and not yet implemented, the constant state in regulatory change will hold the housing markets back from genuine market-driven growth. As a result, the policy response will be interventionist, which will further depress or limit its growth – and the cycle could continue. With some clarity on regulations and less involvement of the Fed, we will see a stabilization and growth of the housing market over the next 3-5 years. The prospects are very good. Given our existing immigration growth rates, more people and families need homes, and we can build, sell and finance them. In this issue we delve into 2013, the path to 2015 and what is next for real estate agents to take advantage of the existing market for the growth of your business. Speak to Your Company or at Your Conference: My goal for The Niche Report, RealEstate Edition, is to provide useful insights into the real estate economy and how real estate professionals can grow their business in today’s challenging environment. Remember, if you want to learn more about what we are doing, email or call me (408.914.5895) and I’ll jump on a plane and come visit with your real estate team! Thank you and I look forward to your hearing from you!
Rick Roque Managing Editor, rick@thenichereport.com
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December 2012
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MEMBER
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Do the Hustle
The Untold Story of the Bank of America Billion Dollar Fraud Case
By brian mahany
F
or those who remember the disco era, Van McCoy scored a number 1 hit on the Billboard charts back in 1975 with a song called “Do The Hustle.” Decades later, federal prosecutors announced a billion dollar civil prosecution against America’s largest bank, Bank of America. Prosecutors say that BOA engaged in a scheme nicknamed “the hustle,” which disguised hundreds of millions of dollars in toxic mortgage loans and cost taxpayers millions. How did the case begin? Through a whistleblower, Edward O’Donnell. O’Donnell was a former executive vice president of Countrywide. Shortly after the financial meltdown in 2007 and 2008, Bank of America acquired Countrywide. O’Donnell says that the lender created a program named High Speed Swim Lane or “HSSL” (pronounced Hustle). On paper, the program was designed to speed up loans. The government, however, says HSSL was a “spectacularly brazen” fraud. Preet Bahara, the United States Attorney for Manhattan, did not mince his words, “Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill. As described, Countrywide and Bank of America systematically 8
December 2012
removed every check in favor of its own balance – they cast aside underwriters, eliminated quality controls, incentivized unqualified personnel to cut corners, and concealed the resulting defects. These toxic products were then sold to the government-sponsored enterprises as good loans. This lawsuit should send another clear message that reckless lending practices will not be tolerated.” This marks the sixth time that Bahara has gone to battle against major lenders. Most of those claims were initiated by a whistleblower, someone inside the organization that was willing to come forward and report illegal behavior. (In the interest of fairness, Bank of America calls the charges false, although it has already settled several other claims brought by the government.) The Federal False Claims Act allows whistleblowers to receive a cash award for their inside information. To qualify, there must be a violation of federal law resulting in a loss to taxpayers. Because Freddie Mac and Fannie Mae guaranteed and ultimately paid off the bad loans, taxpayers were left footing the bill. Until the Bank of America case, the feds only pursued cases in which there was a direct loss to HUD, usually
through the FHA guarantee program. Even though Fannie Mae and Freddie Mac are private companies, because they are now in federal receivership, prosecutors are now willing to consider False Claims Act cases in which Fannie and Freddie initially guaranteed the loans. What makes this case even more disturbing is that Bank of America received about $45 billion in TARP money. At the same time it was asking Congress for bailout monies, the bank is accused of ripping off taxpayers and pushing through garbage loans. According to the original claim, O’Donnell complained several times to both Countrywide and Bank of America. As a senior bank officer, you think someone may have listened. They didn’t. Whistleblowers typically face a tough time when they come forward with information about mismanagement, fraud and corruption. Assuming the allegations in the government’s case are true, Bank of America chose greed and profit over following the law. Thankfully, someone finally came forward. Whistleblowers in False Claims Act cases often receive about 20 percent of what the government collects. That means O’Donnell could receive $200 million for his information. Filing a whistleblower claim under the federal False Claims Act or Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) isn’t easy and requires filing a lawsuit. The payoff, however, can be huge. If you believe you have a case, consult with a knowledgeable whistleblower attorney. With the government signaling it will consider cases in which there were losses to Freddie Mac and Fannie Mae, we anticipate many claimants will come forward. To date, the other major False Claims Act cases against lenders have typically settled for a $100 million to $200 million-dollar
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payment. That means the whistleblowers in those cases are receiving tens of millions of dollars. There is a catch, of course. Generally only the first person to come forward with inside information gets paid. We think whistleblowers are the new generation of American heroes. If you know of fraud or waste in the lending industry, now is the time to consider coming forward. Even if you have signed a confidentiality or nondisclosure agreement, there is still hope. Every jurisdiction is different, but generally non-disclosure agreements can’t be used to cover up criminal activity or violations of federal banking rules. Brian Mahany is an attorney representing whistleblowers. His firm, Mahany & Ertl, represents the whistleblower in the largest False Claims Act case in the U.S., the government’s $2.4 billion case against Allied Home Mortgage. Brian is a frequent contributor to The Niche Report. He welcomes questions and comments and can be reached at brian@mahanyertl.com or (414) 704-6731.
Three Financial Mistakes That Can Substantially Affect Your Credit Score Rating By Ethel Wilson
Y
our present credit score rating is the result of every financial decision you have made in your life. Most of us have had very little or no financial coaching at all, so we have basically been winging it as we went along. We might have made many of our decisions based on good intentions, only to watch them fall flat because we lacked certain knowledge or planned poorly. We all make mistakes, but identifying them and understanding where we went wrong will help us to avoid repeating them. Following are some of the most common mistakes people make that could lead to a bad credit score rating.
Using Your Savings to Pay Off Debt Could Damage Your Credit Score Rating Many people think that by tapping into their retirement fund they have found a quick and easy way to pay off debt. They may believe that if the debt is costing them 15% interest and the retirement fund is making 5%, they will be pocketing the difference. Borrowing from a retirement fund can be a practical option, but only with the 10
December 2012
right mind set. It is easy to take or transfer money from an account, but paying it back is not so easily done. Usually when people pay off debt this way, after the pressure of the debt is removed, so too is the urgency to pay it back. It is tempting to continue along with the same financial habits, which could very easily lead to going into debt again, eventually wiping out your savings and having a negative effect on your credit score rating.
Not Having an Emergency Fund Could Damage Your Credit Score Rating Many of us have the “it won’t happen to me” mentality. Even if it does we think that we will “handle it somehow,” generally by relying on unused credit cards, taking out a loan, or using our savings. If you are living from paycheck to paycheck, a sudden emergency can result in disaster for you and your family. Financial planners recommend the standard of keeping an account that you can access quickly holding three months of expenses. Loss of employment or sudden changes in the economy could force you to use
credit, drain your savings, and suck you into a whirlpool of paying off debt with more debt, with disastrous consequences to your credit score rating.
Having No Insurance Could Damage Your Credit Score Rating Again this falls into the “it won’t happen to me category,” or the “chances are it’ll never happen and I’ll save more by not having insurance and pay cash if it does.” That’s fine if you have set up an account where you place the money you would normally pay for insurance in every month, but how many of us do that? The normal mentality is, “have cash, will spend.” None of us expect accidents or death, but they are a sad reality of life. Insurance protects those you love, providing for them in the event that the chief income earner is taken from them. Having no insurance places them in serious financial jeopardy,
and at extremely high risk of damaging their credit score rating because of the necessity of going into debt to survive financially. Although it takes a lifetime to build a good credit score rating, it can be irreparably damaged almost overnight. Even if your intentions are good, failing to execute could come back to haunt you. Don’t procrastinate – design and begin implementing a financial plan that will protect you, your family, and your credit score rating. Ethel Wilson is a financial and credit specialist with 12 years experience in the banking, credit scores, and financial industry. She has advised countless clients on how to improve their credit score rating. She shares the best of her credit score information as a contributor and editor of http://www. creditscoreresource.com.
How we see it
TheNicheReport.com
11
Bank of America Accused of Loan Servicing Mistakes By brian mahany
W
hen we first learned that a federal lawsuit had been filed against Bank of America in Newark, New Jersey, we were not particularly surprised. America’s largest bank long ago ceased to make news when accused of fraud. Unless the accusations are really sensational or large – last month’s billion-dollar False Claims Act cases certainly qualify – suits against Bank of America aren’t that newsworthy anymore. Like the Death Star in Star Wars, the nation’s biggest banks simply believe they are too big to fail. We believe they have become too big to care. The newest lawsuit is a little different; it was brought by another mortgage company. American Financial Resources says it contracted with Countrywide Mortgage to service approximately $2 billion in residential loans. Now they claim that Bank of America botched the job. (Bank of America acquired Countrywide after the 2007 financial meltdown.) According to the complaint, BOA failed at just about everything they were paid to do. This includes failing to process HAMP (Home Affordable Modification Program) modification requests, failing to maintain proper records, failing to mail certain notices to borrowers required by law, failing to make good-faith efforts to resolve disputes and failing to comply with the National Housing Act. Any person who has been on the wrong end of a Bank of America foreclosure probably has encountered one or more of these problems. 12
December 2012
In a rare glimpse into the servicing world, American Financial Resources says that the amount of servicing fee monies paid to Bank of America increases by 300 to 600% once a loan is more than 60 days past due. The complaint accuses Bank of America of intentionally allowing homeowners to become seriously past due in order to collect additional fees. That, of course, flies in the face of their contractual obligation to make a good faith effort to resolve homeowner disputes. Individual homeowners face a tough battle when taking on big banks. It’s nice to know that homeowners are not alone. This complaint demonstrates that other lenders are also having similar issues. Bank of America is one of the largest loan servicers in the country and processes payments and provides other services to thousands of other lenders and mortgage pools. Perhaps if enough other lenders join forces, Bank of America and the other large loan servicers will begin to focus more on quality control. The complaint was filed on November 16th. No response has yet been filed by Bank of America. About the author. Brian Mahany is a lawyer specializing in lender liability issues. He represents both individuals and industry whistleblowers. Brian welcomes comments and questions and can be reached through his law firm’s website, http://www.mahanyertl.com or by telephone at (414) 7046731.
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Bank Lending Still Tight: Investors Earn 9% Lending on Real Estate By Corey Ann Curwick
L
ooking for a low-risk place to park your cash and earn a nice return? Rates aren’t moving up anytime soon, and the Fed said it will keep short-term rates near zero until 2014. Savings accounts are paying from 0.2 percent to 1.05 percent. Money market deposit accounts are paying 1.25 percent while high-yield, internet checking accounts are paying 2-3 percent. CDs are offering 1.85 percent, while World Currency CDs can earn you returns as high as 3 to 4 percent. With the rate of inflation, how can any of these options be counted as a return? This is why so many investors put their money into stocks. It seems better to gamble for a higher return than to put your cash into such low-yield options. But many people aren’t aware of the returns available in trust deed investing. Trust deed investing is essentially making a loan on real estate, or acting as the bank. The safest trust deeds are paying between 7-9 percent, while riskier trust deeds pay higher rates of return. This may sound risky if you don’t know real estate, but investing in stocks and investing in trust deeds have some strong similarities. For both stock and trust deed investing, a good broker is essential. For example with stocks, unless you know fundamentals and study companies yourself, you won’t make money. This is why having a good stockbroker is essential if you don’t live and breathe stocks. With trust deed investing, you are making loans on real estate and earning a return like a bank would. If you haven’t studied real estate, similar to investing in stocks, 14
December 2012
you need a good broker to make money at trust deed investing. Many hedge funds are taking advantage of the wave of foreclosures by doing trust deed investing – in other words, by making loans to real estate investors. Because bank lending remains tight, particularly on distressed properties, there has been a tremendous need for real estate loans. Hedge fund managers have identified this opportunity and are making real estate loans, charging higher interest rates than a bank. Because bank lending will continue to be tight for the next several years, trust deed investors will continue to be a vital source of funds for both real estate investors and businesses. By leveraging the know-how and the experience of both real estate investors and savvy loan brokers, trust deed investors will be able to earn low-risk returns as high as 9 percent, collateralized by deeply discounted real estate assets. Corey Ann Curwick is a private money consultant for Private Money Utah, a real estate lender based in Salt Lake City, Utah. Corey is from Austin, Texas and is an MBA Graduate of the prestigious Thunderbird School of International Management. An authority in the private money lending industry, Corey provides educational resources for investors who use hard money loans in their real estate investing activities. Before she joined Private Money Utah, Corey was the President of an investment education company in Utah called Bray-Conn Investments LLC. In this role, Corey organized classes, which taught investors how to invest in five asset classes. In her free time, Corey enjoys skiing, snowboarding, and mountain biking in the beautiful Utah outdoors.
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The Road to
2015
Recovery on the horizon: Real Estate by the Numbers By Rick Roque
A
t the time the previous edition of The Niche Report was published, we didn’t know who was going to be elected President. Now we know – President Obama has won reelection. As stated in last month’s edition, regarding policies that affect the housing market, there was little difference between Mitt Romney’s plan to bolster the housing market versus President Obama’s. The indirect policies related to economic growth and federal regulations from the Consumer Financial Protection Bureau (CFPB) are the clouds that loom over an already struggling economic
recovery. But once again, Mitt Romney, the Republican challenger to President Obama, did not provide a clear difference in what he actually would do to alleviate this malaise over the economy. He spoke furiously how he would reform the CFPB and Dodd Frank, but little was actually stated regarding how, and what the impact would be. As a result, many of us in the housing markets were left scratching our heads wanting to see a difference – and, in the end, not really perceiving that there would be all that much.
But More Uncertainty Looms. And this is the good news…. Now that we know who the President is (Obama), the major issue is the Fiscal Cliff. By the printing of the next publication (January 2013), we will know if we drove off this cliff or if we stopped at its edge with a congressional deal on taxes. While politicians play economic roulette, we are trying to support consumers as they attempt to refinance their homes or move. The 2013 real estate housing forecast remains cautiously optimistic; however, a rapid expansion of this market segment isn’t likely until after 2015. Creditqualifying requirements for consumers remain very challenging, and with a lagging economy, it will take several years – into 2015 – before we experience meaningful growth. This is the opinion of many economists, Kenneth Rosen of U.C. Berkeley and Bill Witte of Indiana University’s Kelley School of Business to name two, who are both optimistic but offer only “lukewarm” optimism for 2013. Terms like ‘underachieve’, ‘unambitious’ and ‘unfortunate’ lace the optimism for 2013. And given what the housing market has gone through since 2009, this is good news. The market will continue to grow, albeit slowly, but it will continue to grow out of the recessionary malaise the market has been under given the excess inventory, price of oil, and instability in Europe (and now the Middle East) – not to mention the economy that continues to frustrate those looking for employment. “What we expect is more of the same in the coming year,” said panel member Bill Witte, associate professor emeritus of economics. “[But] housing is a bright spot. ... And the second bright spot is the energy sector. We’ve got oil and gas production booming for shale areas. North Dakota has an unemployment rate of 3 percent.” This should be a good economic model for our public policy makers: if we focus on growing the economy with strong private sector growth, the housing market will quickly grow right along with it. The fiscal cliff debate, which will initiate both budget cuts and tax increases in January unless otherwise negotiated, could seriously impede economic growth. All told, economists expect the fiscal cliff to drain approximately $600 billion from the economy. The Fiscal Cliff will initiate a number of changes, including a jump in capital gains taxes; tax rate increases in the top four brackets to 39.6 percent (from 35 percent), 36 percent (from 33 percent), 31 percent (from 28 percent), or 28 percent (from
25 percent); and 28 million more taxpayers will be subject to the alternative minimum tax . New Medicare taxes will kick in for 2013 for high-income taxpayers under the Patient Protection and Affordable Care Act ("Obamacare"). Married couples with adjusted gross incomes over $250,000, and singles with AGIs over $200,000, will face a 0.9 percent increase in the current Medicare tax and a 3.8 percent tax on investment income. All taxpayers who itemize will also face more restrictive limits on deductions for medical expenses. A payroll tax holiday that has reduced workers' share of Social Security taxes from 6.2 percent to 4.2 percent for the last two years is set to expire at the end of 2012. That tax break has provided workers with an average of about $1,000 a year in extra cash, Reuters said. At the state level, in California the newly passed Proposition 30 will raise the sales tax for everyone from 7.25 percent to 7.5 percent, and also raise income taxes for those earning more than $250,000 a year. This would be another shot in the gut of an already exhaling economy, with little backwind to keep things moving. If that cliff is avoided, however, the economy will expand by about 2.5 percent next year – better than 2012’s 1.7 percent to date. Improvements should be seen in household spending, the housing market and the government sector.
Some Economists Bullish on Housing Recovery Home prices will see steady increases through 2016 starting this year, according to a quarterly survey of more than 100 economists, real estate experts and investment strategists. The survey, conducted by research and consulting firm Pulsenomics LLC on behalf of real estate search and valuation portal Zillow between Aug. 30 and Sept. 14, 2012, asked 113 participants to project the path of the S&P/Case-Shiller U.S. National Home Price Index over the next five years. The latest S&P/Case-Shiller Home Price Indices, which include data through June, show national home prices up 1.2 percent from a year ago during the second quarter. All of the markets in the S&P/Case-Shiller 20-city composite posted annual gains for the second month in a row, and all but two – Charlotte and Dallas – posted better annual returns in June compared to May. The results were optimistic, and anticipated further home price appreciation and a modest increase through 2016. Economists now forecast home prices will rise 2.3 percent in 2012 from fourth-quarter 2011, and see further TheNicheReport.com
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cumulative rises of 4.7 percent in 2013, 8 percent in 2014, 11.4 percent in 2015, and 15.2 percent in 2016.That's an expected annual growth rate of 2.9 percent between 2012 and 2016, slightly under the 3.6 percent annual growth rate experienced in the pre-bubble years between 1987 and 1999. There was a meaningful spread across economists that ranged from 0.3 percent growth to an optimistic 4.4 percent per year. “This spread in the opinions both reflects the uncertainty and how it isn’t evidenced in the data that a genuine recovery has taken root,” said Stan Humphries, Zillow’s Chief Economist. It is important to note the growing optimism among economists, however. Not since 2010 have we seen this number of professionals bullish on our recovery, and the housing numbers support this optimism.
Real Estate by the Numbers: The 2015 Tunnel Ahead Supporting this optimism is a solid 6 percent overall construction increase, while pessimists yearn for the “good old days.” For those who have adjusted to the recessionary
‘new normal’, 2013 will reflect a growing trend. Let’s be honest, however. This growth trend is not the surge of the 1990’s, nor the growth experienced in the early 2000 decade. Many economists expect to be at 2005 levels of housing starts (1.3M) around 2016 or beyond. For many in the housing market whose average age is 56 years old for Realtors and 57 for Mortgage Bankers, this is a challenge. For those who are under 50, the market will present itself as a strong opportunity to capture market share and grow your business. So if you are 56 or 57, it is time to get in touch with your inner 40-year-old. If you are new to the market or perhaps just relatively young, it is time to think aggressively to take advantage of this opportunity. New housing sales will take several years to reach peak levels of over 1 million units after the plunge in 2010 to a paltry 250,000 units. This devastating drop seemed both irreparable and traumatic, leaving many builders to either go out of business or consolidate. With new housing starts at 400,000 units in September, a rise of 5.7% from August, optimism spread across all housing market segments. With inventory of foreclosed properties drying up, there is light
at the end of the 2015 tunnel – yes, 2015.
Home Builders Highlights Looking to 2013 As mentioned earlier, rising home prices spiked across the nation. The National Association of Home Builders naturally joins the chorus of a recovering, albeit slowly, economy. “We’re seeing a more robust housing sector than many other parts of the economy,” says NAHB Chief Economist David Crowe. “One of the reasons is we have finally begun to see on a national scale that house prices are picking up again.” Crowe cited a number of other factors that are carrying the housing momentum forward. These include:
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• Pent-up household formations • Rising consumer confidence • Increasing builder confidence in all three legs of the industry: remodeling, multifamily and single-family construction • Growing rental demand • More than 100 metros currently on the NAHB/First American Improving Markets Index However, Crowe reiterated the cautionary factors weighing down the housing activity. To name a few: builders who are experiencing difficulties in obtaining production credit, qualified buyers who are unable to obtain mortgage loans, inaccurate appraisals, seriously delinquent mortgages that are at least 90 days late or in foreclosure, and a limited inventory of developed lots in certain markets. NAHB is forecasting a 21 percent increase in singlefamily starts this year to 528,000 units, and a further 26 percent climb to 665,000 units in 2013. The housing market and the push for new construction will assist in the overall employment makeup of the country looking toward 2015. Mark Zandi, chief economist for Moody’s Analytics, forecasts that GDP growth will be in the 2 percent range this year and next, and “double that growth closer to 4 percent in 2014 and 2015.” At the same time, he expects job growth to increase from 2 million per year to closer to 3 million in 2014 and 2015. “A big part of this optimism is the housing market,” says Zandi. “I expect 1.1 million total housing starts in 2013, 1.7 million to 1.8 million in 2014 and over 1.8 million in 2015.” While this is the most opportunistic view shared by economists, it is driven by the Federal
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Reserve’s role in keeping mortgages rates low through 2015, and a very optimistic assumption that banks will take advantage of near-zero lending rates from the ‘window’, and turn this around to broadening qualifying requirements. Banks, however, are still recovering from losses from the bust, so it is unlikely that this will occur. It is the opinion of this writer that this will diminish Zandi’s forecast marginally; however what it presents is a possible forecast should the right public policy be put in place. With the regulatory landscape changing as much as it is, it is unlikely banks will be interested in reducing margins any time soon in order to wait for more certain business conditions (as opposed to market conditions). Zandi’s root assumption follows that credit will improve as well as private mortgage lending, which will help improve the job market environment. Whatever happens, one thing is certain: the housing recovery isn’t growing without a great deal of effort by policymakers, bankers and real estate agencies alike.
The Kitchen Sink & Credit Scores Just about everything has been thrown at the economy to get it moving. Through new regulations, HARP 1.0 and 2.0, various rounds of the Fed policy to reduce interest rates (known as Quantitative Easing), rock-bottom mortgage rates (through 2015), and down payment assistance programs at the state and federal levels, the housing market is still 30 percent of what it was in 2006. This is heavily influenced by 23 million potential workers being unemployed and a drop in household income and personal net worth, and an uncertain future for those employed. This is at the heart of both the optimism and the malaise in the housing markets. The good news is, the housing market is not a boom, but it is recovering. One area of improvement will be establishing more effective incentives, as previously mentioned, to encourage a broader ‘credit net’ for borrowers who have good jobs but marginal credit. The issue isn’t availability of loan programs; it is the availability of loans programs to those who can qualify for them.
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Restrictive credit criteria are suppressing home ownership, but this could be fixed with a proper understanding of the mortgage/banking industries. Over-regulation or forcing banks to accommodate this is not going to yield the intended results. Forty percent of borrowers can’t get loans, since the average consumer has a FICO of a 640 while the average FICO of the closed loan in October was 762. This is a significant disparity between what the market demands – because clearly homeownership is in the best interest of all consumers at proportionate levels of income – versus what the market will offer. The average FICO for FHA loans was approximately a 700 in this time period – still a significant disparity that could provide homeowners an opportunity to be more personally stable, which would improve consumer confidence. Despite little hope for improved credit availability, clearly this is an issue. If mortgage banks and depository institutions do not act in this direction, it will be yet another requirement imposed by state and federal governments. "Credit is not going to get a lot looser. This administration is not pro-homeownership. They are not homeowner advocates, they are renter advocates, because their constituency is largely in urban areas, which typically have a high share of renters,” Kenneth Rosen asserts. This is a powerful and yet true assessment of where the political and economic landscapes collide. FHA has done an effective job providing broader opportunities. However there are significant fiscal problems at FHA that will require a taxpayer bailout to address a $16.3 billion deficit. This will require a federal bailout, and rather than a private sector solution, the spiral will continue with further federal oversight and involvement in an already heavily regulated industry.
Morning Dawn or Evening Dusk The U.S. economy has demonstrated numerous signs of improvement in property values, home building and a leveling off of unemployment – at ‘new normal’ levels – but at least it isn’t any worse. Regardless of how terrible it is for this market researcher to put it in just this way, we are recovering, with some stated challenges on the horizon that can only make economists excited at the increased importance in being the soothsayer of economic growth. 2013 could lead to relatively strong job creation in the private sector, auto sales will be strong, home sales will continue to climb back, corporate profits and cash balances will remain high and rates are assured to be low through 22
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the next two years – these all paint an optimistic picture. The fiscal cliff, uncertainty in the Middle East (oil), the possible economic collapse of the European Union and the consequences of inevitable tax increases in the future will hang over this optimism. The challenge is that economists, business owners and consumers alike just don’t know what 2013 will bring. A breakdown in negotiations around the fiscal cliff could impact the Mortgage Debt Relief Act, which will consider mortgage debt forgiven in a short sale, foreclosure or loan modification as taxable income. This will prevent the purchase of excess inventory and have a trickle-down effect on already-struggling consumers. This will hurt the housing market as it will impact the amount of money consumers have in their pockets. How much it will hurt is uncertain. That is the ongoing theme – uncertainty. So, is the economic glass half full or half empty? We’ll see next month. Any questions or feedback on this article, email Rick Roque, Managing Editor of The NicheReport Real Estate Edition, at rroque@thenichereport.com or call him at 408.914.5895.
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Three Popular Lending Scams and How to Avoid Them By Corey Ann Curwick
F
or many real estate investors, it can be a challenge to identify the real lenders from the bogus lenders. Even savvy real estate investors can fall victim to lending scams. Here are three of the most popular scams in hard money lending and tips for steering clear of bogus lenders: 1. Many of you have seen the Upfront Fee Lending Scam. A hard money lender may approve your loan and then ask for a hefty upfront fee. Because even real lenders may sometimes charge an upfront fee, this is a tricky scam to avoid. If the upfront fee is more than $1,000, this can be a red flag. And always ask for references, or verify the lender has closed a loan with someone you trust. A real lender will happily provide multiple references for loans they have closed. 2. The 100% Financing Scam is everywhere. Some lenders claim to offer 100% financing if you buy a monthly membership, or if you pay a “deal review” fee. Rehab lenders will lend on the after-repair value of a property, but usually not more than 70% of the after-repair value. If a rehab lender is offering more than 70% of ARV (afterrepair value), this may be a sign that a lending scam is present. 3. Another common scam is the Bait and Switch Lending Scam. The lender promises low interest rate and fees to “bait” the borrower. Right before closing on the
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loan, the lender may “switch” the terms. Rather than risk losing a deal, some real estate investors are forced to accept the new loan terms at the last minute. Do your homework on the lender by searching on popular scam reporting sites such as Ripoffreport.com. Search for bad reviews about a lender on real estate forums and other mortgage-related websites. Real estate investors who have already experienced a bogus lender could save you time and money. Bottom line – if it seems too good to be true, it probably is. Please share your experiences with lending scams and your own advice for avoiding lending scams in today’s market.
Corey Ann Curwick is a private money consultant for Private Money Utah, a real estate lender based in Salt Lake City, Utah. Corey is from Austin, Texas and is an MBA Graduate of the prestigious Thunderbird School of International Management. An authority in the private money lending industry, Corey provides educational resources for investors who use hard money loans in their real estate investing activities. Before she joined Private Money Utah, Corey was the President of an investment education company in Utah called Bray-Conn Investments LLC. In this role, Corey organized classes, which taught investors how to invest in five asset classes. In her free time, Corey enjoys skiing, snowboarding, and mountain biking in the beautiful Utah outdoors.
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Three Steps to Developing a Focused Lead-Generating Web-Site By Ariel Dagan
A
ccording to the National Association of Realtors, 90 percent of buyers start their real estate search online. Another report from ActiveRain showed that less than 3 percent of agents’ business is actually coming from ‘personal websites.’ What gives? Why are so many agents having trouble generating leads from a platform that nine out of ten buyers are using to search for an agent? My guess is a lack of focus. Over the last three years I have built numerous niche sites focused around different neighborhoods of Manhattan. Each of them has generated over 100 leads per month for me, many of which turn into closed deals. In this article, I discuss three very easy steps to help you identify your niche, build a website around that niche, and effectively drive traffic that will result in conversion both online and offline.
Step One: Identify Your Niche What neighborhood, area or niche are you an expert in? You must pick one that’s not too broad and not too narrow in order to drive targeted traffic that converts. 26
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From my experience, the niche you choose should revolve around a sizable neighborhood where people are looking for property. How do you determine that people are looking for property in a certain area? A simple tool called Google Keyword Tool. Using this program you can enter a couple of neighborhoods into the search box followed by “Apartments” or “House” or “Retail Space” or “Commercial Space,” and click search. On the left hand side of the page you should click “[Exact Search].” This will tell you the exact number of people that are searching for a particular niche in your local district and globally. As a rule of thumb you should pick a niche that generally has 200 or more exact local searches. Anything less than 200 may be too narrow a market. After you have compiled a list of keyword phrases, enter them into GoDaddy or another domain registration tool to determine if the domain is available. If it’s available, buy it, and if it’s not, move onto the next keyword phrase.
Step Two: Plan First, Build Second There are two aspects to every website – design and functionality. The first step to building your website is to pick a design. There are numerous free or low-cost templates out there; you can run a search for ‘Website Templates’ to find some. Don’t get discouraged by the layout of these templates, as most of them can be changed. You want to pick one that has colors that match your brand. Step two is to build wireframes. A wireframe for a web developer is equivalent to a blueprint for a contractor. It’s a plan that shows them where the contact forms, text and images go. I suggest building your wireframes in PowerPoint using shapes and labels. On the bottom of each PowerPoint page, in the notes section, you want to include instructions. For example, if you have included a menu bar, the shape in the slide should say “Menu Bar,” and in the notes section it should say: “Menu Bar – should be on every page and linked to the following pages in this order: ‘Home’, ‘About’, ‘Contact Us’.” This tells the developer the purpose and functionality of each shape. Once you have picked your template and have your wireframes built, you should post a job description with both of them attached onto Odesk.com, eLance.com or Rentacoder.com. Hire someone who speaks English well and has Skype. Try to get an update once a week from this person. Also, build the site on a content management system that has an easy-to-use backend system such as WordPress. Step Three: Ramping Up For Conversion If you think once you build your site that clients will just come, you’re mistaken. Optimizing for conversion is a two-step process. You need to be thinking about it during the development of your site and once it’s completed. When you are designing your wireframe you should be
thinking about your calls to action. Every page on the site should have a unique phone number and a form to capture a user’s information. However, there needs to be a reason why the user would fill out that form or why they will call you. What do they get in exchange for filling out the form – an address to a property? Access to closed sales data? A floor plan? It’s up to you, but think carefully about the contact forms. Think of them as an exchange – what do they get in exchange for giving you their information? Now in terms of driving traffic, the first thing you want to do is find a list of local directories such as Yelp, Yahoo Local, and Google Places and enter your site’s information into them. If you name your website after a keyword phrase that starts with a neighborhood followed by ‘apartments’ or ‘house’ and that keyword phrase gets a decent amount of traffic on Google (which you already checked for in the previous step), you can expect it to get a decent amount of traffic off these local directories as well. This will in turn drive traffic to your site. It will also increase your Google rankings in the search results for that particular keyword phrase. The few neighborhood websites I have built have cost me between $200 - $1,000 each, but they have all converted one or more deals per month. If you are serious about becoming a neighborhood expert, having a focused neighborhood website will become a new standard. Ariel Dagan is a Licensed Salesperson at Keller Williams NYC. Over the last few years, he has developed numerous niche websites revolving around specific neighborhoods of Manhattan to generate leads for both apartment rentals and sales. This has led him to become an expert in Upper East Side Apartments, with a strong focus on Park Avenue and 5th Avenue apartments. He can be reached at adagan@kwnyc.com or 212 836 8700.
California’s Homeowner Bill of Rights By mitchell reed sussman
C
alifornia, which has been called the “epicenter” of the foreclosure and mortgage crisis by Attorney General Kamala Harris, was one of the states hardest hit by the economic meltdown and real estate crash brought on by the latest financial crisis. According to a recent report, in 2011, seven of the nation’s ten cities hardest hit by foreclosure were in California. All told, in the last three years with California suffering from a prolonged real estate slump, more than one million California homes were lost to foreclosure. Not just in the foreclosure pipeline, but lost. Moreover, while parts of the California real estate market are recovering, statewide there are an additional 700,000 properties currently in various stages of the foreclosure process. To help stem the wave of foreclosures, on July 11, 2012, California enacted into law a “Homeowner Bill of Rights” for the purpose of aiding embattled homeowners and bring fairness, accountability and transparency to the state’s foreclosure process. Some of its key provisions include the ban on “dual tracking,” a practice whereby a lender on one hand gives the illusion of working with the borrower to secure a modification, and at the same time is foreclosing. Needless 28
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to say, many homeowners are lulled into a false sense of security by such a practice, thinking they will get a modification, when in reality the bank wants to do nothing more than foreclose and take the home. The dual tracking ban set forth in the statute would prohibit a mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent from recording a notice of default or notice of sale or conducting a trustee's sale while a complete loan modification application is pending on a first lien mortgage or deed of trust secured by residential real property not exceeding four dwelling units that is owneroccupied. In addition, mortgage servicers will be required to designate a “single point of contact” for borrowers who are potentially eligible for a loan modification. The new law requires the single point of contact to be responsible for coordinating the flow of documentation between borrower and mortgage servicer, and be knowledgeable about the borrower’s status and foreclosure prevention alternatives. The new law also establishes procedures to be followed in connection with a modification application on a loan secured by a first lien. There are also procedures that must
be followed in connection with the denial of an application, and most importantly they provide for a borrower's right to appeal a denial. The enforcement provisions of the Bill of Rights authorize a borrower who is forced to litigate with his/her lender to seek an injunction and damages for violations of certain of the provisions described above. Under its provisions, for the first time in the state of California, a homeowner will be able to secure injunctive relief without having to cure arrears or post expensive bonds. In addition to injunctive relief, California’s Homeowner Bill of Rights authorizes the greater of treble actual damages or $50,000 in statutory damages if a violation of certain provisions of the law is found to be intentional, reckless or resulting from willful misconduct. Prevailing borrowers may also receive attorneys' fees. Other changes include revisions to the notice provisions of Trustee’s Sales. Formerly, a Trustee’s Sale could be continued for as much as a year without providing written notice of the continued date to the borrower. Under the new law, once foreclosure begins, if a Trustee’s Sale date is postponed, the new law requires that written notice be given to the borrower after the postponement in order to advise the borrower of any new sale date and time. California’s Homeowners Bill of Rights legislation is effective January 1, 2013, and can be found in the recent amendments and additions to the California Civil Code Sections relating to mortgages. (See: Civil Code 2920.5, 2923.4, 2923.5, 2924, 2923.6, 2923.7, 2923.55, 2924.9, 2924.10, 2924.11, 2924.12, 2924.15, 2924.17, 2924.18, 2924.19 and 2924.20) This is an article by attorney Mitchell Reed Sussman. Mitchell is a California real estate attorney specializing in real estate, foreclosure and bankruptcy. His website is http://www. losangelesrealestateattorney.com/.
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Five Tips for Reducing Your Property Tax Assessment By Jerry Davidson
I
nvesting in income-producing property can be the single most rewarding aspect of getting into real estate. Yet, it also comes with some significant responsibilities including mortgages, maintenance and property taxes. In some cases, annual property taxes can be astronomical for high dollar-value properties and regions where the housing market is popular. Additionally, there are some regions where property tax assessments are not handled well, leaving real estate investors and homeowners paying far more than the properties are actually worth. The good news is that there are some ways to reduce your property tax assessment significantly, to offset the costs of ownership. Learn how to deal with property tax assessments the smart way, and reduce their impact on your bottom line.
Avoid Outside Property Enhancements When property tax assessors start their inspections, 30
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generally in the spring and summer months, they are given some basic guidelines. These are generally focused on the outward appearance and structure of properties. In some cases, tax assessors will merely drive by properties and note any changes, such as home upgrades, additions, swimming pools and outlying buildings and improvements. If you must make a change, limit your home improvements to the interior of your property or the backyard.
Request Your Property and Tax Record It’s a little known fact that any property owner can request copies of their tax records at any time of the year, even for multiple years. It’s important to do this periodically to check on any spikes in tax rates stemming from a poorly conducted assessment or misinformation. To obtain copies of your tax and property records, simply visit your town planning board and request them. You may have to pay a small administrative fee, but it’s worth it to be in the know.
Research Comparable Community Properties As a property owner, you also have the right to know what similar homes and lots are being assessed for taxes each year in your community. This can be researched by visiting your county public records office, sometimes available on the Internet. Look up properties that are comparable to your own home(s) by street address. If you see major differences in the amounts you are paying vs. other similar homes, it’s time to find out why. Walk with the Property Assessor Some homeowners dread the tax assessor’s visit, while others embrace this as a chance to find out what he or she is looking for during the walk-through. While the tax assessor has a specific set of guidelines for conducting a walk-through, particularly on a new or rehabbed property, you can walk along to learn more. It’s better to answer the tax assessor’s questions on the spot than leave things to
conjecture, a factor that can help you save money on your taxes.
Appeal Discrepancies in Your Tax Bill Each year, be sure to review your property tax bill closely to make sure there are no errors. Look for any problems in the measurements, location, property value, or structures of your home and lot. If your tax bill seems a lot higher than last year’s bill, there is likely a problem in the way it was assessed. Take the time to legally appeal your property tax bill and see if you can get it adjusted to the correct amount due. Jerry Davidson has been writing about real estate for several years. When he’s not writing, you can find Jerry reviewing residential, commercial and rapid roll doors for home improvement companies in Chicago.
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Hard Lesson for a Real Estate Investor Who Bought a “Meth House” By Corey ann Curwick
M
ost real estate investors are requiring meth tests on a house before buying it. Once a property is declared a “meth house,” most buyers will flee. However, some real estate investors voluntarily take these houses because they know how to get rid of the traces of meth. Make sure you know what you’re doing when you take one on. Here is a lesson from a real estate investor who bought a meth house. It was back in August of 2012 and Teddy Jamison knew the house he was buying had a history of meth. The Realtor said he could have someone remove the meth inside the house for a good price. So Teddy bought it and spent $2,500 to clean it. Teddy had no experience with meth properties at that time. After the rehab on the house was completed, the meth was removed and the property went under contract. Unfortunately the buyer’s inspection came back positive for meth. Of course the Realtor said he was not responsible; the meth cleaner that Teddy hired also said he was not responsible. So Teddy lost the buyer and ended up spending another $5,000 to hire a licensed guy to remove the meth again. But why did the first cleaning not remove the meth from the house? The first guy only used duct cleaner to clean the air duct and the furnace; he did not use bleach to scrub the walls and other surfaces. So when the rehab was underway, the meth that was attached to the wall became dust as they knocked down the dry wall. The “meth dust” was absorbed 32
December 2012
by the air intake into the furnace, went back into the air duct, and then blew out everywhere inside the house. After the licensed guy cleaned the house, lots of paint was peeled off and every surface had water damage, because he used a cleaning solution to scrub every square inch of the house. This is the right way to take care of a meth problem. And most important – you want to do this type of cleaning before you do any rehab on the house. Also, make sure you test every single room after the meth cleaning, including the garage, before you go ahead and start the rehab on the house. The lesson that this real estate investor learned about meth houses? Always ask the seller to clean out the meth, or ask them for a $5,000 price reduction so you can hire a professional to clean it right. After the meth cleaning, don’t start the rehab on a meth house until you’ve tested every room and the garage. Corey Ann Curwick is a private money consultant for Private Money Utah, a real estate lender based in Salt Lake City, Utah. Corey is from Austin, Texas and is an MBA Graduate of the prestigious Thunderbird School of International Management. An authority in the private money lending industry, Corey provides educational resources for investors who use hard money loans in their real estate investing activities. Before she joined Private Money Utah, Corey was the President of an investment education company in Utah called Bray-Conn Investments LLC. In this role, Corey organized classes, which taught investors how to invest in five asset classes. In her free time, Corey enjoys skiing, snowboarding, and mountain biking in the beautiful Utah outdoors.
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LENDER AND RESOURCE DIRECTORY
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LENDER AND RESOURCE DIRECTORY
Pillar To Post Professional Home Inspection Leading home inspection company, whose professional inspectors work with both the real estate community and the buyer or seller of a home to provide on-the-spot inspection reports. www.pillartopost.com Jay Gregg, Director of Marketing 416-620-3567 jay.gregg@pillartopost.com
PrimeSource Mortgage Publically Traded Retail Mortgage Lender. www.WeWalkYouHome.Com Jeff Smith 888-505-2274 jsmith@wewalkyouhome.com
Primary Residential Mortgage We offer strength, trust, and integrity you can rely on. www.primaryresidentialmortgage.com 800-255-2792 36
December 2012
Marsh U.S. Consumer, a service of Seabury & Smith, Inc. The nation’s leading broker and administrator of insurance programs. www.realproeando.com 866-795-9613 realproeando@marshpm.com
Right Side Marketing Marketing Materials for Real Estate and Mortgage Professionals. www.rightsidemarketing.com Jill Fleischman 800-456-4395 x10 jill@rightsidemarketing.com
Smarter Agent, LLC Smarter Agent Mobile Real Estate Application Platform. www.smarteragent.com 888-486-7319 gomobile@smarteragent.com
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cannot be used as a deduction. This has been more of a problem since the 2008 recession, when the housing market crashed. 7) If you’re having a tough time calculating your taxes, there is plenty of tax software and worksheets out there that can help you once your taxes are due. IRS Publication 523 – Selling Your Home, makes these all readily available. 8) Individuals or couples with two homes can exclude gains from only one of the residences. Even if both homes are occupied a portion of the year, one must be designated as the main home. Only a gain on the sale of the main home can be excluded from taxes on gains. If the other home is sold and a gain results, then no deductions are allowed. Again, this is the “one house per year” rule of thumb. 9) If a first-time homebuyer credit has been received, there are special rules concerning the tax implications of gains. Again, IRS Publication 523 addresses these concerns.
These credits help the young, first-time homebuyer buy a house and were put into place to help stimulate the real estate market. 10) Anyone who moves must be sure to update their address with the IRS. They should use Form 8822 to do this. If the IRS doesn’t have your new address, you might be sent a letter of notice. If you can’t receive that letter, you could be in trouble. Although all information about taxable real estate gains is readily available from the IRS, real estate professionals should frequently update their knowledge about this subject to ensure they are following everything according to the books.
Jana Olson, founder of Olson Tax Consulting, LLC, is an experienced attorney in Denver, Colorado who helps businesses and individuals resolve IRS tax problems.
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Ten IRS Tax Rules Every Real Estate Agent Should Know BY jana olson
R
eal estate can be a tricky business, especially when it comes to taxes and following tax law. Of course, those problems can be avoided if you have a basic understanding of the tax code and how it relates to real estate. Issues can especially arise for people contemplating selling their home. The gains from that sale, because it’s a primary residence, may be fully or partially excluded from your income. Real estate professionals need to be aware of the following 10 important tips. 1) If, during any five-year period, an individual has owned and used their home as a main residence for a period of at least two years, any gain from the sale can be excluded from income. If it has only been a partial residence, it won’t qualify. 2) If a main residence is sold, $250,000 of the individual gain, or $500,000 of the joint gain, may be
excluded from income. This of course depends on the other factors covered in this article. 3) If an individual has sold another home during the two-year period prior to the date of the current home, they will not be eligible for the full tax exclusion. You will be eligible for a partial return, however. One simple rule of thumb: sell only one home per year if at all possible. 4) If all of the gain can be legally excluded, it is not necessary to report the sale of the home on a tax return. This is good because it won’t raise any red flags with the IRS if you sold it for a lucrative price. 5) If a gain cannot be excluded, however, it does need to be reported on Form 1040, Schedule D, and taxes will apply to that gain. It’s not the best situation, but it’s the law. If you ignore it, you’re risking being audited by the IRS. 6) Obviously, a loss from the sale of a main home - continued on page 37
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December 2012
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