Wednesday, October 31, 2012

Why Purchase Property under an LLC?

There are several reasons to purchase property under an LLC as opposed to your real name.  Many people use LLCs to purchase property in order to hide their identity.  A recent article in The Wall Street Journal by Alyssa Abkowitz points out the fact that “when set up properly” deals constructed under legal entities are “virtually untraceable.”  The article went on to state that in the last year 27% of U.S. homes that sold for over $5 million were bought by LLCs.  That number drops off significantly as the sales price decreases.   Given the difficult economic times over the last few years, many buyers of expensive properties want to hide their true identities to avoid the potential for negative publicity over extravagant purchases.  There are other advantages to using an LLC that the average person can take advantage of when purchasing property. 

Protection from Personal Liability

The article explains that one of the key protections offered by an LLC is the legal protection from claims against you personally that arise out of the property.  The prime example being if someone is injured while on your property, the person would have to sue the LLC as the property owner and not you personally.  Your personal assets are protected from such a claim as long as the LLC is set up correctly.  It is wise to use an attorney to set up an LLC for real estate purposes to ensure that you are protected.   The liability advantage is used by a full spectrum of real property owners.  Large investors who hold extensive portfolios of residential and commercial rental space utilize the LLC to avoid potentially devastating lawsuits arising from any one of their many tenants.  Families who own a vacation home that doubles as a rental income generator utilize the liability protection to make sure a careless spring break renter does not come after their personal assets over an injury that occurred at the home.  This protection gives more individuals the peace of mind to own rental properties because they know that their liability is limited to the LLC’s holdings and insurance policies.     

Taxes Advantages

LLCs have “pass-through taxation.”  Any profit or loss associated with the property is passed through the LLC and onto the individuals who own the LLC.  These individuals report the gains or losses on their personal tax returns thus providing opportunities for additional tax advantages.  The capital gains tax rate is lower on a single-owner LLC than on other entities according to David Hryck, an international tax expert quoted in the article.  So if you use property for rental income or other investment purposes, it is to your financial advantage to do so under an LLC.

“Funnel” Expenses through the Entity

With any property, there are expenses to pay.  A member of the LLC can funnel property related expenses through the entity.  This is helpful for tax purposes as well as maintaining the financial independence of the LLC from the individuals.  Expenses like maintenance, homeowner-association fees, taxes and utilities should be paid from the LLC’s account.  You want the LLC to operate as an independent entity and not be too closely tied to you personally or you might lose some of the legal protections afforded an LLC.

What are the Disadvantages?

Not every purchase is eligible for an LLC.  Lenders have different rules for loans given to LLCs versus private individuals.  In some instances, the rates and required down payments are higher for an LLC loan versus a private loan.  Some lenders go as far as not allowing buyers to finance certain types of purchases through an LLC.  There are also certain filing requirements associated with LLCs that must be complied with each year.  Different states have different regulations regarding annual reporting fees and taxes so you should consult with an experienced real estate attorney to ensure proper compliance.

Buying through an LLC is not for everyone, but more real property buyers and owners could benefit by utilizing the advantages offered by this option.  The housing market presents multiple challenges for investors or buyers of all budgets so it is important to know all of your options that might lead to increased success.

See Our Related Blog Posts:
Turning the Corner on the Housing Market
The Anatomy of a Foreclosure

Friday, October 26, 2012

Be Wary of Cement Blocks Disguised As Rescue Floats

In one of our previous blog posts, we wrote about the Hardest Hit program that helps people with temporary assistance to avoid foreclosure.  That post talks about keeping a bad day from getting worse, but today we are reporting about scams that do the opposite.  An article in the Chicago Tribune entitled “Foreclosure rescue scams add insult to injury” highlights the trouble a growing number of distressed homeowners are facing--foreclosure rescue scams.

Foreclosure activity continues to grow in Illinois at a rate higher than the rest of the county.  The three month period ending in September saw a 31 percent increase in foreclosure activity over the same period in 2011 according to the article.  The government is reaching out to homeowners not yet in foreclosure through various programs like the Hardest Hit program while at the same time scam artists are reaching out to the same segment of the population.

Types of Foreclosure Rescue Scams

Fraudsters implement a number of schemes to defraud property owners who are on the verge of foreclosure and are looking for a way out.  Loan Modification programs can in some instances be legitimate means for an individual to avoid foreclosure.  However, certain scams promise lower monthly payments as part of the loan modification agreement.  However they may also include stiff penalties for any late or missed payments, automatic payment increases after a certain period of time and other contractual provisions virtually assuring that the property owner will end up right back in default.  Lease-buyback plans give the owner the right to lease their home from the new holder of the title.  The lease payments are supposed to count towards what will hopefully be the eventual buyback.  These plans may include high lease payments that individuals are not able to pay as well as high buyback prices that the owner cannot afford thus losing the property after all.  Renegotiating Consulting Services offer to help individuals renegotiate their current loan for a fee.  Be wary of the consulting firms who demand partial payment upfront.  Individuals reported forking over fees to these “firms” and then never hearing from them again.  In some instances, the firms instructed the individuals to stop making any payments until they heard back from the consulting firm so by the time the property owner realizes they have been scammed, they are even deeper into default.        

How Prevalent are these Foreclosure Rescue Scams?

According to the article in the Tribune, if the national rate of reported suspicious activity continues for the rest of the year at the pace it did during the first half of 2012, the total 2012 rate could be up 70 percent from 2011.  As the housing market lags in various parts of the country, real estate brokers, lending institutions and other financial services involved in real estate transactions look for new ways to make a profit.  Unfortunately a number of the individuals at these businesses find that property owners on the doorstep of foreclosure are desperate for help and tend to drop their guard when the possibility of a rescue comes up.  This situation is primed for fraud.  The sophisticated fraudsters hide the fee increases and triggers for automatic foreclosure deep in the language of the contracts thus bolstering their position that they are not breaking the law.  This reemphasizes the need for an experienced real estate attorney who will be able to effectively explain the pros and cons of signing on to a loan modification or consulting contract.

The silver lining to this news is that the increase in reports is due in part to a heightened awareness of these schemes by the public.  Property owners also see other people being scammed and are thus less embarrassed to report their own misfortune.  Groups investigating the fraudulent scams have more evidence to work with and can effectively spot and stop new scams based on their knowledge of previous schemes.

There are signs of improvement in the housing market, but foreclosure rescue scams continue to keep many property owners in the depths of foreclosure.  If you suspect that you may be caught up in one of these schemes, do not hesitate to contact our office in Oak Park to avoid additional financial harm.

Friday, October 19, 2012

What is a Deed In Lieu of Foreclosure?

Many people have heard the term “Deed in Lieu of foreclosure” or “Deed in Lieu” for short.  A quick polling would most likely reveal that the majority of people think that a deed in lieu simply means that you turn over the deed to your house to your lender and the lender goes away.  In short, those people would be correct to a certain extent.  However, a deed in lieu situation has multiple parts to it that require the advice and services of a real estate attorney.  If not handled correctly, the deed in lieu will not accomplish the goal of eliminating your financial liability in relation to your property.

Why the Deed in Lieu Option?

The deed in lieu should be considered for individuals who:
·      Are behind on mortgage payments
·      Owe more on the home than it is worth
·      Are facing a long-term hardship (a “hardship” must be proven)
·      Are unable to sell their home
·      Can no longer make mortgage payments
·      Are unable to refinance

Who is Eligible and how does a Deed in Lieu Work?

Not everyone can go through the deed in lieu process.  The lender must qualify you through some eligibility process.  The lender’s qualification process involves them determining the value of the property versus the amount you still owe.  The lender will also review your situation to analyze the “hardship” that you claim has led to you seeking a deed in lieu.  The lender might require you to put the property on the market for a period of time before accepting a deed in lieu.  If you can short sale your home, then lenders would prefer to go that route.   If you are unable to sell the home and you meet the lender’s qualifications, then you must vacate the home and leave the home in good condition.  Different lenders and areas have different expected time periods for completion of the deed in lieu process, but many say that 90 days is about the average.   Do not be surprised if your case takes longer or shorter than 90 days.

What are the Advantages to a Deed in Lieu?

The deed in lieu offers many attractive advantages as opposed to foreclosure.
·      Avoid the negative impact on your credit that a foreclosure would cause
·      Begin repairing your credit more quickly than you would after foreclosure
·      Completely eliminate or reduce your mortgage debt
·      Potentially qualify for relocation assistance through certain lender programs
·      Avoid handling the sale of your property; hand over the deed and the lender takes over
·      May qualify for a Fannie Mae mortgage sooner than if you went through foreclosure

What are the Disadvantages to a Deed in Lieu?
There are some disadvantages to this process for you to consider.  Lenders might not be willing to accept a deed in lieu.  Many lenders might already be sitting on piles of real estate where they would rather have cash.  The last thing they want is another distressed property to try and deal with.  You may not qualify for a deed in lieu if you have a home equity loan, multiple mortgages or certain liens against your property.   You will take a hit to your credit score so you have to be prepared for that.   You may also be forced to pay taxes on the amount of the deficiency that was wiped away by the deed in lieu.  The Mortgage Debt Relief Act of 2007 addresses this problem for now by giving tax exemptions up to a certain amount for qualified individuals, but this might not last.

As with any situation dealing with distressed property, you should consult with an attorney experienced in dealing with short sales, foreclosures and other real estate transactions so you are fully aware of the impact the deed in lieu will have on your financial well being.

See Our Related Blog Posts:
Bank of America Pays for Short Sales
The Anatomy of a Foreclosure

Thursday, October 18, 2012

Turning the Corner on the Housing Market?

JPMorgan Chase & Co. and Wells Fargo & Co. reported double-digit quarterly earnings this past Friday which has some experts declaring that we are finally seeing a turnaround in the housing market according to a recent article in the Los Angeles Times.  JPMorgan Chase and Wells Fargo are the two largest home lenders in the United States.  The “big jump in profits” as reported in the Los Angeles Times was due largely to a surge in both banks’ mortgages businesses.

The increase in mortgage business is due largely to interest rates dropping to historic lows.   Low interest rates are helping with new purchases, but are mostly driving people to refinance their existing properties.  The article pointed out that refinancing existing mortgages is not as helpful to the housing market as new purchases, but the numbers are “eye-catching” none the less.

By The Numbers 
These “eye-catching” numbers are quite remarkable.  JPMorgan and Wells Fargo control nearly half of the nation’s mortgage volume so their numbers are a wide reflection on the housing market.  Between July and September of 2011, Wells Fargo issued $89 billion in mortgages.  During that same period in 2012, Wells Fargo issued $139 billion in mortgages.  JPMorgan went from issuing $37 billion last year to $47 billion this year during that same July through September time period.  Wells Fargo also reported that mortgage business revenue increased to $2.8 billion in the third quarter as compared to last year’s third quarter earnings of $1.8 billion.  JPMorgan’s mortgage business increased from $1.4 billion a year ago to $2.4 billion in the third quarter of 2012.

Both banks beat any expectations or projections from Wall Street on their third quarter profits with JPMorgan posting a $5.7 billion profit and Wells Fargo posting a $3.94 billion profit.

Now that is a lot of numbers to process, but a key number to remember that is driving those numbers is 3.4%; the rate on a 30 year fixed loan.  It was 4.1% in 2011 and over 6% in 2008.  The takeaway from all those statistics is that the two banks who came out of the housing market as the two strongest banks in the country are finally reporting big positive housing numbers.  The refinancing aspect of the statistics puts a little damper on the celebration, but as mentioned earlier, the numbers are still impressive.

Foreclosures and other Rain Clouds
Despite these positive numbers, top executives from both banks acknowledge there is still room for improvement.  Both banks expect to deal with foreclosures and the high costs associated with default related situations for years to come.  Both banks continue to set aside large sums of money strictly earmarked for loan defaults and litigation expenses related to defaults.   Wells Fargo is also facing accusations that it defrauded the Federal Housing Administration out of “hundreds of millions of dollars by wrongly certifying that loans were good enough to be insured by the FHA” reports the article.  JPMorgan also faces legal issues regarding mortgage bonds sold by Bear Stearns, the bank purchased by JPMorgan.   Despite lingering legal issues with both banks, the positive numbers was the big headline.

The Larger Impact   
The article points out that economists predict that “any lift” in the housing market sends positive ripples throughout the economy as a whole.  Home sales are on the rise as are the prices.  Consumer spending increases as people have extra cash on hand due to refinancing at lower rates.  Consumer and builder confidence increases and pulls the rest of the economy with them.

See Our Related Blog Posts:
The Tax Man is Circling the Block
Hardest Hit Program Keeps a Bad Day from Getting Worse

Sunday, October 14, 2012

What is Title Insurance?

Closings costs can sometimes make or break a real estate transaction.  Both parties have agreed to a sales price, but then the closing statement is sent to everyone and all of the sudden a conflict arises.  The seller is not walking away with as much money as he or she thought she would.  The buyer is now over budget.  The buyer starts going over the closing statement and sees the bill for Title Insurance.  “I have insurance on the home and I even have additional insurance for my mortgage, so what is title insurance?” an individual might ask.  The short answer is that it is one of the most important items on the closing statement.   A buyer needs title insurance whether he is buying through a regular process, short sale or foreclosure.
Many real estate buyers do not understand completely what title insurance is and why it is important.

What is Title Insurance and What does it do?

Title insurance protects buyers from issues that might arise with a piece of property having clear title.  Clear title means that the seller owns the property and no other parties have a valid legal claim of ownership.  This might seem like a simple concept.  The seller has the deed and holds himself out to the public as the owner of the property.  He lives there and has lived there for many years.  No problem right?  Well, maybe.  What if there is an easement across the property?  What if the seller actually owns the property as a partner with another person?  These types of restrictions are found in a title search.  Without the title search and title insurance, a buyer might find himself owning a piece of property that he has only limited access to or that is subject to restrictions on how he uses it.

Title insurance provides assurance that the title company that performed the search and issued the policy will stand behind you if an issue arises with the title.  The title company will provide monetary relief for the policy holder as well as legal defenses if needed.

The short answer; title insurance assures the buyer that they are buying what they think they are buying.

What does a Title Insurance Policy Cover?

A title insurance policy will typically cover title issues such as:
-      Third party interests in the property
-      Third party rights such as leases or options that affect the title
-      Forgery related to the deed or associated documents
-      Errors or omissions in the deed
-      Errors in the examination of records
-      Recorded liens
-      Easements on the land
-      Recorded rights that encumber your usage
There are additional items that are covered depending on the homeowner’s policy.  There are also certain items not covered by a title insurance policy so it is important to review the policy and its guidelines with your closing attorney.

What does a Title Insurance Policy Cost?
Title Insurance is a one-time premium paid at closing.  There are no renewal premiums to pay.  The policy is usually handled by the closing attorney or lender.  The costs vary depending on the local customs and fees of the particular area where you are purchasing property.  It is important to review the policy and its costs with your closing attorney or real estate agent prior to closing.

Title Insurance takes up one line on a closing statement, but it can have a huge impact if a title issue arises.  Our Oak Park real estate attorneys strive to ensure that our clients understand every aspect of the real estate transaction to avoid any mistakes or confusion.  Policies differ in coverage and cost so it is important to discuss your particular policy with your closing attorney.  Title Insurance might not be a catchy topic, but you cannot do without it.

See Our Related Blog Posts:
Hardest Hit Program Keeps a Bad Day from Getting Worse
The Anatomy of a Foreclosure

Wednesday, October 3, 2012

Illinois Now Leading the Way in Foreclosure Rate

The numbers are in.  Illinois had the highest foreclosure rate in the U.S. last month as reported in a recent article in Businessweek.  RealtyTrac Inc., a California based company that tracks data on foreclosure numbers across the U.S. reported that 17,781 properties in Illinois received a “filing of default, auction or repossession in August.”  This number is “up 42 percent from a year earlier and the eighth straight monthly increase on an annual basis” according to RealtyTrac Inc.

How Does Illinois Compare to Other States and Their Foreclosure Rates?

The U.S. national average rate of foreclosure filings per household was one in every 681 households.  The rate in Illinois was one in every 298.  Other states report that foreclosure filings are decreasing with only a 1% increase in filings in August from the previous month.  Now contrast that with Illinois which saw foreclosure filings climb 29% over the previous month.  Foreclosure filings will most likely increase “each month in 2012 and break the record set in October 2009 as lenders release a backlog or repossessed properties” explains the article.  Buyers understand that since the market has not improved, many lenders are holding off on releasing properties until prices start to rise.  The lenders and sellers do not want to sell at the bottom and buyers do not want to buy if the market is still on the way down.  So the situation is not going to improve until the lenders release the foreclosures and buyers start purchasing homes to flush the distressed properties through the system.  Add to that the fact that property values in the Chicago area have declined every month on a year-over-year basis since May 2007.

Illinois is a judicial foreclosure state meaning the courts must oversee the process and ultimately decide the outcome of the foreclosure proceedings.  The national average length of time it takes a bank to complete the foreclosure process is 378 days.  The Illinois average time is 647 days.  This lag in process time continues to compound the recovery problem.    

Why are Foreclosure Filings Increasing in Illinois?   

The lag in process time and reluctance of lenders to release properties may not directly increase the number of filings, but those factors drag out the process and give the impression that there is not an end in sight to the foreclosure crisis in Illinois.  Another huge factor leading to the increase in filings is the increase in job losses over the last couple of months.  The unemployment rate rose to 8.9% in July from 8.7% in June.   The Businessweek article sites the work of Bob Tomarelli, a U.S. economist at IHS Global Insight Inc., an economic forecasting firm.  Tomarelli attributes the increase in unemployment rate to the “shrinking manufacturing base and public-sector job losses.”  The combination of buyer uncertainty over the declining values and an increase in unemployment rate means the market will continue to decline and thus lead to more foreclosure filings. 

Another factor the article points to is the fact that Illinois real estate does not attract the numbers and types of investors that states like Florida or Arizona attract.  Investors looking for second homes or retirement properties are not likely to purchase a foreclosure in Illinois.  However, certain investment groups do see the value in purchasing properties in Illinois to renovate and rent to long term tenants.  This might be a bit of a silver lining to this bad news. 

Opportunities Amidst Foreclosures

Waypoint Real Estate Group, LLC is a real estate investment group that is “bullish” on the Illinois real estate market.  Waypoint and similar companies see the value in buying homes that have lost 50% or more of their value, renovating them, and then leasing them out to long term tenants.  Many of the very people filing for foreclosure end up needing a place to live so the rental market these companies hope will strengthen.            

Our attorneys are skilled in not only foreclosure defense, but real estate law as well.  If you are a homeowner facing possible foreclosure, then we can discuss your options to either contest foreclosure or make it through the process as painless as possible.  Our experience will come in handy to individuals needing advice on how to handle a myriad of questions surrounding every real estate transaction. 

See Our Related Blog Posts:   

Monday, October 1, 2012

Bank of America Pays for Short Sales

If you have a mortgage that is owned and serviced by Bank of America, there is a new program where this bank is now paying up to $30,000 in relocation assistance for homeowners who are looking to short sale their homes. This program also includes non-owner occupied properties.

A short sale is where you get approval from your bank to sell your home for less than what you owe on the mortgage while at the same time being forgiven for any deficiency between the sale price and the amount you owe. It has been a very successful and popular solution with homeowners who are seeking to get out of underwater homes and want to do so without a foreclosure on their credit record.

How To Qualify for Relocation Assistance

To qualify for the relocation assistance payments, the seller his or her short sale attorney and/or realtor must work proactively with the bank to obtain a pre-approved sales price prior to submitting a purchase offer to the bank.

This is why it is so important to work with an experienced real estate attorney to make sure you qualify under this and other programs that are currently active to assist homeowners in closing on a short sale. There is also a federal tax break program set to expire on December 31, 2012 that a homeowner should be aware of when moving forward on a short sale. See a full report here: “Time is Running Out on Short Sale Tax Break”.

Timing of the Short Sale

A short sale must be initiated by the end of this year and close by September 26, 2013 to be eligible for payment under the bank of America initiative.  Qualifying short sales already approved but not closed yet may also be eligible for the relocation assistance.

The amount of assistance that you may be entitled to under the new program will be determined on a case by case basis using a calculation that includes the value of the home, amount owed on it as well as other considerations of your particular circumstances.