Yearly Archives: 2014

Mortgage Debt Forgiveness Act extended thru 2014

Both the House and the Senate finally agreed to pass an extension  of the Mortgage Debt Forgiveness Act.

It expired at the end of 2013.

But now that it is revived, those homeowners whose primary residences were foreclosed or short sold during 2014 will NOT have to pay income tax on the difference between the mortgage balance that was unpaid and the market value of the property.


Update to Real Estate Disclosure Form

On January 1, 2015, the Illinois Residential Real Property Disclosure form will be changed.

The words ” windows and doors” will be added to question 6.

So, sellers will have to disclose any known defects to windows and doors. These changes are the result of a case where the court held that leaking windows and doors were not included in the definition of walls, and thus the seller had no obligation to disclose defective conditions involving windows and doors.

Mold & Radon: Scourges of real estate sellers

If I was looking to start a new business, I would get into the mold and radon game. Those guys are busier than sin and they have a captive market: Home sellers in the middle of a contract.

It used to be that about 5-10% of home buyers did radon tests. But home inspectors must have gotten discounted memberships to the National Society to Eradicate Radon in Our Lifetime. Now, about 70% of buyers do radon tests. Well more than half of the radon tests flunk. The seller has to install a radon mitigation system for about $1200.00. That consists of capping the sump pump pit and using a small fan to push all of the radon gas through a pvc tube outside. Radon has a standard of 4.0 pcl or less. Anything higher than that has to be mitigated (brought down to under 4.0).

Those same inspectors are crawling into the attics of homes and finding boatloads of mold on the plywood sheathing. The mold appears because bathroom fans were vented into attics and over many years, mold grew. If mold is found, then the seller has to have a mold remediator get rid of the mold. That costs between $1200.00 and $3000.00. The mold remediation business has grown tremendously in the past few years. I wrote this post in 2004 saying that mold problems were increasing, so this is not an overnight occurrence, but  since then they have exploded.

Mold is found by the home inspector by simply looking at the plywood in the attic of a house and if there is mold there is a dark staining on it. There are two approaches to mold remediation once it is found:

1. An Industrial Hygenist (who is paid about $400-$500) tests the mold then draws up a remediation plan for a mold remediator (other than the hygenist) to work on.

2. A mold consultant comes in and does NOT test the mold, but just removes it all.

Most sellers taking the route described in number 2. Many times the mold will not be harmful or will be in a small area. Since the parties are in the middle of a real estate contract (and there are people who could get sued) everyone takes a scorched earth, remove every spec of mold approach.

I see little to no testing done.  My opinion is that air quality testing is a waste of money. I was surprised that the Illinois Department of Public Health has NO STANDARDS for mold testing and does not recommend testing the mold or the air at all. So why is everyone freaking out and removing all this mold? I’m not sure, but buyers want the mold gone, so that’s what happens. The unlucky seller whose buyer gets a flunking radon test and a flunking mold test will be out of pocket $2500.00 or more before he knows what hit him.

Here are some mold remediators that I have seen on files:

Mold Solutions

Indoor Air Repair

Mold 911

Alliance Restoration 

Appraisals coming in short this spring

appraisalLast week, I had 6 properties appraise for less than the contract sales price. It ‘s not real fun when this happens. No news is good news when it comes to appraisals, but when I get an email with an appraisal attached I know things are about to come unglued.

Seller’s instant reaction = “I am getting scr**** by the buyer’s lender and I am NOT cutting the sales price.” The seller’s  second stress induced reaction is “I’m going to “fight the appraisal” (good luck with that, tiger).

Buyer’s instant reaction = “I can’t believe I overpaid for the casa of my dreams and I hope the seller doesn’t cancel the contract.”

Fortunately, the amount by which these properties under appraised was between $5000.00 and $14,000.00 and the parities were all sensible. All of them were resolved without tanking. Half of them “met in the middle” and for the other half, the seller reduced the price to the appraised price.

Usually when a property appraises low, I estimate that about 75% of the time the end result is that the seller cuts the price to the appraised price. If the appraisal is for an FHA loan, the seller will be stuck with that appraisal for 1 year even if the contract cancels (and a new FHA buyer comes in).

I find that it is nearly impossible to “contest” the appraisal. Appraisers rarely change the result of an appraisal. There is supposed to be no way to communicate directly with the appraiser. I find that when the parties try to contest the appraisal that 2 to 3 weeks are wasted while the loan processing comes to standstill and closing is delayed.

The spring market has been very fast moving with multiple offers on many homes within a day or two the listing hitting the internet. I’ve seen a lot of contracts at or over list price. Sellers are getting more for than they expected in some cases and there are not the comparable sales to support the appraisals.

If you are a buyer be sure to add an appraisal contingency to the contract. The mortgage contingency will act like an appraisal contingency unless you are putting a ton of money (50%) down and then it won’t work and you need a separate appraisal contingency. If you are a seller, just be aware that selling for list price is cool, but it may be cut after the appraiser trots through.

Explosive or easy: How to make a Living Trust your IRA beneficiary

IRAIf you talk to enough people about making a living trust the beneficiary of an IRA, you will get a lot of strange looks.  They’ll say: “Oh…. you should NEVER do that.” It is possible to make a living trust the beneficiary of an IRA. It’s really not an exotic, edgy move. But you do have to be careful.

First, if a client’s kids are adults and the client’s kids are reasonably mentally and financially competent, then 98% of the time we just make them direct beneficiaries of the IRA.  But there are times you might want a living trust as beneficiary, for instance:

1. If you have minor kids (under 18)
2. If a beneficiary of the trust is on social security disability or is disabled.
3. The beneficiary is a financial maniac or spendthrift.

To name a trust as beneficiary of an IRA, the trust must meet the IRS trust rules. If not, the trust will have to withdraw all of the funds from the IRA within 5 years from the date of the IRA owner’s death. Since the whole point of an IRA is to defer income tax, it’s important to meet the trust rules, so that the IRA withdrawals can be spread over the life expectancy of the beneficiary. Good news: Almost all trusts that have no charitable beneficiaries meet the IRS trust rules. I am not going to bore you with these. Read more here if you are an absolute masochist and want to know more about the trust rules.

The wrong way to name a trust as IRA beneficiary

It does matter how one words the beneficiary form if you a going to make a trust the beneficiary. The lazy, easy way is just to name “Suzie Glutz Living Trust dated January 1, 2014” as 100% beneficiary. Then, on her death, the IRA will go to the trustee of the trust and the trustee can take distributions  from the IRA over the lifetime of the oldest beneficiary. The trustee, in turn pays out the IRA distributions from the trust to the beneficiaries or the trustee holds the distributions in the trust. The IRA has to be held as one big chunk, not as separate accounts for each beneficiary.

There are problems with this. The poor trustee will have to leave the trust open for years and will have to file trust tax returns for years. Beneficiaries don’t really like their funds commingled with other beneficiaries. They want their money now, damn it, and they don’t like it tied up with some trustee for years and worse yet, commingled with the other beneficiaries.

Let’s say you did a lazy, generic trust beneficiary designation like “Suzie Glutz Trustee of Suzie Glutz Living trust dated January 1, 2014” and the beneficiaries are rock, solid adults who don’t want the IRA held in trust. Some IRA custodians will let you distribute the IRA from the trust to the individuals even if there was a  lazy IRA beneficiary designation. This satisfies the beneficiaries because they have their own account. I have done this with Schwab, Vanguard, Fidelity and Edward Jones. However, some IRA custodians will balk at this and then you are stuck leaving the trust open for years or just tanking the IRA withdrawing all the funds from it and paying taxes on it.

The right way to name a trust as IRA beneficiary

The foolproof way to set up the IRA beneficiary designation is to specifically describe each share in the beneficiary designation form.  So instead of just writing “Suzie Glutz Living Trust” 100% on the the form, you would say this (assuming Suzie had two kids who were equal beneficiaries of the trust):

1. Separate share of Jane Glutz under Suzie Glutz Living Trust, 50%
2. Separate share of Pete Glutz under Suzie Glutz Living Trust 50%

If you fill out the beneficiary form this way, each child can have a separate share paid out over each child’s life expectancy. There is no danger of time-bombing the IRA and causing fast withdrawals over 5 years. Also, it will be much easier to convince the IRA custodian to distribute it out of the trust to the individual beneficiary if the trustee thinks that would be better.

Internet lenders: Take a pass

I love buying stuff online. Here’s some of the things I’ve bought on the internet recently: a living room couch, a rowing machine and a 10 speed road bike (fully assembled). I trust online buying and hardly ever have any problems.

The one thing I would NOT get online is a mortgage.

About 25% of the buyers that I see use an  internet lender. I specifically recommend against selecting a lender online when I describe the closing process to new buyers.

The advantage of getting a loan online is that the rate is usually pretty low.

There are many reasons not to get a mortgage online. First, almost every time the approval and closing process turns into a semi-nightmare.  With online lenders, there is no single responsible party who can answer questions and resolve issues. The online lenders use a team approach, but usually no one knows what is going on. Our Illinois closing process is kind of quirky compared to other states and funds need to be at closing when it starts, not 10 hours after closing. Online lenders often don’t wire the funds to closing under after the loan is ‘”funded” at closing rather than sending the funds before closing.

If you are near a computer, go ahead and google “best mortgage rate.” Near the top will be Quicken loans, and Lendingtree. Lendingtree takes you through a series of screens that ask you questions about the loan you are seeking and then suggests some lenders for you. Click here to read some reviews of Lendingtree. They are absolutely scathing. Same here for Quicken loans. Brutal reviews. There are many accusations of pulling credit reports without authorization and endless complaints about lack of communication. Many complain of constant spamming the minute they enter data on the site.

Go ahead and scan through them and I doubt that you will have a warm fuzzy feeling about internet lenders.

My recommendation is to pick a good, local lender referred by someone you trust. The online mortgage market is not ready for prime time. Do you really want to be a beta tester?

Help! I lost my living trust

lostI have a client who keeps his living trust  in his freezer. Oh, don’t worry, he says, “It’s in a plastic bag.” He knows where it is, but I don’t think his kids will ever find it because he’s super secretive.

Another client kept his trust in a large safe at home. Someone broke in and stole the entire safe-and his trust went bye-bye. I don’t think the thief was after his trust.

In the last few years, I’ve had  dozens of client lose their living trusts and other estate planning documents. It happens a lot. The trust is kept in a big binder that says “Estate Planning Portfolio” so it’s not super easy to lose. If a client loses a trust, we set up a time to have the client come in to sign a restatement of the trust, a new will and new power of attorneys. The restatement “becomes” the trust so having the original trust is not necessary once the restatement is signed.

You can get by with copies of a trust, a trust restatement, power of attorneys and living wills, but you ALWAYS need to keep track of your original pour-over will (or any will for that matter). Only original wills can be filed after a death, not copies. Any property left outside your trust can end going to different heirs than those named under your trust if you have no original will.

For about the last 8 years, I’ve kept a scanned copies of the trust, will, power of attorneys and living will and that helps a lot when a client loses their originals.

The best place to store a trust is to keep the originals at home and tell your successor trustee where it is kept. Also keep a copy online somewhere. Yahoo, google and dropbox are all good for this.

I don’t recommend keeping a trust in a safe deposit box. The boxes are too hard to get into after a death and are a complete hassle most of the time. It’s okay to put a trust or will in a safe deposit box if you have a child or your successor trustee  as signers on the box and they can get entry to it. Otherwise, it’s a waste.

RIP: Illinois short sales

The year 2014 is here and short sales are the year’s first casualty. They are dead on arrival. Gone, done. The final nails in the coffin were the expiration of the Mortgage Debt Forgiveness Act (MDFA) and the sudden increase in deficiency judgments in Illinois during late 2013.

Now, I recommend short sales to almost no one.  Three reasons you should NOT do a short sale.

  1. Deficiency Judgment may be entered. To get a short sale approved you generally have to be behind on payments. Once you stop making payments and try a short sale, there is a 50% chance that it will close. If it does not close, it will end up being foreclosed and there is a strong possibility that a personal deficiency judgment will be entered against you. Not fun.
  1. You will get a taxable 1099 EVEN if the short sale closes. Many, many short sales do not close and end up as foreclosures. If you are foreclosed upon, there will be a 1099 issued even if the property was your primary residence. The MDFA expires on December 31, 2013 and this means that tax is owed on the 1099 issued after a short sale. Why would you do a short sale if you have a huge tax bill on the back end? Due to the 1099, it makes no sense to do a short sale (unless you are insolvent.
  1. Process is too difficult. I closed a lot of short sales in 2013. We became pretty good at getting some of them approved, but we still lost quite a few. The process is even worse now. Many lenders “service release” a mortgage to a new lender in the middle of a short sale. It seems that the new lender is almost always Bayview Loan Servicing. That means you get to start the short sale over again. Bayview has a crazy process and requires that it “net” 95% of the broker price opinion (BPO) amount. Considering the real estate commission is 6%, how are they supposed to net 95%? The buyer has to agree to pay more than the BPO for the closing to happen. If they net less than that, Bayview requires that the property be listed, which is an online auction site. The chances of closing one of these is slim.

The Chicago Sun Times had a nugget yesterday that 25% of Chicago area homes are deeply underwater. What are these people supposed to do now? With the death of short sales, there are two options: Stay in the home until the value increases or file bankruptcy.


Illinois deficiency judgment update

Deficiency judgments are still being entered in Illinois. Two more clients had judgments of around $50,000.00 each entered in the last two weeks. Oddly, the mainstream media has ignored this, probably because it is a confusing topic.

Before 2013, your chances of having a deficiency judgment entered were slim to none. Half way through 2013, we started to see deficiency judgments entered frequently. My unofficial, unscientific estimate is that there is about a 50% chance of having a deficiency judgment entered against you in an Illinois foreclosure now.

What happens after the deficiency judgment is entered?

In one case, the lender sent a letter asking for payment of about 5% of the judgment amount for a full release. This was a tremendous deal and the client just paid it. I hope that we see a lot of these settlement offers. In several cases, the client has heard nothing from the lender. This does not mean the judgment will just go away.

If a client does not settle, we have to assume that the lenders will place the judgment with a collection attorney and that the client will receive a “citation to discover.” This is served by the sheriff and the client has to go to court to tell what his/her income is and what assets the client owns. The purpose of this is so that the creditor can garnish the wages or take non-exempt assets from the client to pay the judgment So far, I have not had this happen to any client after a deficiency judgment was entered, but that does NOT mean it won’t happen. A judgment is good for 7 years, so time is on the lender’s side.

Can I be arrested due to the deficiency judgment?

No, debtor’s prison, popular in merry olde England, doesn’t exist here. Charles Dickens Dad spent a long time in Marshalsea debtor’s prison, which was the basis for Little Dorrit, a great book/movie. You will not be arrested. The only way that could happen is if you don’t show up to court after you were served a “citation to discover.” The judge has the authority to issue a warrant for your arrest if you are a no-show, so be sure to appear in court.

Will bankruptcy get rid of a deficiency judgment?

Yes, in fact, most clients have filed for chapter 7 to eliminate the deficiency judgment. This knocks out the judgment altogether. The filing fee in a chapter 7 is $306 and attorney’s fees are about $1000.00 so this is a very cost-effective way to solve the problem. If the client has a high income or the assets are over the exemption amount ($4,000.00 of non-IRA assets like checking/savings is exempt, $2400 for a car is exempt) then they have to file a chapter 13, which is more expensive and requires the client to make payments back to the lender over a period of either 3 or 5 years. If payments are completed in a chapter 13, then the judgment is vaporized. Filing a chapter 13 after a deficiency judgment is more involved and expensive than a chapter 7, but it stops collection efforts by the lender and it is the last defense if chapter 7 or a settlement are not possible.

Will I still get a 1099 if a deficiency is entered?

No, you won’t get a 1099. If the lender gets a deficiency judgment, there will be no 1099 (for the difference between the value of the property and what was owed the lender). Note: There WILL be a 1099 if you settle the judgment for less than the face amount without filing bankruptcy.

Will the deficiency judgment hurt my credit?

Yes. Like any other judgment, it will drag down your credit score until it is removed by bankruptcy, payment or settlement.