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Category Archive: ‘Short Sales’

Moonbeam Vetoes Debt-Tax Relief

brown reagan

Will short-sale agents disclose the tax? Trivia: Jerry Brown’s first term as governor followed Reagan’s last:

Legislation that would have protected homeowners from being taxed on “phantom income” after losing their homes has been vetoed by Gov. Edmund Gerald Brown Jr.

State income tax law generally defines cancelled debt as a form of income. Under current law, those who foreclose on their homes are not taxed, but those who negotiate a short sale with their lender, or re-finance their home, are taxed by the state.

Without the legislation to exclude cancelled debt, many Californians are essentially taxed on money they never received.

The sponsor of the legislation, Cathleen Galgiani, D-Stockton, says she plans to reintroduce the bill at for the 2017-2018 sessions and plans to pursue the policy through the budget process as well.

Will agents disclose?

Posted by on Sep 14, 2016 in Jim's Take on the Market, Short Sales, Short Selling | 0 comments

Debt-Tax Relief Gets Another Chance


With the difficulty the state politicians had in reaching an agreement – and it’s not done yet, Moonbeam still has to sign it – this will probably be the last chance for over-encumbered homeowners to short-sell and avoid taxation on their debt relief.

With less than four months left in 2016, maybe we will see a surge?

A bill giving state tax relief to California homeowners who received modifications of their underwater mortgages, or engaged in short sales, was revived and enacted in the final moments of the state legislative session Wednesday night.

After passing the Senate, the measure, Senate Bill 907, had been held in the Assembly Appropriations Committee earlier in the month, a non-action that is considered tantamount to death.

However, the bill suddenly popped up and was passed on the Assembly floor very late Wednesday, then sent to Gov. Jerry Brown by the Senate just moments before the midnight deadline for the 2015-16 legislative session to end.

While the federal government has exempted paper income from mortgage modifications and short sales – which mushroomed during and after the Great Recession – from income taxes, the state has only sporadically followed suit.

The Legislature approved a series of state tax exemptions for mortgage deals prior to 2014, but Brown vetoed a measure that would have extended tax relief to 2014 and 2015 income, citing the loss of state revenue.

If signed by Brown – not a certainty – SB 907 will allow tax exemptions for 2014, 2015 and 2016 and affected taxpayers can file modified returns for the first two years. The state would lose an estimated $152 million in income tax revenue.

Read more here:

This was the best short-sale value I saw over the weekendLINK


Posted by on Sep 6, 2016 in CA Homeowners Bill of Rights, Jim's Take on the Market, Short Sales, Short Selling | 0 comments

California Mortgage-Debt Tax Relief


California used to lead the nation in exempting mortgage-debt relief from taxation.  But the latest extension of that law was defeated, leaving short-sellers and those being foreclosed in a prickly position – do they hang in there now?

The reason the bill died is because Jerry Brown and other state politicians want to reap the additional tax – but these beleaguered folks can’t or won’t pay it and will have to hang on to their over-encumbered properties.

Senate Bill 907, which had won unanimous approval of the state Senate, died in just a few seconds last week, and that angers Peggy Spatz.

She and her husband, George, took out a $150,000 second mortgage on their modest suburban Sacramento home 11 years ago, only to see home values and their retirement investments crash in the Great Recession that struck shortly thereafter.

They, like millions of other Californians with underwater homes, eventually negotiated a settlement with their lender to write down the loan, only to learn that the canceled debt was what’s called “a taxable event.”

Congress had declared that loan write-downs, short sales and other forms of mortgage relief would be free of federal income taxes. The California Legislature and then-Gov. Arnold Schwarzenegger followed suit for several years, extending relief through 2013.

However, when Jerry Brown returned to the governorship, facing an immense budget deficit, he refused to continue the tax exemption for any relief actions since 2013, last year vetoing a bill that would have added two years to the window. It created, a Senate staff analysis said, “a fine mess.”

Brown said the state budget “has remained precariously balanced (and) I cannot support providing additional credits that will make balancing the state’s budget even more difficult.”

SB 907, carried by Sen. Cathleen Galgiani, D-Manteca, would have extended the tax break through 2016. She represents a region hardest hit by the housing meltdown and during one hearing cited her own underwater mortgage.

“Many years later, it still isn’t worth what I paid for it,” said Galgiani, adding that many Californians are in the same situation and “for us to hit them a second time is unconscionable.”

The Spatzes hoped that with the Senate’s passage and a heavyweight list of supporters, including Attorney General Kamala Harris and real estate and banking lobbies, it would at least get to Brown’s desk.

In anticipation, they wrote a letter to Brown, laying out their experience and concluding, “This letter is written by two people, but there are hundreds of thousands of us. Please don’t turn your back on us.”

SB 907 never made it to Brown. Although it also won unanimous support in the Assembly Revenue and Taxation Committee, it was placed on the Assembly Appropriation Committee’s “suspense file” because of its cost – an estimated $95 million in lost revenue during its first year and $57 million in the next two years.

Last week, the appropriations chairwoman, Lorena Gonzalez, announced the fate of dozens of Senate bills, spending just a few seconds on each. SB 907, she said, would not be sent to the Assembly floor.

As is the custom, no reason for its demise was offered. But it probably had something to do with its heavy cost, more than 10 percent of the total for bills on the suspense file, and the strong likelihood that Brown would have vetoed it, as he had done in 2015.

“The thing that breaks my heart is that people aren’t marching in the street,” Peggy Spatz said after learning of Gonzalez’s decree. “I’m a bitter person at this point.”

Posted by on Aug 18, 2016 in Foreclosures, Jim's Take on the Market, Short Sales, Short Selling | 4 comments

Short-Sale Fraud


The new guy named Jeremy wandered into the discussion about short-sale fraud the other day, and found that long-time readers here don’t take kindly to scams – and scammers.  But we’ve seen how short-sale fraud has run unabated, and that it has practically become a badge of honor among realtors. Nobody in the industry is motivated to stop it either.

Here are a few examples:

  1. At the top of the last article, Jeremy’s friends were filing notices that mortgages were paid off when they weren’t, which is outright fraud. But the second half of the article mentioned the typical example of short-sale fraud, where a straw buyer purchases the property at a below-market price, and then spoons it to a waiting buyer who pays retail. The banks who got shorted on the first sale might have caught the fraud with better appraisals, or if they just had a strict policy. I’ll never forget the one case where the perpetrator caught wind of his own story here on the blog and left a his comment. He said they included in their contract to flip the house immediately to the shorted bank.  They then flipped their short-sale buy on the SAME DAY to a retail buyer for a $100,000+ profit.  If the banks have knowledge and turn their head, then it’s on them.
  2. A short-sale that’s fully furnished. The seller makes the furniture sale mandatory so he can squeeze some cash out of the deal – he sells the ‘furniture’ to the buyer for $50,000 to $100,000 outside of escrow, in exchange to agreeing to a low-ish sales price for the house.  Usually these are cash sales only.
  3.  Listing agent twists seller’s arm to take his buyer, rather than one of the two higher cash offers.  I turned this one into VP of Fraud at the Bank of America, who said that because the lower price was still within their acceptable range, he’d let it go.
  4.  There were the investors who approached naive listing agents and insisted on negotiating their own deal with the bank.  If they could get the price approved low enough to flip immediately, they’d complete the purchase.
  5.  Both short sale and REO investors engage in ‘reverse staging’ to make a property appear in worse condition than it is, including the removal of kitchen-cabinet doors, garbage left lying around the home, and sometimes old fish hidden behind refrigerators to create pungent scents.  Sometimes BPOs include false property stigmas such as high crime rates, or claim the home was a meth lab that would need to be entirely gutted.
  6.  Parents buying their child’s over-encumbered house as a short-sale.  A favorite among realtors themselves.

Thankfully most of these are in the rear-view mirror!

Posted by on Mar 24, 2016 in Fraud, Jim's Take on the Market, Scams, Short Sales, Short Selling | 8 comments

Local Fraudsters Sentenced


They nailed these guys for fraud….but only 18 months in jail?  This is more than your standard short-sale fraud, and I’m surprised this doesn’t happen more often.  They just sent in a forged bank reconveyance showing that the mortgage had been paid (when it wasn’t), and then sold the property.

Link to story

A Carlsbad real estate broker and his brother were sentenced Monday to prison terms for their roles in a fraudulent “debt elimination” scheme that purported to eliminate the mortgages on several million-dollar homes in Del Mar, La Jolla and San Diego.

U.S. District Judge John Houston sentenced Adel Afkarian, 43, of Carlsbad, to 18 months in custody and Atef Afkarian, 41, of Slidell, Louisiana, to 13 months. In addition to the time in custody, the brothers were both ordered to pay more than $5.5 million in restitution to the victims of the scheme.

To implement the scheme, the Afkarians identified underwater homeowners — including themselves — and began a process to make it appear as though the homeowners’ debts had been satisfied.

To do so, they recorded fraudulent deeds that purported to extinguish the large mortgage loans encumbering each property.

Working through entities known as The Better Mortgage Company and Elite Coast Realty, the defendants then sold the properties to innocent purchasers, deceiving the buyers into paying the full purchase price to the Afkarians or their co-conspirators. The mortgage lenders, unaware of the fraudulent documents recorded on title or unable to prevent the sale in time, were left unpaid.

With regard to their own underwater home, the Afkarians pretended that $1.4 million in mortgage debt had vanished, prosecutors said.

The defendants used the “debt elimination” method to successfully arrange the fraudulent sale of four properties, generating more than $4.3 million in proceeds which went directly into bank accounts of the brothers and their co-conspirators.

In some cases, the brothers sold the fraudulent “debt elimination” program to existing clients of their mortgage business, according to prosecutors.

In addition to the “debt elimination” scheme, the Afkarians also conspired to arrange fraudulent short sales for underwater clients through a simultaneous “double escrow” scheme.

Rather than selling an underwater home at a pre-approved short sale price, the defendants arranged two simultaneous sales of the same property at two sale prices, using a straw buyer as the intermediary and purported seller in the second transaction.

That way, the short sale lender would believe that the property was being sold for the initial first escrow price, rather than the higher second escrow price. The defendants and their co-conspirators would then pocket the difference, diverting money from the lenders.

The Afkarians each pleaded guilty in September 2013. As part of their pleas, they also agreed to forfeit a home on Santa Fe Canyon Place in Torrey Santa Fe, which they had purchased using about $715,000 in proceeds from the fraud, and an additional $388,000 recovered from bank accounts where they had transferred proceeds.

Posted by on Mar 22, 2016 in Fraud, Jim's Take on the Market, Short Sales | 11 comments

Potentially Distasteful?


Because California has been exempted by the IRS from their debt-tax on short sales, we should still see more of them in the coming months and years.  They tend to be shady – here’s how a case in Nevada turned out:

An excerpt:

Harcourts was one of the Northern Nevada companies identified by a Reno Gazette-Journal investigation last year for engaging in quick-listed, dual agency short sales. The deals allow the same agents or firms to earn multiple commissions on the same property by representing both the buyer and the seller — at times “triple dipping” and earning a third or even fourth commission by being involved in the property’s resale as well.

The practice also allows a pre-arranged buyer or investor to purchase the property far below fair value by blocking other offers for the property, which go pending with an approved offer the moment they are listed on the market. This allows an investor to resell the property just a few weeks or months later at huge profit, with some examples posting more than $100,000 in appreciation during the resale.

“What we pursued was gross negligence based on fiduciary duty … to represent the interests of all parties involved,” said Jonathan “JD” Decker, Nevada Real Estate Division administrator. “In this case, all parties include the seller, buyer and the mortgage lender.”

According to the defense, the primary interest of the seller is to sell a property quickly to avoid a harder hit on their credit rating from foreclosure. Since the seller is losing the property, it does not matter if the house is sold at a lower price to a prearranged buyer. By failing to get the best offer, however, Decker’s team said that the deals did not fairly serve the interests of the mortgage lender.

During the hearing on Wednesday, the defense countered that courts have ruled that the lender and homeowner are adversarial so the broker cannot represent both their interests. Instead, banks need to do their own due diligence to ensure a distressed property is being sold for the best price possible.

“You could call what was going on potentially distasteful,” Decker said. “But (the commission decided) that it did not come down to being illegal or in violation of statute.”

Posted by on Jan 8, 2015 in Fraud, Short Sales, Short Selling | 1 comment

REO Listings Skyrocket

I hope the headline porn grabbed you! 😆

REO listings have increased lately around NSDCC, though they are still a small fraction of the overall marketplace (there have been 2,238 detached-home sales closed this year between Carlsbad and La Jolla).

The short-sale listings coming to market haven’t changed much all year, which would be the first place you would see the effect of mortgage servicers getting tougher with deadbeats:

Type of Listing
Jan 1 – June 30
July 1 – present

This guy borrowed $3.75 million to do a spectacular remodel on this Del Mar home (the house with the glass-bottom pool), but he wasn’t going to give it away.  The original list price was $6,750,000 in October, 2013, and dropped to $5,950,000 before getting foreclosed in June. The bank promptly listed for $5,495,000, and sold it for $5,210,000 last month:

There is some hope that lenders and servicers are increasing the flow now that prices are so much higher than before, and it would make sense that they would cherry-pick the properties on which they could make a profit.

But no flood of notices yet:

San Diego County Filings

Posted by on Oct 12, 2014 in Foreclosures/REOs, REO Inventory, REO Pre-Listings, Short Sales, Short Selling | 6 comments

Mortgage-Debt Tax Relief

Yesterday I saw a for-sale sign in front of an upcoming REO listing.  It made me wonder, “How many REO and short-sale listings of detached-homes have we had this year around NSDCC?  Here are the counts:

REO: 5

Short Sales: 43

Non-distressed: 3,516

There’s not much chance of finding a deal these days!


Here is the update on the Mortgage-Debt Tax Relief:

Read More

Posted by on Sep 4, 2014 in Foreclosures, Short Sales, Short Selling | 0 comments

Only Non-Recourse

From CAR:

barbara_boxer_2After receiving comments from California tax practitioners and its own review of California law, the IRS has issued a clarification to its September 19, 2013 letter to Senator Barbara Boxer concerning short sales and taxes on the forgiven debt. The new IRS letter indicates that forgiven short sale debt is not subject to cancellation of debt (COD) income only if it is non-recourse at its inception and that their prior letter was overly broad.

In their new April 29, 2014 letter, the IRS states that in order for a debt to be non-recourse at the time of the short sale, the original debt must be used to purchase or build a 1-4 principal residence or a refinance of such debt. As in the prior letter the IRS affirms that a lender’s forgiveness of such debt in a short sale will not result in COD income, but instead will be treated as capital gains. And as before, single or joint tax filers selling a principal residence can use the appropriate $250,000 or $500,000 capital gains exclusion.

What changed is that a loan used to substantially improve the taxpayer’s principal residence may now be treated as COD income instead of capital gains. Additionally, the IRS clarified that an investor’s short sale debt will also be characterized by the nature of the debt at inception. If it was recourse debt (non principal residence purchase) originally, it will remain recourse debt at the time of the short sale. This may be somewhat good news for investors who may prefer to have short sale debt treated as COD income rather than capital gains. COD income may be avoided under a claim of insolvency where capital gains cannot.

C.A.R. will continue to seek additional clarification about some issues not addressed, such as a taxpayer’s reliance on the IRS’s prior letter, and whether forgiven home improvement debt should not also be excluded from COD income. As always REALTORS® must advise their clients that they cannot give tax advice and that the client should seek tax advice from a qualified tax professional. A copy of the letter from the IRS is available for reference.

Posted by on May 25, 2014 in Short Sales, Short Selling | 1 comment