Tuesday, August 31, 2010

Qualified Principal Residence Indebtness

The debt must have been used to buy, build or substantially improve the taxpayer's principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt was reduced through mortgage restructuring, as well as the mortgage debt forgiven in connection with a foreclosure, may qualify for his release. In most cases, eligible homeowners only need to fill out a few lines on Form 982.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available.

See Form 982 for details.


For additional information visit the IRS website
IRS Publication 4705 (2-2009)
Catalog number 51765 C

Monday, August 30, 2010

An Agents Perspective: Survey of California Residential Market

Included in our analysis is a survey consisting of 11 questions concerning the California residential real estate market. These questions were answered by 237 residential real estate agents located throughout California, each with at least three years experience.

The answers to the following questions will give a better understanding of the 2009 and 2010 California residential market from an agent’s perspective. Each agent was asked 11 questions regarding inventory levels, buyer activity, sales volume, foreclosures, short sales, and financing, all in relation to the California real estate market. The following data was accumulated from February 14, 2010 to February 25, 2010.

1. Are inventory levels in your market on average increasing or decreasing?
Over 60% of those surveyed agreed that inventory levels are currently decreasing, while only about 30% believe that inventory levels are increasing. The current market is demand-driven, and is therefore absorbing much of the supply (inventory levels).

2. To what extent has buyer activity increased or decreased over the past year?
Over 79% of those surveyed agreed that buyer activity has increased over the past year. On average, prices for a single family residence decreased dramatically, leading to an increase in buyer activity and an increase in demand.

3. What do you expect will happen to buyer activity in 2010?
Over 60% of those surveyed believe that buyer activity will continue to increase throughout 2010. The sustained increase in demand (buyer activity) can be attributed to the continuation of low prices as well as the buyer tax credit.

4. What do you expect will happen to sales volume when the buyer tax credit expires in April?
Over 70% of those surveyed believe that sales volume will decrease now that the tax credit has expired. The current tax credit includes up to $8,000 in government assistance for qualified first-time home buyers purchasing a principal residence, and up to $6,500 in government assistance for qualified repeat home buyers.

5. What proportion of buyers in your market are owner-occupants, not investors/landlords?
Over 75% of those surveyed believe that buyers are owner-occupants as opposed to investors or landlords. To some degree this is due to the current mortgage incentives given to owner occupant residencies.

6. Is favorable financing for purchases readily available?
Over 75% of those surveyed agree that favorable financing is either somewhat or readily available. Although lenders have become more stringent concerning lending and FICO scores, historical trends confirm that financing has become easier to obtain.

7. Have foreclosures in your market increased or decreased since early 2009?
Foreclosures vary typically by market. Although there is an increase in default payments, the variations in foreclosures can be attributed to the increase in loss mitigation efforts (short sales, loan modifications), which have helped many homeowners find ways to avoid foreclosures.

8. Have short sales in your market increased or decreased since early 2009?
Over 80% of those surveyed believe that short sales have increased since early 2009. The downturn in the California residential market has led many homeowners to seek assistance in the form of loss mitigation, in an effort to avoid foreclosures.

9. In your opinion, what effect have short sales and foreclosures had on home values during 2009?
Over 86% of those surveyed believe that 2009 home values were negatively affected by short sales and foreclosures. Due to homeowner debt and a lender’s willingness to rid itself of a property in default, many short sales are typically priced below fair market value, leading to a negative effect on home values.

10. In your opinion, what will be the future effects of foreclosures and short sales on home values?
75% of those surveyed believe that short sales and foreclosures will still have some effect on home values in the future. Therefore, a majority of the agents surveyed believe that home values will continue to decrease.

11. In your opinion, what will be true of housing values in 2010?
There is disparity concerning housing values in 2010. Over 44% of those surveyed believe that housing values will decrease in 2010. This can be attributed to the continuation of short sales and foreclosure, which lower housing values.

Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.

Tuesday, August 24, 2010

Professional investors move into flipping foreclosed homes

Squeezing out amateurs, private equity funds and wealthy individuals are buying distressed properties at public auctions, refurbishing them and selling them for quick profits.

Hoping there are big profits to be made in the aftermath of California's housing collapse, professional investors are flocking to the business of buying foreclosed homes at distressed prices.

The investors, primarily private equity funds and groups of wealthy individuals, purchase the homes at public auctions, which are held daily on the steps of local courthouses. They refurbish the properties and try to sell them for quick profits.

Not long ago, the typical home flipper was an amateur tapping a home equity line or savings for an investment property. But professionals have rushed in, partly because of sparse investment opportunities elsewhere.


"In crisis there's opportunity," said Rick Hudson, president of investment firm Prosperity Group Real Estate in Irvine. "Right now there's huge opportunity with flipping houses."

Closely watched gauges of professional buying have surged over the last two years.

The number of homes sold at foreclosure auctions statewide increased to 4,336 in April, from 884 in January 2009, according to research firm ForeclosureRadar. It eased back to 3,483 in July as banks offered fewer properties for sale. The auctions are dominated by professional investors who shop with cash (although not usually with actual greenbacks, for practical reasons).

Another measure, the percentage of all homes sold to absentee buyers, paints a similar picture. In the hard-hit Inland Empire, for instance, 30% of all homes sold in April went to absentee buyers -- up from 19% at the end of 2008 and the highest level in at least seven years, according to San Diego research firm MDA DataQuick. It was at 28.2% in July.

The binge of professional buying has helped spark a nascent housing recovery in Southern California because investors have cut significantly into the glut of foreclosed properties after the subprime mortgage meltdown.

Home sales in the six-county region rose 7.2% in June from May and 2.6% from a year earlier, according to MDA DataQuick. In July, overall sales tumbled primarily because of the expiration of federal tax credits, falling 20.6% from the month before in Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura counties. But the region's median home price of $295,000 was off only 1.7% from June.

The fragile rebound in the broader market contrasts with the behind-the-scenes scramble at foreclosure auctions.

"There's a tremendous amount of capital that is desperate to just buy anything right now," said Gil Priel, principal of a real estate investment firm in Woodland Hills.

In some cases, well-financed newcomers are elbowing out smaller investors at auction sales.

"The people who want to go and buy a house to flip, and do one or two, are already exiting the market," said Jan Brzeski, who manages a residential investment fund at Standard Capital in Los Angeles.

The swarm of new investors, however, is making a treacherous and labor-intensive business even tougher.

Investors must do their homework on dozens of homes for every one they buy. Legal and other impediments usually prevent them from going into homes prior to buying them, leaving no way to gauge repair costs. And despite being foreclosed on, the original owners often still live in the houses. That forces buyers to pay them to leave, a dynamic known as cash-for-keys.

The influx of new players is pushing up auction prices and squeezing profits. The average discount at auctions -- the difference between a home's sale price and its actual value -- is 21.6%, down from 28% in January 2009, according to ForeclosureRadar.

Last year, Chase Merritt, a Newport Beach private equity fund management firm, notched strong returns from auction sales, said Chad Horning, its chief executive. Chase Merritt bought a property in Costa Mesa in June 2009 for $315,500 and sold it 21/2 months later for $470,000. It bought a Mission Viejo home for $305,371 and sold it within two months for $375,000.

Chase Merritt launched its first foreclosure fund in May 2009 and has started two more funds since then. But "it's literally gone from a business that's very attractive, even lucrative, 12 to 18 months ago to something that almost doesn't make sense," Horning said.

"It's just like the housing bubble," he said. "It's almost like we're in a bubble at the courthouse steps."

The scramble was on display recently at an auction at the Norwalk courthouse.

A semicircle of people crowded around auctioneer Elwood Brown. Most were clad in cargo shorts and flip-flops. A few sat in lawn chairs. But their laptops and cellphones, as well as the thousands of dollars' worth of cashier's checks they clutched, marked them as professional investors girding for battle.

Brown took a swig from his oversized water bottle and announced that bidding for a four-bedroom duplex in Hawthorne would start at $179,598.60.

The price shot up within seconds as two men and a woman raised one another's bids in $1,000 increments.

"It's at 229, Daryl," a man in a polo shirt and sunglasses whispered intently into his cellphone. "About to close. Do you want it?"

He increased his offer, but a rival bidder claimed the home a few seconds later for $237,000.

Competition at the auctions is brutal, said Bruce Norris of Norris Group, a real estate investment firm in Riverside.

Norris unwittingly bought a house that was the site of a gruesome double murder. No one else bid -- a rare occurrence that showed others knew the history -- leaving Norris with less cash to bid for other houses.

"It's a very lonely place out there," Norris said.

That's only one of many risks in the foreclosure business. People who've lost their homes through foreclosure sometimes vent their anger by smashing walls, knocking over water heaters or ripping out toilets.

"We've literally had people take $20,000 of cabinetry out and feel perfectly justified doing it," Norris said.

The daily auction ritual begins each morning when banks signal which homes they are likely to dispose of that day. That sets off an early-hours scramble as would-be buyers speed through suburban neighborhoods to investigate the homes.

On a recent day, Norris steered his sport utility vehicle into the driveway of a 3,300-square-foot McMansion on a corner lot in Moreno Valley. The front lawn was brown and the backyard was littered with garbage. But the windows were intact and there was no visible damage -- far better than many foreclosures.

Aiming for an all-important look inside, Norris rang the doorbell and delivered the bad news to the teenage boy who answered the door that the home was scheduled to be sold that day.

"Do you mind if I poke around a little bit to see what kind of condition it's in?" Norris asked, angling his body to get a glimpse of the living room.

Then another car sped up and a rival buyer hurried up the driveway. She studied the house for a few seconds and craned her neck over the wooden fence protecting the backyard.

"This is a dream compared to a lot of them," she said in a satisfied tone as she rushed back to her car.

In the end, no one bought the home. The sale was delayed after the owner filed for bankruptcy protection.

Norris was philosophical, knowing that there were plenty more foreclosures.

"If you miss one," he said, "oh well, tomorrow's another pile."

walter.hamilton@latimes.com alejandro.lazo@latimes.com

Copyright © 2010, Los Angeles Times