Lower Your Taxes By Appealing Assessments

One result of the decline - or depending where one lives, the collapse - of the residential real estate market is that many homeowners are likely to find themselves with tax assessments that exceed the current market value of their homes. If you believe that you are in such a circumstance, you need to check your assessment against the current market reality in your neighborhood in terms of current sale prices and/or via an appraisal. City assessments are an inexact science at best and are not always quick to catch up with market changes, especially when prices are falling. This is especially true in neighborhoods that have been plagued by numerous foreclosures and/or short sales. A recent Virginian Pilot story looks at the situation in the southside of Hampton Roads. Here are some highlights:

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As home prices fall across Hampton Roads and city assessors scramble to keep up with changing values, persuading a city to lower an assessment - especially by $10,000 or more - could mean hundreds of dollars in tax savings. In the past year, the median price for homes in South Hampton Roads has dropped 7.4 percent, according to Real Estate Information Network, the Virginia Beach-based multiple listing service. Sales of existing homes also have fallen to unusually low levels - another problem for cities trying to value them.

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"We're all up against the same thing," said Jerry Banagan, Virginia Beach's assessor. "The volume of sales is down so much that (it) makes it harder to do an assessment and make comparisons." Several cities have already announced that median assessed values will decline this year. Despite that, for homeowners who think their properties still are overvalued, now is the time to challenge the assessment.

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"If you disagree, you call into the office. We will put them in touch with the appraiser who is responsible for their property." Minor discrepancies such as mistakes in square footage, damage that has occurred in the past year, or the fact that a home is unfinished, are often resolved quickly.

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"We normally get 300 to 500 calls a year," said Chesapeake Assessor William L. Rice. "Out of those, we'll do about 75 or 80 home visits. We come out and take a look. If there's something wrong, it's often something on our property record cards." The assessor shares with the homeowner recent sales in the neighborhood that were used as comparisons.

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If the city does not agree to change the assessment, the last recourse for a property owner typically is to appeal to the city's Board of Equalization. Boards meet at various times, depending on the city.

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Depending upon one's circumstances, filing an appeal with the Board of Equalization may make sense and could translate into savings for a number of years to come. Since each local city has its own process, it is important to file a timely appeal. The burden of proof in an appeal lies with the taxpayer:

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Section 58.1-3379.C of the Code of Virginia: "the burden of proof shall be upon a taxpayer seeking relief to show that the property in question is valued at more than its fair market value, that the assessment is not uniform in its application, or that the assessment is otherwise not equalized. In order to receive relief, the taxpayer must produce substantial evidence that the valuation determined by the assessor is erroneous and was not arrived at in accordance with generally accepted appraisal practice."

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Set out below are the schedules for the cities in south Hampton Roads:

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Chesapeake Board meets: May
File appeal by: May 1
(757) 382-6235
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Norfolk Board meets: July and August
File appeal by: May 31
(757) 664-4732
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Portsmouth Board meets: April
File appeal: Office recommends as soon as possible before the board meets.
(757) 393-8631
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Suffolk Board meets: May
File appeal by: April 30
(757) 514-7475
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Virginia Beach Board meets: December
File appeal: The city accepts appeals all year.
(757) 385-4601

33,000 Local Homeowners Owe More Than Homes are Worth

The caption of this post is the headline from a new Virginian Pilot article that looks at the faltering residential real estate market and the fact that more and more homeowners are "underwater" on their properties. Here are a few highlights:

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More than 33,000 homeowners in Hampton Roads owed more on their mortgages than their homes were worth at the end of 2008 as home prices continued to fall, according to a report released Wednesday by a mortgage research firm. That's roughly 13 percent of all mortgages in the local market, . . .
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Across the country, more than 8.3 million homeowners owe more than their homes are worth, representing about 20 percent of all outstanding mortgages, First American CoreLogic reported. The majority of such "negative equity" mortgages are in states such as California, Florida, Texas and Michigan. In Virginia, 19.6 percent of all mortgages were underwater.

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Brian Holland, president of Virginia Beach-based Atlantic Bay Mortgage Group, said many of the region's upside-down loans could be attributed to mortgages guaranteed by the Department of Veterans Affairs with no down payments. "Your typical VA buyer is going to fund 100 percent," said Holland, whose firm handles such loans from 19 mortgage offices in Virginia and the Carolinas. "After fees associated with the sale, they're automatically underwater."

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"The ones who are really impacted by this are the ones who have to sell," she said. "Then you're forced in to a short-sell situation." A "short sale" means selling a house for less than the amount the seller owes the lender. Lenders agree to take a loss on the short sale to avoid the added costs of a foreclosure plus trying to maintain and resell the property.

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Negotiating a short sale is NOT an easy process and is something that neither most homeowners looking to sell or buyers looking to purchase have the where with all to undertake. Worse yet, many Realtors are rather clueless in how the process works as well. Michael B. Hamar, P.C., has experience in such transactions and can assist in expediting the process which can take weeks or months depending upon the lender involved and the particular circumstances.

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In addition to the overview article on this blog, a detailed piece - with sample forms and exhibits - on negotiating a short sale is available upon request. It is not posted on this blog because of its length and numerous exhibits. Anyone interested in learning more should e-mail the office at mike@hamarlaw.com We also provide resources for for sale by owner ("FSBO") transactions which can save the seller the 6% real estate commission otherwise payable to a realtor. This savings can significantly improve the out of pocket loss for a homeowner who is "underwater" on their property.

INVESTOR ACQUISITION OF MULTIFAMILY OR COMMERCIAL REAL PROPERTY – CHECK LIST

DUE DILIGENCE INVESTIGATION ITEMS
1) Inspection of Property
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2) Inspection of Books and Records – If Applicable
a) Income/Operating Statements
b) Rent Roll - Security Deposits
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3) Environmental, Termite and/or Moisture Reports
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4) Insurance and Paid Receipts
a) Hazard or Builder’s Risk
b) Liability
c) Flood
d) Business Interruption
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5) Title Commitment
a) Mechanic's Lien Coverage
b) Zoning Endorsement
c) ALTA 8-Environmental
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6) Legal Description
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7) Appraisal
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8) Physical Survey
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9) Evidence of Compliance with Governmental Laws
a) Americans with Disabilities Act
b) Chesapeake Bay Preservation Act
c) Wetlands
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10) Evidence of Zoning Classification
a) Lot Size - may be grandfathered non-conforming use
b) Permitted Uses
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11) Evidence of Street Access and Utility Availability
a) Water
b) Sanitary Sewer
c) Drainage
d) Electric
e) Gas
f) Telephone
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12) Building Permits
a) Scope of Rehab
b) Cost vs. % of assessed value
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13) Plans, Drawings and Specifications
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14. Non-Bankruptcy Status of Seller
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DOCUMENTS RELATING TO ACQUISITION OF PROPERTY
15. Contract
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16) Deed
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17) Bill of Sale – If Applicable
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18) General Assignment
a) Licenses and Permits
b) Service Contracts
c) Management Contracts
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19) Assignment of Rents, Leases and Security Deposits
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20) Closing Statement
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21) 1445 Tax Certification
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22) 1099 Tax Certification
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23) Commercial Affidavit
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24) Virginia Department Taxation Form R-5
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25) Seller/Owners Affidavit
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26) Owner's Title Policy - Mortgagee Title Policy
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27) Organizational Documents of Seller Entity
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28) Resolution/Unanimous Consent of Seller Entity
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29) Evidence of Good Standing of Seller Entity
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NOTE: The foregoing Check List is for educational purposes and contains items that may not be applicable to all transactions which can vary substantially based on the particular facts and circumstances of and type of property to be acquired, as well as its condition. Therefore, the Check List should not be relied upon as a substitute for individualized legal advice addressing one’s particular situation.

PITFALLS FOR INVESTORS RENTING SINGLE FAMILY HOMES

INTRODUCTION: From time to time real estate investors may rent single family residences to unmarried individuals, whether in terms of an unmarried couple with children, a group of college students, or perhaps by leasing out portions of the residence to separate individuals. While such action is commonplace, particularly in view of the changing nature of “families” and the need on the part of investors to keep properties leased and generating cash flow for debt service. However, many investors probably do not know that by doing so they may be unwittingly setting themselves up for misdemeanor prosecution depending upon (1) the jurisdiction in which their rental property is located, and (2) that jurisdiction’s restrictions concerning what constitutes a “family” for zoning purposes.
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LOCAL ZONING ORDINANCES: Each local city in the Hampton Roads area has adopted a Comprehensive Zoning Ordinance which typically appears as annex or some similar designation to the City’s Code of Ordinances. Each Zoning Ordinance contains provisions establishing different zoning classifications and the requirements/restriction applicable thereto and set out definitional terms, including what is a “family” for the purposes of single family residential zoning districts. In addition, these ordinances or the related City Code establish various criminal and civil penalties for violations. No two of these Zoning Ordinances are the same and, therefore, investors with rental properties need to be aware of the specific restrictions that apply to their properties. The various definitions of what is a “family” for zoning purposes in the area cities range from three (3) unrelated individuals in Newport News to five (5) unrelated individuals in Chesapeake. (NOTE: Detailed information on a city by city basis is available upon request)
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ENFORCEMENT OF ZONING RESTRICTIONS: Enforcement of zoning restrictions is not consistent either from city to city or even within the same city. Typically, unless a violation is picked up during an inspection triggered by some other issue, property owners only receive a summons based on a complaint from a neighbor. Often the complaints are anonymous. Once a complaint is received, inspectors will come to the property and verify whether a violation exists. If a violation is discovered, a warning letter or in some cases a criminal summons will be issued to the property owner of record. Usually, if the violation is corrected within a timeframe specified by the Codes Enforcement office, the matter can be dismissed. If not resolved, however, a criminal conviction can and will be entered against the property owner.
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If a summons is issued for violating the single family restrictions of the Zoning Ordinance, generally it will NOT be possible to secure a license to operate a rooming house or a boarding house because such a use is NOT consistent with the single family residence zoning district. Should an application be submitted, action by the Planning Commission and City Council will be involved and the aggrieved neighbor(s) will speak in opposition and it will be unlikely that a permit would be issued.

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Real Life Example: An unmarried couple in Norfolk owned a home and leased out a room to a tenant. Subsequently, another unmarried couple was allowed to move into the home after one of the parties to that couple lost their job and that couple was unable to remain in their rented apartment. A neighbor made an anonymous complaint, inspectors appeared and a criminal summons was issued because the five occupants exceeded the four (4) unrelated person limit of the Norfolk Zoning Ordinance. Because the zoning of the property in question was single family residential, it was impossible to get a permit for a rooming house and the only way in which the owners could avoid a conviction was to make the homeless couple move out.
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MORAL FOR INVESTORS:
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1. Before leasing a property to a group of unrelated individuals, make sure that you know the limitations imposed by the governing zoning ordinance.
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2. Make sure that the lease form utilizes requires that the tenants comply with all applicable governmental regulations and ordinances and that failure to do so is grounds for immediate termination of the lease if not immediately rectified.

PITFALLS, DANGERS AND RISKS OF "SUBJECT TO" REAL ESTATE TRANSACTION

WHY USE "SUBJECT TO" TRANSACTIONS? There are a number of reasons why "subject to" real estate transactions are attractive to real estate investors and make economic sense, whether the investor's goal is to acquire rental properties or to rehab and sell fixer upper properties.. These attractions include most significantly:
(1) The purchaser may be required to pay little or no down payment to close the purchase.
(2) Since the purchaser need not go through a loan application and approval process, there is no limit to many properties an investor can buy.
(3) Subject to loans stay in the seller's name are not on the purchaser's credit, and the purchaser is not personally liable on the loan, although record title transfers to the purchaser.

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WHAT ARE THE PITFALLS AND RISKS OF "SUBJECT TO" TRANSACTIONS? There are a number of inherent risks and dangers associated with purchasing real estate pursuant to a "subject to" transaction. Among these risks are the following:
(1) Subject to sellers may be in serious arrears in their mortgage payments and may owe significant unpaid principal payments, large sums of unpaid accrued interest and/or penalties.
(2) Subject to sellers may be in foreclosure or on the brink of the commencement of foreclosure proceedings. Once a property goes into the foreclosure process, it may be either (A) impossible to stop the foreclosure without refinancing the loan or (B) more expensive to bring the loan back into good standing because of advertising and legal costs incurred by the lender.
(3) Subject to sellers may be in bankruptcy or end up in bankruptcy between the date of contract signing and closing. Once a seller is in bankruptcy, NO conveyance of the subject to property can be made without the approval of the U.S. Bankruptcy Court. Unapproved transfer of title may be set aside by the Bankruptcy Court without any assurance of compensation to the investor who may have paid delinquent amounts owed on the existing mortgage.
(4) Subject to sellers may have numerous judgment liens, tax liens, and other liens that attach to the subject to property.
(5) Conventional mortgage loans contain "due on sale" clauses and, if the mortgage lender learns that the seller has transferred title to the property, there is a very real risk that the lender will call the loan and/or commence foreclosure proceedings. Therefore, (A) monies paid by the purchaser to bring the loan current may be lost and (B) the purchaser may be faced with the need to refinance the property on an emergency timeframe.
(6) Subject to sellers with financial problems may have purchased or refinanced the property with less conventional lenders and the loans may have prepayment penalty provisions which may not be discovered except by reviewing the recorded deed of trust or by securing a pay off statement.
(7) If the purchaser acquires the subject to property for less than fair market value, other unpaid creditors of the sellers may attack the transfer if the seller subsequently files for bankruptcy protection.
(8) Many subject to sellers are unsophisticated and may claim that they did not understand (A) that their credit was to remain tied up by the existing mortgage loan and/or (B) that they could be liable for mortgage payments should the purchaser fail to make such payments.

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HOW DOES A "SUBJECT TO" PURCHASER AVOID SUCH RISKS?
(1) Independently Confirm the Mortgage Status. Do NOT rely on the seller's representations as to the status of the existing mortgage on the property. Subject to purchasers or their legal counsel should ALWAYS obtain a written statement from the mortgage lender confirming the payment status of the loan. This can take the form of a payoff statement - which will reflect escrow deficiencies and prepayment penalty amounts - or other written account summary.
(2) Obtain a Title Commitment from an Experienced and Reputable Title Insurance Company. Because many subject to transaction sellers are in precarious financial condition, it is crucial that a title exam be conducted to identify (A) all mortgages that attach to the property, (B) any state or federal tax liens that may attach to the property, and (C) any other judgment liens that may attach to the property. This latter category of judgments can relate to unpaid medical bills, defaulted credit card accounts, unpaid utility bills, or even delinquent child support payments.
(3) Independently Confirm that the Seller Has Not Filed for Bankruptcy Protection. Do NOT rely on the seller's representations that he/she has not filed for Bankruptcy protection, particularly since creditors can put a debtor into involuntary bankruptcy. A purchase should NEVER make payments to bring a mortgage loan current without first verifying that the seller is not in bankruptcy. If such payments are made and the seller is in bankruptcy (or thereafter goes into bankruptcy), the purchaser will be an unsecured lender seeking payment from a seller that may have no ability to make repayment
(4) Have a Contingency Plan to Deal with Due on Sale Clauses. While many "subject to" purchasers use seller transfers to (A) land trusts where the purchaser is the actual beneficiary or (B) limited liability companies ("LLC") where the seller is the only member and then transfer the membership interest to the purchaser to attempt to avoid the mortgage lender's right to call the loan, these precautions are NOT a guaranty against a loan being called should a lender discover the transfer of title. Some lenders apply the prohibition against the transfer of any interest in the mortgaged property VERY, VERY strictly. Therefore, a transfer to a land trust or LLC (which by law constitute a separate legal "person" distinct from the seller) will sometimes trigger the due on sale clause, if discovered by the lender. Similarly, if a more lenient lender inadvertently learns that the real beneficiary of the trust or the ownership of the LLC has changed to someone other than the seller, then a mandatory call of the loan may also occur.
Because of this latent risk, a subject to purchaser should ALWAYS have a contingency plan as to how the property can be refinanced if the mortgage lender learns of the transfer of title and calls the loan. A subject to purchaser should also be mindful that even if he/she is not liable on the mortgage loan, if a foreclosure occurs and a deficiency judgment is entered against the subject to seller, the seller may attempt to recover the amount of the deficiency from the purchaser based on the purchaser's contractual agreement with the seller to pay the balance of the loan.
(5) Utilize a Purchase Contract that Affords the Purchaser Numerous Rights of Termination. Because it is often only after a purchase contract is signed that a purchaser is able to commence his/her due diligence investigation, the purchase contract should afford the purchaser the ability to terminate the contract should the due diligence investigation disclose additional judgments, liens, bankruptcy proceedings, etc. NOTE: Included in the handouts is a sample contract form.
(6) Give the "Subject To" Seller an Opportunity to Consult Legal Counsel. Often subject to purchasers act in haste to secure the seller's signature on the purchase contract in order to "beat out the competition." The danger in this approach is that the seller may later claim he/she was mislead and/or misunderstood the details of the transaction. A court would very possibly defer to the unsophisticated seller as opposed to an experienced investor.
(7) Remember that "Sometimes, No Deal is Better Than a Bad Deal." Too many investors rush to buy a property without adequately verifying delinquent mortgage payments, the existence of other liens, actual rehab costs and/or whether or not the seller has sought bankruptcy protection in a case that is not yet closed or dismissed. Properly investigating ALL relevant facts can avoid monetary loss and headaches.
(8) Purchase Proper Insurance Coverage: Remember that insurance naming the seller as the insured does NOT cover you as the subject to purchaser. Therefore, be sure to obtain hazard insurance naming your as the owner/insured. In situations where the property will be vacant and under significant rehab, a builder's risk policy should be used in stead of a homeowner policy.