It’s getting tougher to make a buck on homeowners in Washington State. In less than one month the new “distressed property law,” HB 2791, approved by both the House and Senate, and signed into law by Governor Christine Gregoire, goes into effect. The law contains sweeping provision designed to shut down the foreclosure rescue scam business – a business accused, rightly and with few exceptions, of taking advantage of homeowners desperate to stay in their homes while avoiding foreclosure.

The bill defines a distressed property conveyance as “a transaction in which: (1) a foreclosed homeowner transfers an interest in the distressed property to a distressed property purchaser (DPP); (2) the DPP allows the foreclosed homeowner to occupy the property; and (3) the DPP or a person acting in participation with the DPP conveys or promises to convey the property to the foreclosed homeowner; or provides the foreclosed homeowner with an option to purchase the property at a later date; or promises the foreclosed homeowner an interest in, or portion of, the proceeds of any resale of the property.”

The law has alleged unintended consequences on real estate agents listing properties close to foreclosure. However, the NWMLS is working to bring ethical agents, and NWMLS forms, into compliance with the new law to avoid those agents from being inadvertently accused of a consumer protection violation under the new rules. CPA violations under the new law can result in damage awards in excess of $100,000.00 per occurrence. “Rescue professionals,” that special breed of investor, naturally think the law will hurt homeowners and increase the number of foreclosures, reportedly up over 60 percent in King County from a year ago. I think that remains to be seen. Most people contacting us are homeowners on the wrong side of the rescue scam. By the time they start calling lawyers for many of them it’s already too late. That’s partially due to the fact that most “rescue professionals” strongly encourage sellers to avoid lawyers prior to signing away their homes. Most of these so-called deals are scams as they very rarely workout the way they are represented. I think it’s a good law and needed protection for venerable homeowners. Learn more about HB 2791 on Washington State Legislatures Website.

More to come on this one.

This week a California court upheld a distant venue arbitration clause against a California franchisee Smith v. The Paul Green School of Rock Music LLC, CV 08-00888 (C.D. Ca May 5, 2008). The clause forces the franchisee to arbitrate its dispute in Pennsylvania. In 2006, the 9^th Circuit Court of Appeals held that such clauses could be challenged as unconscionable Nagrampa v. MailCoups, Inc., No 03-15955 (9^th Cir. Dec. 4, 2006). Common sense dictates that the practice of demanding franchisees, usually independent business owners with little in the way of liquid assets, at least by the time of default, to travel across the country, pay for room, board, and retain counsel, to defend or bring actions against cash rich franchise organizations, is unconscionable. It is a boiler plate provision in nearly, if not all, franchise agreements. And for some reason, it is a provision that most franchisees blow right over when reading a franchise disclosure document and draft franchise agreement. In Smith, the California Central District Court upheld the distant venue clause on a technicality (the Pennsylvania “choice of law” provision) rendering the Nagrampa unconscionably decision unenforceable. Franchisors and their counsel are delighted.

Life is good for apartment building owners and investors. Dupre+Scott Apartment Advisors, Inc. have reported this week that the Puget Sound apartment rental market is booking one of its lowest vacancy rates in 27 years. The drop in vacancy, coupled with increases in rents, is partially the result of loss of units to conversion, the continuing mortgage meltdown affecting consumer borrowing, and influx of new residents to the area. With even entry level condominium purchasers starting to have difficulties obtaining purchase loans, and sales slowing, condominium conversion activity has dropped off sharply in the Puget Sound and across the nation. Many projects scheduled for conversion have been cancelled; others recent conversions are being partially or fully converted back to apartments. Low vacancies, however, have not translated into a substantial increase in new project development. The combination of construction cost increases and difficulty in obtaining construction loans have caused many new projects to be cancelled or delayed.

Cap rates on rental buildings should remain constant for the short term while cap rates on commercial buildings and shopping centers nudge up as vacancies increase and loans become harder to qualify for and obtain. While not a glamorous as investing in neighborhood shopping centers and office buildings, investment stability is constant and buyer interest strong.

That said, apartment deals are not easy unless you’re an all cash player. With cap rates on net operating income at or below commercial loan rates, it’s hard, if not impossible, to get a positive return on equity. Therefore investor returns are made up primarily on increases in rents, which over the past 20 years have been minimal if you adjust for inflation, and appreciation. You can’t feed the kids on appreciation. Any drive up in cap rates will negate a certain amount of that appreciation. So while apartment owners are doing well today, it’s fine line between feast and famine, even in this market.

According to the Commerce Department, new home construction starts fell to a seventeen year low in March 2008. Privately owned housing starts were down 11.9% from February’s revised readings. Did you ever wonder about the relationship between reported building permits, housing starts and housing completions? The numbers usually don’t match up. Here’s how it is explained by the US Census Bureau. Clearly the market is still looking for a bottom. Thank goodness we live in Seattle. Although inventory levels here continue to rise as sellers’ continue to hold out for the return of 2006, and buyers’ hold out for the bottom of the market. Maybe this would be a good time to get cracking on building that custom home you’ve been dreaming of. Building material costs are up sharply over the past couple of years, but given the cost of delivery, it’s unlikely they’ll be coming down anytime soon. There are a lot of very good custom home builders who could deliver the goods on a custom design-build product. And, unfortunately, there are also a lot of very talented subcontractors and artisans who are hungry and looking for new projects to feed their families and crews. For those who can secure adequate financing, building site costs are depressed, meaning you can cut a very good deal today on a custom building lot too. If you wait too long, this opportunity may pass. Even if the market continues south for the next 12 to 18 months, residential real estate pros will tell you if you love the home you’re in and plan to stay, you can ignore the short term market conditions. Give the Commerce Department’s industry report, this may very well be a great time to build.

Now may not be the best time to buy that neighborhood shopping center you’ve had your eye on for the past few months. According to a story run in the New York Times and covered by the Seattle Times, lack of consumer spending and tightening credit has resulted in record levels of retail store closures and bankruptcies. The International Council of Shopping Centers (“ICSC”) estimates there will be over 10,000 store closures between 2007 and 2008; with 2008 closures up 25% over 2007.

The ICSC is a shopping center trade organization that is involved with industry related education, networking, deal making, public policy and lobbying efforts. Members include brokers, developers, financiers, property managers and retail tenants. The ICSC Spring Convention is one of the largest trades show gatherings in the world, and second only to COMDEX in attendance. Held in Las Vegas each May, the ICSC Spring Convention fills not only the Las Vegas Convention Center, and adjoining Hilton Hotel Convention facilities, but spills over into tony restaurants and posh suites throughout the city for a week of deal making, networking and education.Not all shopping center owners and developers belong to the ICSC. I have represented a number of very sophisticated commercial real estate owners, developers and managers over the years that do not belong to ICSC. I doubt all these owners’ stores are included in the current estimates. If not, then the actual number of store closures could be far greater. Also, it is possible that current estimates of store closures do not take into account the number of single store and small chain operators, franchisees, restaurateurs, and the like, across the country, that are barely holding on. If you are considering purchasing or exchanging into a commercial building or one of the neighborhood centers that have proliferated around Western Washington, “anchored” by a fast food restaurant, drug store, or video rental shop, you will want to consider the impact this recent wave of store closures and bankruptcies will have not only on the value of your investment, but the viability of your own tenants. Even if the property you are considering has a strong line-up of tenants, inventory financing is getting more difficult and the cost of goods more expensive for these tenants, as it is for consumers at their banks and grocery stores. There are still good deals out there for investors. However, today you will want to be far more careful than in recent years in conducting due diligence on prospective investments. A rising tide lifts all boats. Today’s tide is not rising. When considering hiring outside professional service providers, such as accountants and lawyers, look for credentials that span more than a narrow band of expertise. Consider retaining an attorney that is not only competent in the evaluation, negotiation and drafting of legal documents such as purchase agreements and leases, but also has direct, meaningful experience in real estate development, property management, finance and brokerage. This kind of diversified experience will come in handy when you are trying to understand the psychology of the deal, motivations of the developer, risk factors, costs and market conditions, and not just the legalese of word processed documents. The commercial real estate and shopping center business has been on a role for several decades now. We have all benefited from the strength in the retail market - from convenience of store locations to the diversity of goods and services available to us all. For a while it seemed as though the commercial real estate market would be immune from the turmoil that has besieged the consumer/residential real estate and credit markets. That’s clearly changing now. Buyer beware.

Short Sales are becoming a more common part of the real estate sale landscape during these days. The reason short sales are becoming more common is simple, people have borrowed more than their properties are now worth and are looking to get out from under the debt. In brief, a short sale is an agreement between a real property owner and creditor that allows the owner to sell property for less than what is owed the creditor after closing costs. I didn’t include broker’s commissions, because some short sales are completed on a “for sale by owner” basis.

A short sale will allow the lender to recapture some, but rarely all loan principal. However, it does free up lender capital to be put to more productive use and allows for a sum certain balance sheet write down. For the borrower, it allows the sale of property and avoidance of foreclosure; however, it may result in an adverse impact on the borrower’s credit score. In cases where the seller has some liquidity, they may be required to come out of pocket, if possible, even with the lender taking a short, in order to complete the sale and pay closing costs.

Some real estate agents working with short sale clients agree to reduce their commission in order to facilitate the sale. For example, in a case where a creditor has an agreed upon maximum write down, agents agreeing to a reduced real estate commission may be the only way a sale can close.

In a short sale that I facilitated recently both the buyer’s and seller’s agent gave up a portion of their respective commissions in order to complete the sale. The creditor also comprised their position in order to facilitate the close. In this case, the seller wasn’t able to pay the full commissions, closing costs and loan balance. The only alternative to the short sale was bankruptcy. All parties worked very hard to complete the sale. Cooperation between the brokers, lender, buyer and seller was key to getting the deal done.

The Northwest Multiple Listing Service has also stepped in to help agents and consumers with short sale transactions. This month the NWMLS issued new rule changes and a new Short Sale Addendum to assist licensees and parties in short sale transactions. I think these rule changes will be very beneficial in removing ambiguities and clarifying the roles and obligations of agents and parties to short sale transactions listed with the NWMLS.

NWMLS Rule 11(iii) defines a “Short Sale” as “a sale that does not produce sufficient funds to cover the existing monetary encumbrances against the Property, closing costs, real estate commissions, and other financial requirements of closing.” Other rule changes address listing input and changes in listings from conventional to short sale, “pending” offers subject to lender approval, back-up offers, commissions and other matters of concern to brokers, agents and consumers alike.

NWMLS Form 22SS is the new Short Sale Addendum to Purchase and Sale Agreement. The form has six discrete sections. Section one defines a short sale. Section two contains the short sale contingency, allowing seller time to obtain lender consent. Section three addresses the right of seller to accept offers from other prospective buyers during the pendency of lender approval. Section four allows for a limited right of termination by the buyer. Section five addresses the computation of time and provides that other time periods, such as inspection contingencies, do not begin to run until the buyer has notice of lender approval. Section six is an acknowledgement by the parties that the short sale addendum does not fully explain all implications of a short sale and advises consumers to obtain the advice of third party professionals.

If you are considering buying or selling property that may involve a short sale, I encourage you consider obtaining legal counsel prior to signing anything.

I attended the Community Breakfast hosted by the Seattle Chamber of Commerce yesterday titled “Housing Trends and Impacts on the Puget Sound Economy,” featuring Diane Sugimura, Director, City of Seattle Department of Planning and Development; Peter Orser, President, Quadrant Homes; and Bill Fleckenstein, President, Fleckenstein Capital. The perennial questions, “has the housing bubble burst” and “is the economy headed toward recession” were again hashed over. This morning’s Seattle Times headline, “One not-so-rosy view of Seattle-area home prices,” featured a story covering the event. In truth, the questions were not answered because no one really knows. The other markets with gloom and doom real estate trends used for comparison were last year’s high flyers, Las Vegas, Miami and San Diego. Mr. Fleckenstein stopped short of making any actual predictions about where our market is headed. He did have some timely comments on the sub-prime lending market and a veiled pronouncement about upcoming events that will further impact this sector of the lending market. Mr. Fleckenstein also presented the audience with a handout that illustrated the impact of home equity borrowing on overall national economic growth over the past decade. The results are not surprising. The graph illustrated that to a great extent Americans have been living on borrowed wealth capturing the wave of home equity growth. If the real estate market continues to stall there will be many, many Americans underwater on their home loans and personal wealth. Needless to say this will result in further increases in personal bankruptcies and home foreclosures, negatively impacting the real estate market and economy. Quadrant Homes as merchant builder continues to serve that sector of the market that for the time is hopefully insulated from a price downturn — affordable single family homes — boasting 6 starts and 6 closings per day. Mr. Orser’s point that buyers need to closely monitor their spending between loan application and closing to avoid a disqualifying event illustrated the homebuilder’s sensitivity to his customer’s needs. Occasionally, I am contacted by a disgruntled home buyer who has lost their loan due to post-application borrowing. It is a difficult situation to deal with especially if an existing home sale is moving toward closing. None of the panelists or audience professed owning a crystal ball. Our local economy remains strong. Let’s hope that last quarter’s increase in foreclosures; changes to the sub-prime lending market and national real estate trends have minimal impact on our Puget Sound real estate market.

The Federal Trade Commission issued an updated Franchise Rule today. The update amends the Franchise Rule originally promulgated in 1978. The purpose of the amendments is to harmonize state and federal disclosure rules. A further goal of the new rules is to account for changes in the marketing of franchises and to address certain franchise-relationship complaints of franchisees aired during the amendment proceedings. The amended rules also acknowledge the substantial difference between a “business format” and a “business opportunity” franchise and separates the requirements for each. The new rules have phased-in effective dates. On July 1, 2007 franchisors have the option to follow the new rules or the applicable existing rules. After July 1, 2008 franchisors will be required to follow the amended rule. An overview of the amendment will be outlined in future posts.

On November 16, 2006, the Washington Court of Appeals, Division III, reviewed a dispute over a trust property and trust administration that raised the issue of the enforceability of a real estate purchase and sale agreement (REPSA) despite the absence of a legal description in either the offer or acceptance. The court affirmed that “in Washington an agreement to sell real estate must include an adequate description of the property as required by the statute of frauds.” Bartlett v. Betlach

When preparing a REPSA, estate agents and FSBO sellers often do not have access to a full legal description. Occasionally I am asked what kind of a description is minimally acceptable to satisfy the statute of frauds. Reliance on partial legal descriptions, available from many public sources and on the Internet, and street addresses will not do. The Washington State Supreme Court has “consistently [held] that, in order to comply with the statute of frauds, a contract or deed for the conveyance of land must contain a description of the land sufficiently definite to locate it without recourse to oral testimony, or else it must contain a reference to another instrument which does contain a sufficient description.” Bingham v. Sherfey

The Northwest Multiple Listing Service (NWMLS) Form 21, Residential Purchase and Sale Agreement, provides for the input of a property street address, along with the city, county, state and tax parcel number. This agreement and form of description is sufficient, so long as the correct and complete tax parcel number is included. The tax parcel number is a adequate reference to another instrument (the recorded deed) which does contain a sufficient description to satisfy the Bingham requirement.

When preparing a REPSA for a commercial or investment sale I prefer to use a full legal description. Prior to use I personally and independently verify its accuracy as true and correct. I believe that this practice is preferable to reliance on a street address and tax parcel number. When representing residential buyers or sellers using a Form 21 I will use the street address along with the tax parcel number but prefer adding that actual legal description, attaching it as an addendum to the agreement, when it is available.

A lease or other encumbrance affecting title to real property requires a full legal description to be legally enforceable. In these cases reliance on a address and tax parcel number will not satisfy the statute of frauds for legal sufficiency.

Yesterday, while waiting for my flight from Orange County’s John Wayne Airport back to Seattle I purchased the current issue of Fortune Magazine. In addition to the feature story, “What It Takes To Be Great,” the magazine interviewed Boeing CEO James McNerney and Costco Founder Jim Sinegal.

I found the feature story extremely fascinating and well written. Although it covered no new ground, the author Geoffrey Colvin presented further compelling evidence that the secret to great success, no matter what the field of endeavor, is determined more by painful and demanding practice than natural talent. After examining consistently outstanding sport figures, musicians, artists and business people, study and study concludes that consistent application of a proper mental approach, focused practice, and obtaining quality feedback on performance is what determines the difference between good results and excellence. The article contains a “tip sheet” for perfect practice. I highly recommend this issue of Fortune that will be on the shelf until November 6th. The interviews with Mr. McNerney and Mr. Sinegal alone are worth the purchase price.

This afternoon I will meet with a dozen or so other volunteer attorneys who are members of the King County Bar Association’s Business Assistance Panel as we plan for the annual Business Advisory Day. We provide pro bono legal advice to small business owners in Seattle’s economically distressed communities in cooperation with the University of Washington’s Business and Economic Development Program (BEDP). According to the King County Bar Association website, “participating members of the King County Bar Association have been a key component of the BEDP’s ability to link 380 Business School students and more than 100 business advisors with 110 inner city companies since 1995. Based on feedback from business owners, the work of the students and advisors has led to the creation of more than 200 new jobs, the retention of 190 other jobs, and the addition of more than $6.5 million in new revenue for inner city small businesses.”

Perhaps from that group of business owners will emerge an individual that strives for greatness, understands perfect practice and the path so difficult to tread to become the next James McNerney or Jim Sinegal.