Rick Sharga is correct, the fed’s new short sale program won’t be the answer the government seeks, or is selling. Sharga, RealtyTrac’s chief economist, was commenting on the new Treasury Department rules going into effect on April 5th. (Short sales suggested as option to loan modification, The Seattle Times, Real Estate, Sunday, March 28, 2010) Under the new rules, a short sale must presented to a borrower as the logical next step if the homeowner fails to meet the criteria for a home modification under the Home Affordable Modification Program (HAMP). According to Sharga, “While we’ll likely see an increase in the number of short sales, I doubt the reality will live up to the hype.” Currently, homeowners with their backs to the wall are going to their lenders to either request a deed in lieu (i.e., handing back the keys with the deed) or asking for approval of a short sale as alternatives to foreclosure when a loan modification request fails. Yes, they are asking the same lender that wouldn’t work with them on modifying the terms of their loan to approve a sale and take less than what is owed at closing… So, now the Treasury Department is requiring the lender suggest that the borrower consider a short sale after they turn down the same borrower’s request for a loan modification. And this is somehow going to change things? While lenders “must” offer the short sale alternative, there is no law requiring lenders to work in good faith to approve or consummate short sale transactions.

There are a couple good things coming out of the new rules – the borrower may receive assistance with relocation expenses from the lender (up to One Thousand Five Hundred Dollars) and the lender will be offered One Thousand of your dollars for each short sale completed. However, there is nothing to suggest that lenders have to consider a short sale unless the borrower agrees to take back a note for the deficiency (i.e., the difference between the amount the lender would have otherwise realized at closing and the amount short). This is a huge stumbling block as most borrowers, if they could afford to pay the deficiency, wouldn’t be asking for a short sale in the first place. To re-frame the issue, the borrower loses his or her home, then rents an apartment and on top of rent, has a residual note payment due each month to their former lender. A bitter pill, no doubt. That’s of course assuming that the short sale goes through before the foreclosure. Not that all borrowers are innocent victims. But that’s not the issue. The issue is – when are the feds going to deal with the short sale process and create definitive, non–ambiguous guidelines? No time soon I fear.

The really good news in the new program is that lenders will no longer be able to reduce real estate agent commissions. Agents have to work their tails off on these deals; they take months and months to complete, and hours and hours on the telephone for the negotiator, usually a real estate agent or lawyer. Lenders’ are resistant throughout the entire process, and then they want to all but eliminate broker commissions prior to finally approving the sale, if the sale is actually approved. Protecting commissions will incentivize agents and should generate more interest in working these kinds of deals. That alone should be some good news for underwater borrowers.

Senate Bill 6749, mandating disclosures in commercial real estate transactions, was signed into law today by Governor Christine Gregoire. The bill passed the house and senate unopposed. The following analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent:

A seller of commercial real estate must provide a buyer with a disclosure statement about the land unless the buyer waives the right to receive it. The disclosure for commercial real estate concerns title, water, sewer/on-site sewage, structure, systems and fixtures and environmental. The disclosure statement must be provided within five business days, or as otherwise agreed to, after mutual acceptance of a written purchase agreement between a buyer and a seller. Within three business days of receiving the disclosure statement, the buyer has the right to approve and accept the statement or rescind the agreement for purchase. If the seller fails to provide the statement, the buyer may rescind the transaction until the transfer has closed. If the disclosure statement is delivered late, the buyer’s right to rescind expires three days after receipt of the statement.

Generally, complete due diligence on a commercial property acquisition, be it a redevelopment opportunity, development land, improved shopping center, industrial, or office property, always includes comprehensive review of title, utilities, structure, fixtures and environmental. This cost is generally absorbed by the buyer, normally a professional experienced in commercial real estate transactions, with all reports certified to the buyer. However, on smaller deals undertaken with less seasoned, unsophisticated buyers, this law will bring the importance of due diligence to the forefront of the transaction. Often this class of buyer is schmoozed into overlooking proper due diligence during the sell the sizzle not the steak, hard sell process. As an aside, that very pitch, heard by this writer first hand, was advocated by a certain President and CEO of a regional real estate brokerage with international offices, to the commercial real estate investment brokers and sales agents. His name, and that of the firm, shall go unmentioned.

Naysayers may argue that this law will increase the burden on sellers and increase transaction costs. I think it will protect a vulnerable class of buyers who are sometimes encouraged to close quickly without conducing proper investigation. The opt out language in the law, allowing the parties to shift the burden and costs from seller to buyer, negates the increased transaction cost argument. Most buyers will continue to bear the burden of due diligence.

I believe this is a good law protecting a potentially vulnerable, if not financially secure, class of real estate investors. The question becomes what level of detail in the disclosures will be minimally acceptable in litigated cases.

The law goes into effect in 90 days.

As most Washington residents now know, our legislature is proposing a first ever personal income tax to meet budget deficits (Senate Bill 6250). The tax will be imposed on all income of resident individuals, estates and trusts deriving income from Washington State. The proposed new rates look like this:

Married, filing jointly:
Not over $49,900 – 2.2% of taxable income
Over $49,900 but not over $120,650 – $1,098 plus 3.5% of the excess over $49,900
Over $120,650 – $3,574 plus 6.0% of the excess over $120,650

Head of household:
Not over $37,425 – 2.2% of taxable income
Over $37,425 but not over $90,488 – $823 plus 3.5% of the excess over $37,425
Over $90,488 – $2,681 plus 6.0% of the excess over $90,488

Individual:
Not over $24,950 – 2.2% of taxable income
Over $24,950 but not over $60,325 – $549 plus 3.5% of the excess over $24,950
Over $60,325 – $1,787 plus 6.0% of the excess over $60,325

Rate increases begin in 2012 to adjust for inflation. (Too bad incomes and sales don’t automatically adjust for inflation as well.)

Despite the constant background buzz around the alleged economic “recovery,” there are a lot of duel income families, and individuals, living pay check to pay check, very close to the edge. Many small and mid-size businesses are just getting by trying to keep the doors open. Others are trying to launch. Even with the proposed B&O tax credit these rates are going to kill a lot of struggling small businesses and and families trying to cope. Admittedly, belt tightening will only get our state so far; there are a lot of programs that need funding. Nonetheless, I don’t accept that a personal income tax is good for our state. As other commentators have pointed out, one need look no further than California. No bragging rights in that.