home buyer tax credit

Purchasing a Condominium- BUYER BEWARE . . . not really, just do your homework

The real estate economy is slowly picking up encouraged by an abundance of condominium units on the market, Sellers motivated to move them,  historically low mortgage interest rates and the first time home buyer tax credit due to expire (unless extended) at the end of April, 2010.  I feel the need to revisit certain items of due diligence a prospective purchaser must look at when buying a condo.

As posted on this blog on September 17, 2007:  There are currently a great number of sponsor sold condominium units in the New York City market place. A sponsor is the person or entity who is developing a building as a condominium (or cooperative). Like everything else, there are condominium developments that have been built well and others that have been built poorly. Prior to entering into contract, the offering plan and all amendments should be reviewed. The offering plan is a full disclosure of a project to the public that is filed through the New York State Attorney General’s Office. The offering plan lists the name of the sponsor of a condominium building, its principals and other developments built by them. Research the names of the principals and their other developments on the internet. You may find references to any of the above and if the buildings and the units are built well or poorly. Even if the price is right, the carrying charges low and the location of the building prime, you do not want to invest in a building or unit that is poorly constructed. It is more likely that you will have problems in the future. Even if a warranty is given by the Sponsor, if a history of poorly constructed buildings exists, you may still need to go to court to enforce your warranty behind other disgruntled purchasers.

Another thing a potential purchaser of a condominium unit can do is speak with the current occupants of a condominium building. Unlike real estate brokers who have an underlying motivation to sell a condo unit, an existing owner of a condo unit in a building typically does not have an agenda to hide the truth from anyone who asks. People love to complain. If there are problems you will hear about it. I would ask more than one person just to make sure that the complaint spoken of, is not the exception and but the rule. One complaining unit owner may have a particular set of circumstances that do not necessarily apply to the entire condominium building and taint one’s decision to buy.

It may be beneficial for the prospective purchaser of a condominium unit (whether a resale or a Sponsor sold-newly constructed Unit) to engage the services of an engineer or home inspector before purchasing a condominium unit. It is not only good to know what the physical condition of the unit you are purchasing, but it is important to know the overall condition of the condominium building. The need for repairs to the common elements and infrastructure of a condominium building may result in unplanned assessments that may not fit into a prospective purchaser’s budget.

One of the things prospective purchasers need to look at is the number of the units in a particular condominium building that are sold or in contract. If the number of unsold units is too great, banks will refuse to give mortgages in that particular building and prevent a person from buying a unit in a building despite good credit. Some developments are able to get a building “pre-approved” by a particular lender and may even require a purchaser obtain a pre-approval letter from a particular lender who has already consented to providing mortgages in a particular building.

I came across a recent New York Times article written by Elizabeth Harris that highlighted certain things a prospective purchaser must look at prior to signing on the dotted line.  I thought it was informative and encourage you to read it.

http://www.nytimes.com/2010/01/31/realestate/31cov.html

I do not do this very often but I will tell you that I have worked a number of times with Tom Le of the Corcoran Group who was quoted in the article. I have found him to be very knowledgeable in the field of condominiums. He is a very savvy customer orientated broker. All of my clients who have used him (developer and consumer alike) have been very happy with the services provided.

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Lavenderlawblog Post- First Time Home Buyers Tax Credit Approved by Congress

I know it seems as if I am milking the first time home buyers tax credit (this is my third post about it).

Although not a cure-all, I think its extension and expansion of the credit will definitely be a catalyst for the economy. A large number of purchasers of real estate that I represent are encouraged and/or are counting on receiving this tax credit. The tax credit paired with current quoted mortgage interest rates in the high 4% (maybe with payment of points) to mid 5% range will act as fertilizer to help grow the housing market. It is hoped that the tax credit will continue to drive up the sale of homes which would consequently add to transfer tax revenues sorely needed by governing municipalities. The decrease in the amount of homes on the market would drive the prices of existing product higher which in turn would lead to higher real estate taxes needed by the local governments. The $8,000.00 home buyer tax credit will have more value in areas where the value of homes are less and presumably assisting families with smaller incomes.

What is the cost? I have read reports that expanding the home buyers’ credit will cost about 11 billion dollars. The total cost of extending the first-time buyer credit and adding the existing owners’ credit is reportedly at 16.7 billion dollars. Opponents are concerned about its repayment. Are we sacrificing the futures of our children and grand children? Some real estate experts think it is better to let the market correct itself and let the chips fall where they may. There is also a concern that the banks that own all of these foreclosed homes may pull them from the market resulting in a decrease in the supply only to sell them in the future at a much higher price (remember the rules of supply and demand?). It is unclear on what level this scenario can be addressed, if at all.

Like it or not, the first-time home buyer tax credit extension and expansion is to be sent before President Barack Obama after the U.S. House of Representatives voted yesterday morning (403 to 12) to pass the measure as part of unemployment benefits extension legislation H.R. 3548. The U.S. Senate unanimously approved it Wednesday.

The Obama administration has already publicly announced that the President is in favor of the bill and he is expected to sign the measure as early as today.

The extension and expansion of the tax credit gives a tax incentive to buy a home until at least April 30, 2010 for both new and not-so new buyers. Military personnel have a longer period of time.

The new tax credit extends the existing credit for first-time homebuyers, worth up to $8,000.

Existing homeowners, who have been in their current residence for a consecutive five-year period are offered a reduced new credit of up to $6,500.

The new rule also raises the qualifying income limits to $125,000 for single taxpayers and $225,000 for joint taxpayers. Currently, the income limits are $75,000 (single taxpayers) and $150,000 (joint taxpayers).

The maximum allowed home purchase price is $800,000.

The buyer needs to enter into a contract of sale by April 30 and close title by June 30, 2010.

Military personnel, deployed overseas for a minimum of 90 days in 2008 or 2009, would have until April 30, 2011 to claim the tax credit.

People are creative. BE CAREFUL!

The new legislation includes provisions to stifle fraud after the Internal Revenue Service identified 167 suspected criminal schemes and opened nearly 107,000 examinations of potential civil violations of the first-time homebuyer tax credit.

Cheating the IRS is a federal felony that comes with a fine of up to $250,000.00 and three (3) years in a federal prison, or both.

To combat fraud, a HUD-1 Settlement Statement will have to be attached to the tax return to secure the credit.

You will need to submit IRS Form 5405 with your tax return.

IRS Form 5405 for 2008: http://www.irs.gov/pub/irs-pdf/f5405.pdf

Proposed tax form for 2009: http://www.irs.gov/pub/irs-dft/f5405–dft.pdf

The IRS site for the home buyers tax credit is: http://www.irs.gov/newsroom/article/0,,id=204671,00.html

Any questions or comments are greatly appreciated.
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Lavenderlawblog post- First Time Homebuyer Tax Credit To Be Extended . . . . getting closer!!

As you may recall, there was a movement to extend the American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8000.00 for qualified first-time home buyers purchasing a principal residence. The expiration of this first time home buyers tax credit is on November 30, 2009. Many purchasers to be are pushing to close before this date to avail themselves to the credit.

Law makers are working to extend the first time home buyers tax credit to stop and reverse sinking home prices in an effort to prop up the sagging economy.

The plan would extend the homebuyers credit past the November 30th expiration date to home purchases under contract by April 30, 2009. Borrowers will be allowed another 60 days to close the sale.

The credit would be available to individuals earning up to $125,000, or $250,000 for couples, up from $75,000 for individuals and $150,000 for couples under the current law.

There is a proposed expansion of the tax credit also. Other individuals, who are not first time home buyer could get up to $6,500, starting December 1st, if they’ve lived in their current home for at least five years. There are reports that the proposed legislation would require the purchase of a home to be a primary residence but no requirement to sell an existing home. This is an acknowledgment by lawmakers of one of the realities of the economy. Proposed home buyers may not be so quick to sell their current property in preparation of purchasing their new home. Not requiring the sale of an existing primary home while being permitted to utilize the tax credit and purchase a replacement primary home would potentially subsidize paying the carrying costs of the yet to be sold house while it is on the market.

One of my primary concerns about not requiring the sale of an existing primary home while utilizing a tax credit is unwise financial decisions that may lead to additional defaults and foreclosures. An individual in attempting to utilize a tax credit while owning an existing home may attempt to retain the original home as a rental investment property hoping that the net operating income (net amount of income generated by rent after deducting the homes expenses) is sufficient to pay the existing mortgage. If the bill is passed not requiring the sale of the original primary home (even if the deadline is an extended period of time) it could lead to a great number of wannabe investors going into default on existing loans when the rental of these home are delayed or do not materialize. The alternative argument to permit the retention and rental of an existing primary residence while purchasing another primary residence is that only borrowers with incomes sufficient to pay two mortgages simultaneously will be able to obtain a mortgage while still living or renting their existing primary residence because a lender may very well determine that the borrower-to-be has too much debt in relation to their income to obtain a mortgage in order to finance the purchase of another home without satisfying the prior mortgage.

There is significant support for the bill by both democrats and republicans and is endorsed by the Obama Administration.

See the link to an article on Bloomberg.com

http://www.bloomberg.com/apps/news?pid=20601087&sid=ayS36Cg5hu5w

There are still questions on where the additional funds will come from and debate on whether to expand the credit to existing homeowners in an effort to boost home sales.

Due to a Republican demand that a vote be allowed on an amendment to end the Treasury Department’s Troubled Asset Relief Program at the end of this year, the proposal to extend the tax credit wont be voted on by the Senate until next week.

The U.S. Senate won’t vote until next week at the earliest on proposals to extend both an $8,000 tax credit for first-time homebuyers and unemployment benefits for the nation’s jobless. The administration endorses an extension.

Senate action was delayed by a Republican demand that a vote be allowed on an amendment to end the Treasury Department’s Troubled Asset Relief Program at the end of this year. See bloomberg.com article:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoI9KTlHpwzI

 

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Lavenderlawblog post- BEWARE, Downpayments of Sponsor sold condominium units are at risk

As an attorney who represents a fair number of purchasers of Sponsor sold condominium units, I have noticed a pattern that raises a red flag regarding my representation of purchasers. On more than one occasion, a sponsor and/or its’ attorney has refused to return the down payment deposited by a purchaser despite the existence of a seemingly unequivocal obligation under the purchase agreement to return it.

Pursuant to a typical purchase agreement in conformity with New York State General Business Law sections 352-e(2b) and 352-h, any dispute over the disposition of a down payment tendered by the Purchaser of a condominium unit can be submitted to the New York State Attorney General’s Office (“AG’s office”). The conflict can be resolved through litigation but the more “cost-effective” way is through the AG’s office.

The New York State Attorney General’s office is flooded with these types of applications. In speaking with a staff member, they are still working through applications submitted in 2008. Various accounts seem to indicate that it will take over a year to have the application processed and a determination made by the AG’s office.

Where the down payment is less than $100,000.00, it does not make sense to spend more than $50,000.00 + in legal fees to recover a $40,000.00 down payment. Additionally, seeking judicial intervention could very well take over a year to come to a resolution.

Where the contract of sale to purchase agreement has been effectively cancelled by the parties and they are disputing over who receives the down payment, purchasers are faced with making a hard business decision. Typically, the down payment deposited on contract represents all or substantially all of the life savings of a prospective purchaser. Tying up the money for such a long period of time results in the purchasers being held in limbo, prevents them from going somewhere else to purchase a home, the loss of potential income where the money was raised from liquidating stock portfolios, withdrawals from 401K plans, pensions and the loss of the first time home buyers tax credit due to expire at the end of November, 2009 (unless extended).

Developers face economic collapse where withdrawing purchasers mean, not only reduced sales but, the inability to meet guidelines established by lenders needed to fund loans of current or future purchasers of units.

Armed with this knowledge, developers have the ability to oppose the release of the down payment, seek a renegotiated purchase price (if the cause for cancellation was an insufficient appraisal of the unit) or seek money to cover the cost of keeping the project afloat (where interest on the underlying construction mortgage continues to accrue). The sponsor of a condominium project really has nothing to lose by contesting the release of a down payment. If the AG’s office decides in favor of the purchaser all the Sponsor is required to do is return the down payment and any interest that may have accrued. Due to legal fees generated from the litigious environment of condominium development paired with collection of legal fees resulting from the boiler plate closing of multiple units customarily paid by purchasers, it is very likely that the law firm who would act on behalf of the sponsor would likely discount or absorb the cost of contesting the disposition.

Rather than lose tens of thousands of dollars and be faced with the uncertainty of the decision of the dispute over the down payment (whether it is a judge or the AG’s office), some purchasers make the decision to settle with the Sponsor and negotiate the release of their money by giving them the interest earned (if there is any) or giving them a portion of the down payment.

The next logical question is how do you avoid this? I don’t know if you can really answer this question. Language could be added to a contract that awards legal fees and expenses to the prevailing party of a dispute over a down payment. This may also act as a deterrent where a purchaser seeks to get out of a contract due to the decline in value of a condominium unit being purchased by asserting a material change in the condominium project or a default in the contract by a sponsor. Some say that this may have a chilling effect on the exercise of the right to dispute of the down payment. I think it may cause a party take a really careful look at the circumstances surrounding disputing the release of a down payment and allow the AG’s office to avoid wasting time on less than meritorious disputes.

Are there any attorneys who have information or contract language that may address this problem?

Your feed back is greatly appreciated.

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