Sonoran City News

Phoenix Foreclosure Properties

On any given day I can expect numerous calls and or emails from someone seeking to buy foreclosure properties. It almost seems as though half of Phoenix is in danger of facing foreclosure and the other half wants to purchase these properties. I thought I would take a moment to do a brief foreclosure guide.

First, and most importantly, if you are falling behind on your mortgage payments or have already received a Notice of Default (NOD), please read my posts on ways to help yourself during this difficult time. Know that you are not alone and most lenders are willing to work with you to get you through this.

OK, for those of you looking to purchase foreclosure properties there are a few things you should know.

• If a property is facing foreclosure in Arizona there has been a notice of default (NOD) filed. Generally the property owner has 90 days to bring the loan current before the foreclosure sale proceeds.
• There are many websites which list properties that have had a NOD filed. Here are two Foreclosure.com and RealtyTrac. Both offer similar property listings. Try them out and see what works best for you.
• If the property is facing foreclosure but NOT listed for sale, your average real estate agent will not help you. Approaching people facing foreclosure is not for the faint of heart. If the property is up for auction, not many agents will accompany you as, quite honestly, there is little financial incentive for them to do so.
• Many, many of these properties are listed for sale and available on the MLS. Some of these will be listed as pre-foreclosure or short-sale. Some will just have instructions that lender approval is required. A good, experienced agent will be able to find these listings for you and will be happy to provide you with a list of these properties. You can also contact me and I will send you a daily list of properties fitting this profile.
• Properties which were offered at auction but failed to sell are known as lender-owned or REO (real estate owned) properties. Many of these are also available on MLS. Contact an agent, or me, for information.

Are foreclosures a bargain? Not necessarily. Realize the homeowner was in some sort of financial crises which caused the foreclosure process in the first place. Knowing this, keep in mind that regular home maintenance probably fell short and the home could be in need of major repairs.

Know that in a market such as the Phoenix real estate market, there are so many home owners who owe more then their home is worth that you are just as likely to find a property on MLS as you are searching foreclosure lists. Again, this is where a good agent comes in handy. One of the advantages of buying an MLS property is you have a 10-day inspection period. Should you approach a homeowner direct, you are unlikely to have this sort of protection.

There are professional foreclosure property buyers. These investors have cash in hand to bail-out a property owner on short notice. If you need to secure a mortgage you are at a disadvantage. Also, when a property is offered for short-sale be prepared to wait a few weeks while the property owners lender decide if they will accept your offer.

In conclusion, foreclosure property purchases can work to your favor but you must be prepared for the type of purchase and do your homework.

Southwest 1031 Exchange - Changing the rules?

The recent closure of Southwest 1031 Exchange and its affiliates, Arrow 1031 Exchange and Qualified Exchange Services (QES), raises an interesting question; if the IRS requires you to follow its rules, should the IRS be responsible the regulation of said rules?

An Arrow 1031 victim contacted me. He lives in Texas and used Arrow 1031 Exchange for his 1031 because he contacted the IRS and was told he must use a qualified intermediary to complete his 1031 exchange. He searched the Internet and made a few calls and selected Arrow 1031 Exchange as his qualified intermediary because Nevada requires Qualified Intermediaries (QI's) to be registered, they had a good website and the staff was friendly.

I'll be the first to admit a good website is huge. I've been conducting business online since the early 90's when the Internet was text based and I'm a sucker for a good website. A friendly and helpful staff is also huge. The Nevada registration would also have sealed the deal for me.

In hindsight we now know the registration meant very little, if anything. We already know a good website and friendly people means little when it comes to trust and money.

I've been a cheerleader for 1031 Exchanges for years. I believe in the concept and the benefits. I have always been extremely frustrated by the lack of educational requirements on those involved. The lack of regulation for Qualified Intermediaries (QI) has always concerned me and I've frequently warned clients about who they are trusting with their money. But it never occurred to me that the IRS has to take some responsibility in this. The IRS requires the use of a QI. I would guess that the average investor assumes the IRS must regulate the QI industry if it requires the use of a QI to complete a 1031 Exchange.

If the government decided to build a bridge across the Grand Canyon and made that the only way to get from one side to the other, it is reasonable to expect the bridge to provide safe passage? Basically the IRS has built a rope bridge with the Qualified Intermediary requirement but they failed to ensure the bridge was safe or to even provide a safety net.

How to select an agent - For Investors

Back in December I posted on what a real estate investor should look for when selecting an agent. A bit of shameless self-promotion...I was interviewed for Personal Real Estate Investor Magazine. This month they have a feature article this month on "How to Find the Best Buy-Side Agent". You can pick it up at your local bookstore or magazine rack. The article gives a great overview of questions you should ask when selecting an agent and the type of experience you should look for.

Southwest 1031 Exchange Resources

More information for those involved with Southwest 1031 Exchange, Arrow 1031 Exchange or Qualified Exchange Services (QES).

Yesterday I heard from Rob Egenolf, he is a real estate and tax attorney in Santa Barbara specializing in tax deferred exchanges. Full disclosure...he owns a competing Qualified Intermediary company.

Mr. Egenolf was exceptionally kind in sharing his wisdom on the situation. He has given me permission to post his comments here.

Here is some of what he had to say...

"One thing the victims might want to know is that if their exchanges fail in 2007, they will have a taxable event in 2007 even though the funds were "stolen"  The deductible loss for the funds will probably not be deductible until they have been finally determined to be collectible and that will likely not occur until 2008 at the earliest.

Also, the bonds they had are likely not to provide any help either.  They do not cover "owner" theft, and there is some question as to what was covered and whether or not the premiums were even paid.

People choosing a QI need to ask more questions about security of funds before choosing their QI.  For instance, our company Amherst Exchange has always offered a full bank guarantee where the bank used (and we use several;) guarantee that the funds will be there when the replacement property is being acquired.  A signature of the exchanger is necessary to move the funds so there is no risk at all of the type of loss we have seen

Also, one should make sure all fund are held in segregated accounts so it is easy to audit things and the exchanger will have prompt knowledge of any difficulty. Keeping funds in one co-mingled account only benefits QIs that keep all or part of the interest earned.  In today's world, clients should insist that they get ALL interest earned on funds held."

Mr. Egenolf also gave me the contact information for an attorney who is filing a class action suit against QES. My hope is to contact him tomorrow to get further information to share with all of you.

Yesterday I started the list of those involved. Again, if you have been victimized you need to visit the website set up by the court appointed receiver.

Here are some other resources. Please contact me if you know of others or are involved in any way.

Nevada Real Estate Division - there are claim forms to be completed here

Copy of the Southwest Exchange Motion - from the klas-tv website

Marquis & Aurbach - firm representing many of the investor's

Nevada Secretary of State Securities Division 1- 800-758-6440

Southwest 1031 Exchange

While working on my quest to help Wayne and Greta Albritton, I've compiled some interesting information and a list of resources for those involved in the Southwest 1031 Exchange, Arrow 1031 Exchange, and Qualified Exchange Services debacle.

Yesterday I brought up the closure of Arrow 1031 Exchange. It has been pointed out to me that I have failed to mention Qualified Exchange Services (QES). QES, now closed, was a Santa Barbara based 1031 company that was purchased in 2006 by Don McGhan and company, the owner of Southwest 1031 Exchange. So far I am aware of at least $12 million in missing funds from QES.

For those playing along at home, I'm going to try to put together a summary of those involved just so we can keep everything straight.

The Main Company:
Southwest 1031 Exchange -
  - Donald McGhan, Chairman
- David Keys, Former CEO Southwest Exchange, Resigned from Silver State Bancorp Board February 6
Affiliates:
Arrow 1031 Exchange of Boise, Idaho (owned by Southwest Exchange)
Qualified Exchange Services (QES) of Santa Barbara, California (owned by Southwest Exchange)

Capital Reef Management - Company which purchased QES - Owned by Don McGhan, Jim McGhan and others.

Silver State Bank - where Southwest 1031 did their banking

Brown & Brown Insurance of Santa Barbara, CA - according to the Southwest Exchange website, this is the company which held the 'bond'. I've been told the bond expired. Still researching....

Larry Bertsch  - receiver for Southwest Exchange, more info here. Visit this site is you are an 'injured' party. This is where you contact the receiver.

District Judge Elizabeth Gonzalez - the judge who will be presiding over the lawsuits.

$83 Million and 75 people and counting - the amount of money and the number of people believed to be victims

Next post...things you can do if you are a victim

Southwest 1031 Exchange Update and request for information

Last week I wrote about Southwest 1031 Exchange closing their doors while retaining investor's money. A few quick updates, a correction, and a request

Arrow 1031 Exchange of Boise, ID an affiliate of Southwest 1031 Exchange has been ordered to cease and desist doing business by the Idaho Department of Finance. Based on the article posted on Idaho Business News, Southwest Exchange doing business as Arrow 1031 Exchange violated the Idaho Escrow Act.

The Idaho Escrow Act...well this is a surprise. Since 2005 Idaho requires the sales proceeds to be kept in a trust account established at an Idaho financial institution and not be co-mingled with other funds. I stand corrected from my earlier statement that only Nevada had any regulations for Qualified Intermediaries.

Now a request...Today I had a very interesting and informative conversation with Wayne Albritton. Wayne and his wife Greta had 1031 Exchange funds held with Southwest 1031 Exchange. Wayne and Greta now find themselves victims possibly losing over $433,000 held with Southwest 1031. The Albrittons deserve more then this quick mention in my blog and I intend on doing an entire story on them in the next day or two. Wayne has provided me with a wealth of information and it might take me a bit of time to get it all compiled in a neat and interesting fashion. What I am looking for is more people like Wayne and Greta. If you were involved with Southwest 1031 Exchange or Arrow 1031 Exchange I want to hear from you. Call me, email me, post here. Investors, agents, accountants or anyone else. This entire situation is tragic and frightening. I hope to connect those victimized with people who can provide assistance.

Not Everyone Commits Real Estate Fraud

For months now I've made it a point to visit Casey Serin's iamfacingforeclosure.com blog. It would be nice if I could claim I only read it for education purposes but the truth is, reading Casey's blog is like watching a reality TV show where people eat live bugs. It is repulsive and disturbing but hard to look away.

Until the past two weeks or so Casey was somewhat interesting then something changed and the blog turned more into a troll with each passing day and my interest in his web of lies waned. There are occasions when he states something so bizarre (he is a vegan who eats In-and-Out burgers) that it is hard to resist posting. Until now, most of what he has done and said has troubled me because of the crimes he has committed or just bothered me because he is such a train wreck.

His latest post though has upset me on a professional and somewhat personal level and I feel compelled to address it. I won't post on his blog because he chooses not to listen but it is important to correct his repugnant inaccuracy.

Casey has justified his 'cash-back-at-close, stated income, owner-occupied mortgages' by saying it is what all investors do. NO. It is not what all investor's do. My clients don't do it. I don't do business with those who do it. What Casey Serin did was illegal. He broke the law. He knew what he was doing was illegal because all mortgage applications have an area where you sign stating the information given is true. He lied. He committed fraud. He has admitted this.

To make such an egregious statement and try to justify his actions by comparing it to copying a CD is not only appalling, it is revolting. Until today I've resisted vilifying Casey for what he has done. I didn't support him but I had a very small amount of empathy for him and the ignorance of his youth. No more. It is because of people like Casey that lenders are closing their doors and people have extra disdain for real estate agents.

Not all investor's are bad. In fact most are great. Casey Serin is a poster child for so many things that are wrong in real estate and lending. 

Protecting Your 1031 Exchange

My earlier post on Southwest 1031 Exchange closing their doors and allegedly taking off with $83 million in investor funds prompted a call from a very nice gentleman in Texas who asked me some interesting questions. I'd thought I would share...

How does an investor prevent this from happening to them? Excellent question. First understand that with the exception of Nevada, there are no state or federal regulations for 1031 exchange accommodators or qualified intermediaries (QI). No bonding, licensing, or even segregation of funds is required. There is nothing to stop your QI from running off to the Bahama's and requesting citizenship.

I'm not an attorney and am not offering any legal advise, just common sense and experience. When selecting a QI, look for a well-established company (Southwest 1031 Exchange had been in business for 16 years, so age of business is no guarantee). Personally I would select a company with multiple locations throughout the country. IPX1031 has 44 locations nationwide (yes, I've used them and have always been very pleased by their service but I'm just referring to them for illustration here).  IPX 1031 is a division of Fidelity National Title Group. First American Title has a 1031 exchange division. First American Title and Fidelity National are publicly traded companies (again no endorsement implied). Does this mean nothing can go wrong because they are publicly traded companies? Well, no (uh, Enron comes to mind). But hopefully if something does go wrong you will have more avenues for recourse.

What other things can investors do to protect themselves? Once or twice a week someone will call me seeking advice on a 1031 exchange that they are currently involved in. I love talking to people (I've been frequently accused of not knowing when to stop talking). The problem is talking to someone who has already established an agency relationship with a REALTOR. I am bound by a code of ethics which basically prevents me from discussing a transaction that I am not involved in. The reasons for this are many. The bottom line is, if you are already working with an agent, I cannot help you even though I might really want to help you. I can discuss theoreticals and possibly discuss the replacement property if you are still in the relenquishing stage. Just know I might not be able to say much.

What you need to do before you sell your investment property is assemble a group of people who are knowledgeable on 1031 exchange. You need a good tax advisor with 1031 exchange experience and you need a good real estate agent with a background in 1031 exchange. There are no education requirements for real estate agents in 1031 exchange. Any agent can be involved in a 1031 exchange and have absolutely no idea what the are doing. When I first became interested in 1031 exchange I was told to attend a one-hour class held at a title company and I would learn all I needed to know. Wrong. I learned very little but believed I knew a lot. Not until after my first 1031 did I fully understand I would need a lot of education and would have to travel to get it.

Anyway, ask your accountant and agent how many 1031 exchanges they have been involved with. This should elicit a stream of anecdotes on the many facets of the 1031's they have done. At least it does with me. Listen to what they have to say. Then decide if this is someone you want on your team. Investment properties are very different from residential. Just because your best friend has sold your last three homes does not mean this is the right person to guide you through a 1031 exchange.

I've rambled enough for today. You worked hard to earn what you have. Make sure those you trust with your money know what they are doing and will work hard to protect it.

1031 Exchange Terms

Tax-Deferred Thursdays....

Based on my earlier post on the ugly 1031 Exchange fraud in Las Vegas, I thought I would do a post each Thursday to 1031 Exchange basics.

This week will be some basic terms.

Boot - Any assets received from a 1031 Exchange that is not "like-kind." The most common types are "Cash Boot" and "Mortgage Boot." All Boot is taxable.

Cash Boot - Any cash an exchanger receives upon the closing of the relinquished property is considered Boot and can be taxable.

Constructive Receipt - The Exchanger having unrestricted control of the equity from property sold. Constructive Receipt will invalidate a 1031 exchange.

Qualified Intermediary - A third party that helps to facilitate the tax deferred exchange. Sometimes refers to as "facilitator," or "accommodator".

Relinquished Property - The property sold when making a tax deferred exchange.

Replacement Property - The property purchased when making a tax deferred exchange.

Decisions of a Young Homeowner

There are days when people surprise me. In a good way.

A young woman is preparing to purchase her second property. Her first has become too small. She wants a yard and a dog. Nothing about this is particularly surprising. Except (surprise) she is 22 years old.

Now I'm sure there are 22-year-olds out there who are ready to move out of their 'starter home', but I don't run in to too many. This young woman is impressive because she embraced homeownership and independence at a young age and is now looking forward to 'moving up'. I only wish I could get my adult children to embrace the same.

This is where the fun starts. She has told me her goals for her new home. They are ambitious. Maybe too ambitious. She is in the right price range and her choices of neighborhoods are in line with her lifestyle. The next decision will be the tough one.

She wants a new build. Like many, she has her dream home in her mind and by buying a new build she can make that dream a reality. There is, of course, a hitch in this plan.

Buying a new build comes with out-of-pocket expenses that many buyers fail to think about when making the purchase. Most new homes lack many of the amenities found in existing homes. Things like window treatments and ceiling fans, garage door openers and landscaping. All the little things that can drain a bank account overnight.

This young woman has grand plans but will soon find herself in the position of being a landlord and a homeowner. Being a landlord is expensive. Cash reserves are necessary in case of vacancies or repairs. This is a reality that is staring her in the face.

Her decision will be difficult for someone so used to handling responsibility so well. Will she purchase an existing home, saving the necessary emergency reserves for her rental property? Will she follow her dream and purchase a new build and face the out-of-pocket expenses that come with it?

For me, the answer is easy. I know what I would do but I also have a few more decades of life experience under my belt. All I can do is give her my best advice and hope she surprises me.