By: Joseph E. Seagle, Esq. President of PCS Title

October 25, 2021

Now that Zillow has stopped buying homes…at least for the rest of the year…investors and REALTORs can focus on other news.  BTW, if you’d like to see us in person, we’ll be at the Night With Nuview event on Wednesday, October 27. Be sure to sign up if you haven’t already.

1236 words…6 mins. 30 secs.

1236 words…Est. Reading Time: 6 mins. 30 secs.

1 Big Thing: IRS re-focuses on FIRPTA

While most news in October 2020 focused on the pandemic, the IRS announced that it would crack down on those who aren’t paying their fair share of the “FIRPTA” tax (Foreign Investment in Real Property Tax Act) which is a tax on non-resident aliens who own real estate inside the United States. 

State of Play: The tax must be withheld and paid to the US Treasury upon a foreigner’s sale or rental of real property located in the USA. The IRS launched a “compliance campaign” to increase the number of audits of this tax.

  • Most real estate professionals are aware that, when they’re buying real estate from a non-resident alien, they should let the closing agent know so they can withhold the appropriate taxes and remit them to the US Treasury within the deadlines after closing. 
  • If they fail to do so, they – the BUYERs – are liable for the tax, interest and penalties; not the foreign seller. The Buyer is the “Withholding Agent” with the duty to withhold and pay the tax.
  • But when it comes to rentals many property management companies don’t know or understand that they have a legal obligation to also withhold the tax on rents received. 
    • Property managers for non-resident alien landlords are “withholding agents” who have control, receipt, or custody of the funds (monthly rents) that are subject to the tax. 
    • Such “withholding agents” generally must withhold a sizable percentage of the rents and remit them to the IRS unless the non-resident landlord makes a special election to have the rents treated as income from a trade or business in the US.

Bottom line: If you’re a property manager, managing properties owned by non-resident foreigners, be sure you have IRS Form W-8ECI in your file in the event of an audit. Otherwise, as the property manager, you must have IRS form W-8BEN in your file, stating that withholding is required. In that case, be sure you’re remitting the tax regularly as required. Also, discuss it with your CPA to make sure you’re compliant prior to an auditor darkening your door.

2: Fannie Mae scrutinizing new condo mortgages

Starting January 1, 2022, Fannie Mae will no longer purchase mortgages secured by condominium units in developments with significant deferred maintenance. 

State of Play: Since the Champlain Towers South condo building collapse in Surfside, Fannie Mae and others have been examining how they evaluate aging condominiums (and cooperatives) for everything from mortgages to insurance. 

  • Florida condo associations’ owner-members may waive reserves. Reserves are usually collected in monthly installments along with the regular monthly assessments which cover maintenance and operation costs such as lawncare, security, insurance, and pool maintenance. Reserves are additional costs that are to be paid in the future for major repairs such as roof replacements, parking lot repaving, exterior painting, and overhauls of structural components. These are large-ticket items that can cost in the millions of dollars to complete. 
  • Waiving reserves is a sure way to hold monthly assessments artificially low, keeping owners happy and off the backs of condo board members. Board members who push for reserves or special assessments to make major repairs are traditionally voted off the board by owners who cannot or do not want to spend any more money than absolutely necessary each month on their unit’s ownership. 
  • Such deferred maintenance, renovations, upgrades, and repairs, over time, diminish the value of the condominium and – as seen in Surfside – can lead to a total building collapse, killing dozens of owners.
  • The property and casualty insurance industry has started to recognize its liability for such deferred maintenance, and rates are likely to rise precipitously on such condominiums and cooperatives that have waived reserves and deferred maintenance. 
  • Now, Fannie Mae, the nation’s largest purchaser of conventional mortgages, is also taking action to protect itself from such losses. 

Bottom line: Fannie Mae buys mortgages from lenders, freeing up mortgage money for those lenders to make more mortgages. If Fannie Mae won’t buy a mortgage from a lender, then the lender either simply won’t make the mortgage, or they will price the mortgage at an interest rate to make it worthwhile. That rate would usually be much higher than normal market rates. If potential buyers can’t get a mortgage to buy a unit in a condominium with severely deferred maintenance, then that reduces the pool of buyers for that unit to those with 1) cash and 2) no care for the deferred maintenance. Cash buyers typically can demand a lower price, which could send the condominium into a negative feedback loop of ever-decreasing values per unit. 

The take-away: Sellers of condominium units where the maintenance has been deferred should be prepared to see buyers unable to obtain a mortgage to buy the unit. Buyers who are borrowing to buy a condo unit should be prepared for a long wait while the lender’s underwriters scrutinize the condo budgets and insurance coverages. Don’t be surprised if we see a severe price correction on condominiums statewide after January 1, 2022. 

3: Most people still want to close in person

When the pandemic first hit, everyone in the real estate settlement process moved to remote work as fast as they could, including PCS. We ramped up our digital signing capacity and adopted remote online notarization.

  • We expected everyone to quickly embrace remote online closings, especially since it seemed like almost every state was passing a new RON law each week. But it didn’t happen.
  • To our surprise few people wanted remote online notarizations for their closings. We learned that it created a lot more work for us to upload and tag documents, and then to coordinate times with buyers or sellers to execute documents online, only to discover that the end user (buyer or seller) didn’t have the right technology to access the platform. Or the credential analysis, knowledge-based answers, didn’t work so that the party’s identity could be verified. Further, no lenders would accept loan documents that are remotely signed and notarized, and all notes were still required to be “wet-signed.”
  • A report by Solidifi U.S. Inc. has proven what we’ve experienced: most parties still prefer to sign their closing documents in person per the MReport

The take-away: 81% of those surveyed prefer to execute their closing documents in-person rather than electronically or by videoconference. PCS has an extensive network of certified and vetted notaries across the country who can meet in-person with buyers and sellers to execute their documents. We still have RON available as well for those who prefer and are able to sign remotely by video, and we use e-signing as much as possible for internal documents that do not require notarization. But, even without the formal survey data, we had heard that people prefer to sign with a human at a table the traditional way when buying or selling a home, and we make it happen every day.

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