How to Compute Tax Prorations & Tax Credits in Cook County Illinois

If you are a young attorney just starting out or just someone interested in the obscure world of tax prorations, this article is for you.  Tax Prorations are essentially receiving credit for unpaid taxes either now or later after tax bills come out.

History:  In the Great Depression of the 1930's; the State of Illinois granted a one year property tax holiday.  This set all tax collections back one year.

Example:  Your Tax Bill for the First Half of 2010 (January 1, 2010 to June 30, 2010)  is $2000.  The tax bill is dated March 15, 2011 and due by June 30, 2011.    Since the bill is provided nearly a year after when the tax was incurred, the taxpayer has no idea what his tax bill will be when the tax is actually being incurred....He can only estimate based upon his prior tax bills.

Application.  When you purchase a piece of residential real estate in Cook County, clear title is provided and all of the taxes that can be paid are paid up on the day of closing.  However, because tax bills come out one year after they are due, there is often an entire year of property tax liability that is unpaid and the actual bill is unknown..

Example:  Buyer of Real Estate makes offer to purchase a home in Chicago.  The offer is accepted June 1, 2011.  The closing is to be September 30, 2011.  Full Year Tax Bill for 2009 is $4000.

First:  Calculate the estimated tax liability  up to the date of closing:

First Half of 2010 Tax Bill $2200  (must be 55% of the full bill from the prior year)
Second Half of 2010 Tax Bill (unknown)
First Half of 2011 Tax Bill (unknown)
Partial Second Half of 2011 Tax Bill (unknown)

The contract should call for a proration premium which is typically 105% or more.  In this contract, the amount is 105%.

To figure out estimate full year 2010 bill, simply take the 2009 bill times 105%.
$4000 X 1.05 = $4200.

To figure out Second Half of 2010:

Take $4200 (total estimated 2010 bill) less the $2200 already paid for a credit of $2000 to be given at closing for this half.

To figure out estimated full year 2011 bill, simply take the 2009 bill times 105%
$4000 X 1.05 = $4200.

For 2011 you will be paying 1/2 of the $4200 for the period 1/1/2011 to 6/30/2011 or $2100

For the period or 7/1/2011 to 9/30/2011 you would pay the fraction of ((31+31+30)/365) x $4200
$1058.64.

So our closing statement will show the following credits:

2010 Taxes 1st Paid
2010 Second Half Credit    $2000.00
2011 First Half Credit:  $2100.00
2011 Second Half Credit to 9/30/2011:  $1058.64.


SO WHAT DO YOU DO WHEN YOU DON'T HAVE A FULL YEAR TAX BILL AVAILABLE AND MUST CREATE A BASE TAX AMOUNT FROM SCRATCH?

Answer:  Take 2% of the purchase price.  This is an approximate annual maximum tax rate for homes in Cook County and specifically applicable to the City of Chicago.  This is used often with new homes that do not have any tax record yet.

For more information about tax prorations or to hire David Nelson as your real estate attorney, please call 877-464-6656 (877-GO-GO-NLO) or email David at info@nelsonlawoffice.com

I've Purchased a Home with Mold Damage - What do I do NOW?

First of all, don't panic!   Instead, take immediate action.  Within one week, you should have your own mold inspector preparing a report and providing a referral for mold remediation work.  Next, you should see a Plaintiff's Real Estate Attorney who is intimately family with how to file a lawsuit based on the Illinois Real Estate Disclosure Laws.  Next, if you can afford it, have the mold remediated.  If remediation is not possible and the home is a loss, move out, move on and get your litigation going so that your claim is not barred by the statute of limitations.

How do I find an attorney who is a skilled Plaintiff's Real Estate Attorney, visit IRELA, the Illinois Real Estate Lawyers Association at http://irela.org and take a look at the membership.  You can also email the current President for referrals.

How do I find a good mold inspector?  First call the home inspector who did your original home inspection for a referral.  Then also consider calling two excellent long time home inspectors for their referrals:  1)  Dan Brown, B & G Home Inspections, you can call him at:  312-558-1343  2)  Juan Negron, you can call him at 847-675-4613.

Home much for a Mold Inspection?  $1000 or less

Home much for remediation?  Sometimes as little as $500 depending on the severity of the problem.

Here is an example what can happen when action isn't taken immediately.

Frank purchases a condominium for $200,000.  Unbeknownst to Frank, the Seller is Developer who is concealing a severe mold and moisture issue in the basement of the building being converted to condominiums.  Frank is buying a unit that has a first floor that is living space with all bedrooms located in the basement floor of the duplex.  Frank hires a home inspector who does not bring up mold at the time of the inspection.  Frank does a walk through of the condominium 3 days before closing and does not see mold.  Frank closes on the property.  At the closing Frank takes a out a $180,000 mortgage.  The monthly payment is $1500 including taxes and insurance.  The condominium association assessment is $150 per month.  Frank moves into the condominium 5 days after closing.  8 days after the closing, Frank smells mold, sees mold showing up through the painted drywall and becomes sick.    Frank moves out of the condominium 10 days after the closing and never returns.

The condominium association files an eviction action one year after the Frank left his condo and obtains an order of possession.  The condo association does not rent the condominium because it is unfit for habitation.  However, the condo association has possession of the condo and changes the locks barring the reentry of Frank.

Frank never speaks to his home inspection to ask about why the mold was not discovered.  Frank never hires a mold inspector and never obtains an estimated cost of remediation and/or determination of whether it is possible.

Frank does spend $5000 on a retainer to hire a law firm to sue the developer.  The law firm files a complaint and can never serve it because the Developer has fled the country to Tahiti.  Frank's law firm has stopped work on the lawsuit because they need more money for legal fees.

Frank's lender is threatening foreclosure and a deficiency judgment.  Frank makes $100,000 per year.

What does Frank do?  If his litigation fails, he will most like need to file for bankruptcy.  However, Frank will be forced into a Chapter 13 and with his income will most likely pay at least 40 cents on the dollar to his creditors including the mortgage for a period of 5 years.

Another option for Frank is to sue the attorney he hired for malpractice, however, this claim will be difficult because the attorneys filed a lawsuit within the time limits.

Frank is stuck in between some problems with very few good solutions.  The lesson is to immediate get the home re-inspected, get a mold inspection, get a remediation estimate and then interview 3 different attorneys to determine the best plaintiff's attorney for the complex claim.  Although not always available, these types of lawsuits often benefit from being contingency fee suits.

For more information about this topic, bankruptcy and other legal issues, please call NLO Nelson Law Office at 877-GO-GO-NLO or email to:  info@nelsonlawoffice.com

CHAC Real Estate Closings...What Everybody Should Know!

In the City of Chicago, the Chicago Housing Authority runs various types of low income subsidized housing.  In the past these were often referred to as the "projects" which was a description of several concentrated areas of public housing in Chicago.  The three largest "projects" were the Robert Taylor Homes, Cabrini O'Green and many lesser known housing developments.  All of these housing projects were failures.  A law enacted in the early 1970's is largely responsible for these failures.  For the most part, all tenants had to pay 40% of whatever their income was.  Therefore, there was no way to have super cheap housing and save money over a period of time.  Without saving, no working class person could use these units and only the very impoverished used these units as "safety net".  Although these units provided a way to stay off of the street, they were unsafe "prisons" that simply encouraged and literally trapped people in poverty.  There was no interaction with working class, middle class or upper class persons and all job opportunities fled as far away as possible from these housing projects.
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In the 1980's Mayor Daley enacted a long term plan to close down all of the concentrated low income housing in Chicago.  Part of the program was to create the so-called "scattered" site housing which was essentially 1-12 unit size housing projects.  Most the land was acquired by people who didn't pay taxes and/or were foreclosed upon.  Vacant lots in up and coming neighborhoods provided the best opportunities for good housing with these scattered site housing programs.  As welfare reform was passed in the middle 1990's the need for this program began to fade and opposition to these scattered site housing developments intensified causing a shutdown of the program.  Bickerdike Housing, Lutheran Social Services and other agencies typically manage these sites today.  Today, there is no further building of these types of housing.

With the advent of Welfare Reform and the Creation of "Section 8" Housing came the idea of landlord vouchers.  Poor people would be allowed to rent "fancy" market rate units in regular neighborhoods all over the place with not racial or economic boundaries.  The reality of this situation was quite different.  Section 8 Landlords had to be qualified and typically only desperate landlords in  mediocre to bad neighborhoods oftentimes also far away from good jobs. 

CHAC Houses are essentially a Section 8 voucher used to purchase a home and then have the mortgage payment paid by Section 8 for up to 15 years.  Before you think this is an easy gift for the buyer.....think again.  Typically, the buyer has been in public housing for over 20 years and has a lot of getting used to working and not being essentially a ward of the state.  It takes a long time to make the transition and usually these buyers have really put forth some good effort to get into the right mindset.  Also, the Section 8 Subsidy only cover principal and interest and does not cover taxes, insurance and mortgage insurance.  Bottom line, oftentimes, the buyer is paying up to 1/3 of their housing costs right away.  .....AND they can never return to public housing - ever!  They sign this agreement when they accept the CHAC home.


So what are the issues for the seller's and buyer's attorney?  BEWARE!  First of all, as all real estate attorneys known in Illinois, nearly 3/4 of their compensation comes from providing the title insurance policy.  This odd and not particularly good situation arises from the introduction of title insurance in the 1930's.  Traditionally attorney's made 1% of the purchase price as their compensation.  Title Insurance Premiums were designed to replace this with only nominal legal fees to the seller.  In a CHAC closing, the seller's attorney is NOT ALLOWED TO PROVIDE THE TITLE insurance.  This is done via a forced rider that the seller signs during attorney review.  Bottom line, if the seller is desperate to sell the property, then they will essentially need to pay their attorney for the missing premiums which average about $1500.  In a good market, the seller will simply refuse to sign the rider and cancel the transaction.

Hopefully, you are starting to see the bad precedent.  Bottom line, the title insurance costs ultimately are paid for by the low income buyer and in an amount that is more than they would have been if the seller's attorney was allowed to provide the title insurance.  Also, better properties will typically cancel faster because they can choose standard buyer's who don't have "weird" financing and restrictive riders to sign.

Obviously the intent of the creators of CHAC was to provide a low cost title insurance policy to the buyer.  However, this ultimately results in a higher price and unavailability of many homes where the seller's reject the CHAC riders in attorney review.  This may be viewed as discrimination and it is, but it's not prohibited discrimination, just unfortunate.

Buyer's attorney also need to be aware that the first sign that your buyer is a CHAC buyer, you need to withdraw.  CHAC requires volunteer attorneys.  This is also misguided.  Good, reasonably priced attorneys who are qualified provide good experience to buyers in how to hire attorneys which they will need in their new non-welfare lifestyle.  Free attorneys sets a terrible precedent for these new homeowners where they think that just because they are low income they will have attorneys wanting to offer pro bono (free) services which is not reality.

In my opinion, the CHAC program is great except that title should be pulled by the seller's attorney using existing rate cards and buyer's attorneys should be hired using reasonable rates.  Moving people into the opportunity to own a home is great.  The process of getting to home ownership should help train the new homeowner in the way the transaction would ordinarily be conducted outside of CHAC home ownership. 

Lastly,  I have recently seen where CHAC buyer's became "stuck" with the idea that they needed a certain kind of home for a certain kind of price regardless of where it is located and regardless of the effect on their commute.  The bottom line is this - it is my opinion that CHAC counselors should always encourage potential buyers to buy within 10 miles of their employment with a viable public transportation option and near an area that has job growth.    A beautiful home that is not near your home is called a "vacation home".  A beautiful home in a depressed economic area is called a museum.  A small but practical home near tremendous job opportunities, vibrant communities and good schools is called a HOME.

For more information about the CHAC program, please contact the CHA at THECHA.ORG


For more information about quality real estate attorneys who represent residential real estate sellers and buyers, please contact David Nelson at NLO NELSON LAW OFFICE INFORMATION

Fidelity National Title and JP Morgan Steal Buyer's Attorney's Fee with Petty RESPA Disagreement

I recently was involved in a closing where JP Morgan Chase and Fidelity National Title ended up "stealing" my attorney fees by not allowing them on the HUD.  How many times has this happened under all sorts of pretenses:  You didn't request your fees be added to the HUD in writing;  The lender didn't list you as receiving any attorney fees;  Your fees don't match the good faith estimate.  HERE'S THE BOTTOM LINE:  If buyer's attorneys cannot be paid pursuant to their written fee agreement with their client in a secured way through the HUD then something is going to have to change.

Specifically, what happened in this case is the following.  Buyer's had a total fee of $450.  This fee was increased due to a cancellation of a schedule closing less than 48 hours prior to the closing date.  All of these terms were in the written fee agreement which the clients signed.  Under our fee agreements, clients must pay 1/2 of the fee up front which the client's did.  Therefore at closing, $225 of the regular rate and $225 additional for the abruptly cancelled closing resulted in $450 due at closing.

The $450 was requested to be added to the HUD and Fidelity placed it in line 1307.  Unfortunately, JP Morgan Chase objected and said that the fee should be placed in line 1100 section.  Fidelity's software supposedly doesn't allow this.  JP Morgan Chase alleges that this is what the RESPA law requires, but Fidelity doesn't allow this.

To settle the matter, I ended up slashing my fees by 50% for a payment by check at the closing from the client.  What is most sinister about this is that the client had more than $1000 that they had to forfeit in seller paid credit for closing costs because they could not get money back at closing.  My total fee could have been paid out of this had JP Morgan Chase not objected or Fidelity had their software updated to comply with JP Morgan Chase's view the RESPA law.

SOLUTION:  All clients should pay 100% of the estimated flat fee to the buyer's attorney up front and deposit into the client trust account.  Upon the failure of the closing, the buyer's attorney could specify in their fee agreement that 1/2 of the estimated flat fee be paid from retainer and 1/2 returned.  Upon successful completion of the closing, all fees wold be paid from the retainer.  Any special charges such as trip charges, cancelled closing fees and other miscellaneous charges could be either invoiced to the client outside of the HUD or invoice and paid via the HUD at closing .....subject to lender and title company approval.  Bottom line - most of the time all of the fee would be paid.

The other option is for real estate attorneys to either take these closings on a loss leaders or simply exit the representation of buyers. 

Attached is a model representation agreement for review.

To download a copy of our proposed Illinois Buyers Residential Real Estate Client Representation Form, please click Download CRA

Steel Porches, Building Maintenance and Condominium Assessments

Today, while riding the Red Line L into work, I was struck by how many steel porches are rusting on Condominium Buildings.  About ten years ago, a porch collapsed in Lincoln Park.  The porch was in adequate condition by porch standards of the day, but it was pushed past its limit with nearly 100 people crammed on a porch designed for about 5 people.  Unfortunately for the owners of the building, several people were killled....an guess what they were wealthy and politically connected.  The result, the new Chicago Porch Ordinance and the witch hunt against landlords and condominium associations to upgrade their porches.

The good news - Chicago has some great porches that are much safer than ordinarily found.  The bad news....well many of the condominium conversions of the housing boom now have strong, but rusty steel porches.  I remember the ballyhoo of developers discussing how great these "premium"steel porches would be.  Practically no maintenance, incredibly strong and panacea for anyone wishing to avoid the costly replacement of wood porches.

Well  - think again.  Steel Rusts.  And it  rusts really well.  In fact, typically rust starts forming immediately after a painted steel surface is exposed to moisture.  So guess what - you need to to regular maintenance on these porches, such a sanding, painting and testing the integrity of rusting areas.

Example:

In 1999, Developer converted 12 unit apartment building to 6 condominiums.  Each unit has "miraculously" only paid $150 per month for their assessments which are to cover primarily condominium association insurance and miscellaneous expenses.  The association does not reserve money and has not ever had an increase in assessments.  Since 1999 all of the original owners have sold and moved out with only second or third generation owners present.  The "new" roof is now over 10 years old, there have been reports of small leaks onto the ceilings of the top floor units.  Also, the "deluxe" steel porches prominently featured in the original advertisement for the condominium development have worked out well for 3 units and poorly for the other 3 units.  Apparently the porches don't all drain outward leaving puddles after rainstorms  After ten years, 3 units have consistently rusty areas that really need to be fixed.  The owners are angry but can't get the association to fix these rusty spots as this is "unnecessary".

Solution:

Automatically raise assessment 15% each year in the budget regardless of whether the membership thinks this is a good idea to get assessments more in line passively over the next few years.   Propose a modest one time special assessment for porch maintenance involving sanding and painting and if the areas are significantly corroded have an engineer prepare a report indicating that now replacement of the deck is necessary.  The increase reserves to at least 10% of budget for the current year - this will make the association FHA compliant.    With good maintenance a steel porch can last indefinitely, but unlike treated wood, constant small amount of maintenance are necessary.

No Saturday Walk-In Office Hours for August 6, 2011

There will be no Saturday Walk-In Office Hours for Saturday, August 6, 2011.   The next walk-in office hours are Saturday, August 13, 2011 from 12 Noon to 4pm at 2215 South California Avenue; Chicago, Illinois.  For more information call 877-GO-GO-NLO or visit http://ping.fm/eZqTA

The Dangers of Non-Bankruptcy Credit Consolidation

The Bankruptcy Act of 2005 wrote in a number of provisions that "encourage" potential bankruptcy debtors to consider non-bankruptcy debt relief such as Credit Consolidation.  The problem with Credit Consolidation is that it is not regulated and is not a global settlement of debts.Also, the cost of credit consolidation is usually between 30 to 50 cents on the dollar which typically is more expensive than what most debtors pay in a Chapter 13 Bankruptcy. 

Just last week, Lisa Madigan, Illinois Attorney General filed a Cease and Desist Order Against Legal Helpers, an Illinois Based Debt Consolidation Firm under the new law effective January 1, 2011 that prohibit any non-lawyer from offering non-bankruptcy debt consolidation.

So what's the solution:  Bottom line is this.  If you are wealthy enough that a bankruptcy is more harmful than good, the traditional route to take is to spend some serious money on legal fees to restructure you debt and also defend lawsuits as they arise.  For most people's debts that are beyond their ability to pay, bankruptcy is the only safe choice because it is court supervised and is global in its effect.  This is not to say that Bankruptcy is the best debt relief ever, but is simply to say that only in a bankruptcy can you get the automatic stay which stops all lawsuits and debt collections from happening without court order.  Also, in a bankruptcy,  a repayment plan uses long established and well thought out priority rules to determine which debts are paid in preference to other debts.  Lastly, all parties in bankruptcy proceedings generally have attorneys which helps to ensure that the focus is on debt relief and not on silly mistakes of procedure or allowing one creditor to have preference over another.

Here is a typical example of why non-bankruptcy debt relief through non-attorney assisted credit consolidation is now prohibited in Illinois:

Sally and Ben are married with two children.  Their family income is $50,000.  The have $2000 of tax debt from last year, Ben owes child support arrears to his ex wife in the amount of $10,000 and Sally has $60,000 in credit card debt.  Ben and Sally own a modest home with a $80,000 mortgage and $500 per month payments.  Ben and Sally are 4 months behind on their mortgage payments and are about to have foreclosure lawsuit filed against them.  Sally has two court judgments against her.  Both have been sent to collection.  15% of Sally's gross income is being deducted each month for these garnishments.  Currently Sally will be in garnishment for 5 years before they are paid off.

What should they do:

If they file a Chapter 7 Bankruptcy, all of the credit card debt will be gone and they can surrender their house and move out in approximately 6 months. Ben will still be garnished for his child support arrears up to 50% of his gross income and he and Sally will also have to make steep payments on their back taxes.  The family will move into low quality rental housing within 9 months.

If they file a Chapter 13 Bankruptcy, all of the credit card debt will be paid at 10 cents on the dollar or $6000 over 60 months.  The arrearage on the home mortgage will be paid first without interest and is approximately $2000 over 60 months.   The tax debt will be paid back before all other creditors at 100% with 9% interest over 30 months.  Ben and Sally will be able to keep their home.  Ben will pay back all of his child support arrears without interest over the 60 month plan at 100%.  In this case, the garnishments stop.  Meaning that the family now only pays 10% of its gross income not to just two unsecured creditors but in satisfaction of ALL of the unsecured creditors - this is where the good deal is.  Also - if Ben and Sally had a car loan, it would be converted today to 6.25% interest with payment spread out over 60 months.

If they went with debt consolidation, Ben and Sally would most likely pay $4500 for debt consolidation services up front.  Then they would pay approximately $1200 per month for at least 36 months.  At the end of the 36 months, the creditors who voluntarily agreed to a reduce payoff would be gone and paid off.  The creditors who did not join in would still be owed money and most likely would have filed a lawsuit for collection and have entered a garnishment against Ben and Sally.  The Child Support and Tax Debt would be paid through garnishment of Ben's Salary up to 50% of his gross income and the tax debt would be paid through a tax lien which would tie up all of their real and personal property, freeze their bank accounts and ruin their credit rating.

Bottom line - when the Bankruptcy Reform Act of 2005 was enacted, part of the goal was to increase the payout to credit card companies.  This has been accomplished by increased payouts under Chapter 13 plans and the means test that forces everyone with above mean income into a Chapter 13 repayment plan.  Bottom line - voluntary credit consolidation was bad for most people prior to 2005 and it is still bad today.

Only the very rich with very private and expensive attorneys benefit from these types of restructuring and usually it is done to simply keep control of many assets with very little equity but lots of income.

For more information about debt relief through bankruptcy, please email  info@nelsonlawoffice.com  or Call 877-GO-GO-NLO to set up a free bankruptcy consultation.