A recent Wisconsin law change in Wisconsin has a big impact for those interested in investment property in Wisconsin. As part of the Wisconsin biannual budget signed into law in September 2017, the State of Wisconsin has discontinued its “rental weatherization” program. This program required either a Seller or Buyer of residential real estate to ensure that the property met certain energy efficiency standards such as the installation of storm windows and proper insulation on hot water pipes. Typically, the party responsible for bringing the property into compliance with the weatherization code in a real estate transaction is negotiated in the property sales contract.

To ensure that the weatherization standards were met, on each transfer of real estate, the party responsible for bringing the property up to code was required to have a document recorded with the deed transferring the real estate. If the Seller was responsible, they would have to obtain and record what is called a “Certificate of Compliance”. A Certificate of Compliance required the Seller to hire an inspector to determine whether the property was up to code, and if it was not, incur the cost of bringing the property up to code in order for the inspector to issue the Certificate.   If the Buyer was responsible, they were required to execute a “Stipulation Agreement” in order for the Register of Deeds to accept the deed transferring the property to the Buyer. A Stipulation Agreement required the Buyer to obtain a Certificate of Compliance within one year of purchasing the property. This program has now been eliminated so neither party is responsible for doing so.

Though in many situations taking steps to improve energy efficiency may still be more cost-effective for residential real estate investors, this change gives property owners more flexibility in determining what improvements are necessary and when they should be made. This change may encourage more investment in residential real estate in the state.

Though this eliminates one consideration for those interested in investment properties, there are many other legal considerations you may not be aware of when entering the process of purchasing investment properties. If you are looking to begin  investing in residential real estate  or looking to expand your current portfolio, contact the attorneys at Schober Schober & Mitchell, S.C. We will be happy to help.

I’ve never really gotten on the Zombie movie and TV show bandwagon. I think it’s because they’re just so far-fetched, that it’s difficult for me to buy into the premise. When it comes to the reality of the Zombie Property Apocalypse though, it’s a completely different story. You may have read or heard about “Zombie Properties” in the news, but might not know exactly what the term really means.

Zombie Properties are partially a result of the subprime mortgage crisis that contributed to the housing bubble burst in the late 2000s, as many homeowners and lenders across the state of Wisconsin found themselves in court involved in foreclosure actions. In Wisconsin, a lender must foreclose on a property by bringing a law suit, where it must prove that the borrower defaulted on its mortgage obligations in order to get a judgment for foreclosure. Upon that judgment, the borrower has a specified period of time to redeem the property. Often, however, upon receipt of the foreclosure notice, borrowers just abandon their homes and don’t fight the foreclosure action in court, making it easy for a lender to obtain the foreclosure judgment. Seemingly, this would also make it easy for lenders to sell the property to get their money back from the loan it gave to the borrower. But, sometimes lenders won’t sell the property even if they have a foreclosure judgment. Upon a property being abandoned, properties  sometimes become subject to break-ins and other crime, making them unmarketable for sale, and often are of so little value that the lender has little incentive to incur the costs to sell. The lender will then just leave the property abandoned and dormant, putting the property in a limbo where it is neither dead nor alive; hence the term “zombie property.”

Zombie Properties have a negative effect on the marketability of sellers of other neighborhood homes and also decrease the availability of housing for buyers. In an effort to curb the problem in the state, Wisconsin enacted Act 376 earlier this year. The Act seeks to combat the Zombie Property problem in Wisconsin by making the time period for all foreclosures quicker and by deterring lenders from letting abandoned properties sit unsold for too long.

Shortened Redemption Periods

The first notable change under the new law is the reduction of redemption periods for owners of residential properties subject to foreclosure. In Wisconsin, when a lender wins a judgment of foreclosure against a borrower in default, the borrower has a chance to redeem the property by paying off the mortgage, executing a short sale, giving the lender a deed in lieu of foreclosure, or even filing for bankruptcy. Under the old law, if the lender opted to retain the ability to go after the borrower for any outstanding amount due on the mortgage, the borrower was given a year to redeem the property and to repay the deficiency. Also under the old law, if the lender opted to just have the ability to sell after the redemption period but waived its ability to go after the owner personally for the deficiency on the mortgage, the redemption period for the property was only 6 months. Under the new law, the redemption periods were reduced from 12 months to 6 and from 6 months to 3, for each respective situation. One caveat in the new law is that for this new 3 month redemption period, the owner of the property can extend the redemption period by a maximum of two months by showing that he or she has made a good faith effort to sell the property. The home owner can show a good faith effort by listing the property for sale with a real estate broker.  Though this reduction in redemption time affects all foreclosures on mortgages executed after April 27, 2016, the law reduces the likelihood of a home becoming a “Zombie Property” by reducing the amount of time that abandoned properties remain dormant.

 

Forced Sale of “Zombie Properties”

            The other notable change in the new Act is a rule that forces the hand of a lender to sell a property within a certain period of time if a court deems the property to be abandoned. Under the prior law, the Wisconsin Supreme Court had interpreted the statute as to require a lender to hold a sheriff’s sale of a property within a “reasonable” time after the expiration of the redemption period. In that ruling, the Wisconsin Supreme Court intended to curb the apparent Zombie Property Apocalypse by forcing lenders to sell abandoned properties after redemption periods expired. Despite the Court’s efforts to combat the problem, the Court’s ruling requiring a lender to sell an abandoned property within a “reasonable time period” was unclear.

The new law removes this lack of clarity by accomplishing two things: First, it requires that either the lender or the municipality where the property is located prove that the property is abandoned. Next, if a court rules that the property is abandoned, the lender must either sell the property or release the mortgage on the property within 12 months of the expiration of the property owner’s redemption period. If the lender does not do so after the expiration of the 12 month period, the municipality where the property is located or even the owner of the property can force the lender to sell the property at a sheriff’s sale. This change on forced sales of abandoned properties applies to foreclosure actions begun after April 27, 2016, without regard to whether the mortgage was executed prior to that date. By deterring lenders from sitting on abandoned properties for long periods of time, this change also reduces the likelihood that a property becomes a “Zombie Property.”

This new foreclosure process in Wisconsin is important to know for both lenders and all owners of real estate. For any questions on how this new law might affect you or your business, contact Schober Schober & Mitchell, S.C. at 262-569-8300 or email me at jmk@schoberlaw.com.

Spring is almost here, and that means real estate sales in Wisconsin will soon be picking up! With that in mind, a recent Wisconsin Court of Appeals decision may have a large impact on future Wisconsin real estate transactions. In Fricano v. Bank of America, the Wisconsin Court of Appeals found that a buyer of a home had a valid fraudulent misrepresentation claim against a seller despite the fact that their purchase contract contained an “as-is” clause.

“As-is Clause”

“As-is” clauses are frequently used in real estate transactions to allow a seller to avoid liability coming from a buyer, usually when hidden defects are discovered after the sale closes. However, in Fricano, the sales contract also had a clause that stated the seller had “little to no direct knowledge about the condition of the property,” when in fact, the evidence showed that the seller had knowledge of a severe mold problem that had resulted from flooding of the home. The Wisconsin Court of Appeals found that where there is a deceptive affirmative representation, like the one the seller made in Fricano, an “as-is” clause cannot preclude the seller’s liability for fraudulent misrepresentation. Where there is evidence that a seller knew of a material adverse condition, it has a duty to disclose that to the potential buyer. The case is now being appealed to the Wisconsin Supreme Court.

This case demonstrates the importance of having well-drafted real estate documents and effective legal representation when you are buying or selling property. Whether you’re looking to buy or sell, consult an attorney at Schober Schober & Mitchell, S.C. to ensure your transaction goes smoothly.

This post is being submitted with the substantial research and writing help of Jeremy Klang, 3rd year senior at Marquette University Law School.

A Federal Appeals Court ruled earlier this month that an S-Corporation’s rental income from a leairs[1]se agreement with a C-Corporation with entirely common ownership with the S-Corp, could not be classified as passive activity income, and therefore could not offset the individual’s passive activity losses.

Internal Revenue Code section 469 was passed in the 1980s to close a tax code loophole that allowed investors to invest in real estate ventures that were likely to incur heavy losses in order to offset an individual’s income. The section requires that for trades or businesses in which an individual does not materially participate, the income or loss from that activity must be classified as “passive” and therefore can only be offset against income or loss from other “passive activities.” The section specifically lists individuals, estates, trusts, closely held C corporations, and personal service corporations as taxpayers that are subject to the passive activity re-characterization rule. The section does not, however, list S-Corporations as a taxpayer that is subject to this rule.

Where an individual has losses from passive activities in a particular year, the individual can only offset that against passive income, or else be forced to roll over the losses into future years in which the individual has passive income. Some individuals had attempted to “create” passive income by engaging in what is known as “self-renting.” Self-renting occurs where a business owner creates another legal entity that the owner also owns, transfers title of business real estate to that entity, and then leases back the business real estate to the originally owned business. This way, there is rental income, (which is always classified as passive) that passes through to the individual, who can then offset her passive losses with that passive income. The IRS prohibited this practice in one of its regulations, stating that where this type of arrangement is present, the rents are then changed back from passive income, to non-passive income, thereby disallowing the offset against passive losses.

While the self-renting practice has been prohibited in the IRS regulations since the enactment of section 469, there has been no binding judicial authority that has ruled that the rule applies where an S-Corporation is the taxpayer receiving the rental income. The IRS has released some memos on the subject, which only evidence the opinion of the IRS, and not the binding interpretation of a neutral judge. In Williams v. CIR, the taxpayers were owners of both a C-Corporation, the lessee, and an S-Corporation, the lessor. They argued that because S-Corporations are not listed as taxpayers subject to section 469, and because S-Corporations do not pay taxes as an entity, the self-renting rule did not apply. The Fifth Circuit Court of Appeals rejected that argument and upheld an additional IRS regulation that stated that S-Corporations are subject to all section 469 rules (including the self-renting rule). This rule gives significant weight to the self-rental rule as it relates to S-Corporations, and all other pass-through entities (LLC and Partnerships).

Schober Schober and Mitchell stays apprised of updates and changes in tax laws as they relate to you and your business. Please contact us for advice on the tax status of your business or structure and for any of your other business needs.

This article was contributed by Jeremy Klang, a third year law student at Marquette University Law School and law clerk for Thomas Schober.

Starting in 2013, a new 3.8% federal tax, known as the “Medicare Tax,” may apply to some gains on the sale of real estate, including even sales of personal residences. However, this is not a general tax and there are some exceptions. It is best to know the rules and seek competent tax advice.

The tax is calculated upon the lesser of:

1.  Net investment income; or

2.  The amount modified adjusted gross income exceeds: $250,000 for married couples filing a joint return or surviving spouses, or $125,000 for a married individuals filing a separate returns. The excluded amount is $200,000 for all other taxpayers.

Married couples filing jointly may still exclude up to $500,000 and singles up to $250,000 of the gain on the sale of a personal residence, thereby avoiding the tax. Consequently, persons selling homes may be subject to the new tax if their gain: 1. exceeds the exempt amount ($250,000 for individuals, $500,000 for married couples) and 2. causes taxable income to increase above the $125,000/$250,000/$200,000 limit.

While I’m focusing on the sale of real estate in this short article, I want to point out that this tax applies to all investment income, including dividends and interest, as well as gains on the sales of many other things, including the sale of a business.

If you find yourself in such a situation, be sure to confer with your tax advisor.

The Wisconsin Supreme Court in Brenner v. New Richmond Regional Airport Commission 2012 WI 98 (July 17, 2012) reversed a circuit court decision dismissing inverse condemnation claims made by property owners abutting a municipal airport due to the effect of flights of private aircraft over their properties resulting from the extension of runways at the airport.

The Court took into consideration the fact that Wisconsin Statutes Section 114.03 and 114.04 gave property owners certain rights with respect to airspace over their properties.  It determined referring to federal case law that the proper standard to be applied in determining whether a taking occurs in airplane overflight cases is whether the government action results in aircraft flying low enough and with such frequency as to have a direct and immediate effect on the property owner’s use and enjoyment of the property.  The circuit court had held that the appropriate standard to apply was whether the property owners had been deprived of all or substantially all of the use of their properties.

The Supreme Court found that the circuit court had applied the wrong standard, and remanded the case for submission of evidence and a determination whether the flights were so low and frequent as to constitute a taking.

I have been told that I am a fairly good negotiator. That raises a question: is negotiating inherent or can it be learned? I think it can be learned.

While I have taken many courses about how to negotiate (several from Marty Latz, one of the best negotiators of our time), I spend a lot of time just thinking about the concept of negotiating. I have concluded that I follow two basic rules when I negotiate:

  1. The other side always has more information than me; and
  2. The other side is always smarter than me.

When I follow these two rules, I generally don’t get into too much trouble when I’m negotiating.

Knowledge is power. Whenever negotiating, one must learn as many facts and as much law on the subject as possible, given the client’s constraints of time and money. The side with the most information will generally have an edge. In negotiating, we call that “leverage.” Leverage can generally be created by having options. Options can only be created by knowing all the facts, capabilities and desires of the parties, and determining how goals may be accomplished. If there is more than one way to accomplish a goal, there are options, and such options, even if not exercised, may provide a way to achieve the primary desired goal.

Intelligence is most likely determined at birth. However, the kind of intelligence I’m talking about is more than just raw IQ. It is more akin to “wisdom,” which is acquired over much time and helps in determining the emotions of each side, the “uncommunicated words” that accompany each proposal, and ultimately, the right hunches to play. If I start with the proposition that the other side is smarter than me, I will most likely play my hand a bit more conservatively. As a result, I make less mistakes. Downside risk often outweighs upside gain. Consequently, my clients usually prefer to win when they are absolutely sure that winning will given them an overall improved position. They don’t cry over lost opportunities that carry substantial risk.

If I follow these two rules, I generally fair pretty well when I negotiate. Perhaps you should consider setting up some similar rules for yourself the next time you need to negotiate something. If you need help in doing so, don’t hesitate contacting me or our other great negotiators at Schober Schober & Mitchell, S.C., attorneys, at 262-785-1820.

 

Property Condition Reports have been used for a long time with regard to Wisconsin residential real estate. They are also used in commercial and other real estate transactions, but not because they are required by law, but because they are negotiated between the parties. Now that is all changing with respect to vacant land sales in Wisconsin

Pursuant to 2011 Wisconsin Act 107, as of July 1, 2012, sellers of vacant land must provide buyers with a condition report set forth by statute. That form is found in Wis. Stat. 709.033.

Failure to comply with these provisions will create problems for sellers. If you or anyone you know faces this situation, feel free to call us at Schober Schober & Mitchell, S.C., and we will be glad to help you comply with this new legal requirement.

Picture of Cancun Beach
Sunny Cancun

I recently had an opportunity to represent a client who was selling a condo in Cancun, Mexico. I got quite an education as to how real estate transactions are handled in other countries, and became very thankful that I practice in the U.S.

Such transactions become tricky because the Seller wants to be sure to get his/her money, while the buyer wants to be sure to get clear title and be fully protected as the owner, before giving up the payment price.

In Mexico, real estate transactions occur before a Notary Public, a government appointed official who does much more than certify the correctness of signatures on a page. I found it indispensible to obtain co-counsel who practiced in Mexico and was familiar with such closings. Co-counsel actually traveled to Mexico to do the closing, as well as establish an escrow with a U.S. based title company to assure the funds would be available when the clear title was transferred and the transaction was completed by and before the Notary Public.

Continue Reading What is an Apostille?

The Wisconsin Legislature in its last session made significant changes to the ability of municipalities to regulate commercial and other buildings.

Senate Bill 472 prohibits municipalities from imposing cost requirements on repair or remodeling of legal nonconforming structures.  Such structures are not compliant under currrent zoning regulations, but were compliant at the time the current regulations were adopted.  Such structures cannot be made to comply with current regulations, but municipalities have long provided that if costs of repairs or remodeling of a structure exceed 50% of a structure’s assessed or fair market value, the structure must become completely compliant with the zoning code.  They can no longer do so, once the Bill is signed into law by the Governor.

Continue Reading Important Changes to Zoning Law