If you are buying a home in Sequim or Port Angeles involving a short sale, here are three proven steps to making that purchase a huge success.  If you’re not familiar with the term “short sale,” it involves buying a home at a price that is less than the current mortgage balance.  Most people are familiar with the concept of a car  being upside down when the car isn’t worth what is owed on it.  Until the recent real estate recession, we didn’t have homes that were upside down.  Around the country many homes have had to sell as short sales.  Of course, this requires the bank’s agreement to cut their losses and take a payoff on the loan that is less than what is owed.

Short sales are closing every day in cities like Las Vegas and Phoenix, but not in Sequim and Port Angeles.  The procedure and the steps to accomplish a successful short sale here are different than the template for the short sale hot spots around the country.  As a real estate attorney who handled many foreclosures and short sales, and now who represents buyers in short sales as a real estate agent, I’ve articulated three steps to a successful short sale in Sequim or Port Angeles.  If you do complete these three steps, you still have no guarantee, but if you miss one of these steps, you are guaranteed to fail or end up with a nightmare scenario.

3 Steps to Buying a Short Sale Home

1.  Know the process and save yourself from disillusionment.  Know that negotiating a short sale in Sequim or Port Angeles will be a slow and tedious process, and the bank can leave you waiting, literally not responding for months.   The process can drive a normally patient person to say, “Forget it, I’m not going to sit around waiting, not knowing when or if anyone will decide to respond to my offer.”  [Again, this is not the same in Las Vegas where there are currently 700,000 loan modifications in process.]

2.  Find a Professional Short Sale Buyer’s Agent.  Buying a home that must be a short sale is not something you want to do without an experienced professional who has been there, done that many times.  There are many nuances and many traps for the unwary.  I picked up many clients as a real estate attorney who thought they knew all they needed to know, but subsequently found themselves in deep trouble.  When I represent a client as their Short Sale Buyer’s Agent or their Foreclosure Buyer’s Agent, I cost my clients absolutely nothing.  Sounds too good to be true, doesn’t it?  But it is true.  The seller pays all my fees as well as his agent’s fees.  What I give my clients is a lifetime of real estate experience, including many short sale and foreclosure transactions.

3.  Do Your Due Diligence.  You’ve got a lot of due diligence to do when buying a home in a new area, and a short sale or a foreclosure will require some additional due diligence because of unique problems associated with distress sales.  Also in this process, the bank will submit certain documents to you, in addition to the standard real estate forms used in Washington, and these forms will require legal interpretations as you will be asked to sign them.  Some entities representing banks in this process have put together forms that were not drafted by an attorney and give them complete access to all of your personal financial accounts and identity.  That is not only inappropriate, but dangerous, and yet many who don’t know or aren’t getting good advise are signing such documents. [I know this because I have reviewed these documents and advised my clients.]

Your ideal home may be in the MLS and listed with an agent, and it may or may not necessitate a short sale, but if it does, know how to go through the entire process and come out a winner.

I hope this information is helpful.  If you do find a home that is for sale, and it is either a foreclosure, or was, or it must be a short sale, you can hire me as your Short Sale Buyer’s Agent or Foreclosure Buyer’s Agent.  Contact me by email, chuckmarunde@gmail.com, or call me at 360-775-5424.  I would love to represent you.

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The success or failure of your short sale depends on where you live.  It should not be, but it is.  How banks are handling short sales varies dramatically based on where you show up on Google maps.  I’ll explain.

A short sale is the sale of a home at a price less than the current mortgage balance.  While a buyer and seller may agree on a price that is less than what is owed on the mortgage, obviously in order for such a transaction to close, the bank has to agree to accept less than what they are owed.  Without their agreement, they will not issue a reconveyance of the deed of trust extinguishing the promissory note on the debt.

Bank short sale departments have been totally overwhelmed by the volume of short sale requests (let’s not even get into the foreclosure chaos that has also overwhelmed the banks).  They did not gear up for this, which means they do not have systems in place to manage short sale requests.  A bank has a lot of due diligence they are obligated to do in the process.

They must process an offer from a Realtor and coordinate with the seller, their client.  This means having an organization that can manage files, computer database records, and compile  all loan and value information from various sources (which exceeds the capacity of many bank databases at this time).  They must put together a checklist of information and documents they need to process a short sale request, and as one short sale clerk told me,

“Sir, we have multiple checklists, depending on who is the supervisor at the time, and I’m sorry but it’s chaos in our short sale department.  I’m not supposed to talk like this.  Our investors are demanding that we require certain items, no matter how impossible it may sound, and we have no flexibility.  We have requirements, which vary as I said, and we apply those nationally.  I’m so sorry but our investors are requiring this, and I have no authority to help you, no matter how reasonable your request may be in your market, if you cannot meet all of our [multiple] checklist requirements.  And I cannot promise you that the offer will be considered within any particular time period.  We usually take 30 to 90 days to process a request, but it could take any amount of time, but we have files we haven’t been able to get to in months.”

The result of such chaos and lack of good organizational systems is that bank short sale departments have implemented systems on a regional basis.  So Las Vegas and Phoenix short sales (and foreclosures) are handled much differently than a small out-of-the-way market like mine in Sequim and Port Angeles on the Olympic Peninsula in Western Washington.  Short sales are being approved daily in the Vegas market, but not here.  It is like pulling teeth to get a bank to cooperate on a short sale here.  I take that back, because it is much harder than pulling teeth.

Do the bank short sale departments specifically and intentionally create different systems around the country?  I seriously doubt it.  I think the more likely explanation is that they reach the practical limitations of manpower, money, and other organizational resources.  Their pipeline is getting clogged up in numerous places, so where do they focus their resources first?  In the larger markets that have crashed with thousands of homes in foreclosure and thousands needing to be sold prior to foreclosure as  short sales.

The reason this is important to understand is that rules and principles for handling short sales that work in one part of the country may not work so well in another part of the country.  While many are out making millions selling their short sale secrets and systems, for the Realtors among us who get involved with short sales, it is important to know that what worked in Miami might not work in Tacoma or Sequim.  The process, the paperwork, and the people will all be different.  As with every real estate transaction, every short sale must be handled on its own merits and each client given the highest customer service to work through the unique issues in that transaction.  Be prepared to spend between three (3) and five (5) times as much sweat and labor on a short sale as you would on a regular sale.

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There are Sequim spec homes for sale, homes that builders built anticipating they could sell those homes to buyers during or after construction.  During a strong real estate market a Sequim spec home would sell within a reasonable period of time, provided the location was good and the floor plan was what the majority of retirees want when they move here.  There have been a few speculators who built homes that were just plain weird, and those homes sit on the market a long time.

Being a good carpenter and being good at marketing are two different things entirely.  New contractors often get in the market just as it starts turning down. A Port Angeles builder who was not a novice had about 24 spec homes foreclosed upon this past year.  What a disaster that was, but it was obvious he was sailing against the wind when the real estate market crashed and he kept on building like there was no tomorrow.  Those of us who have been in real estate for a few cycles anticipated his foreclosures, because there were no buyers and he had massive lines of credit.

There still are some spec homes on the market, and not all have been foreclosed.  Some are in default to be sure, and will have to be sold as short sales if they are to be sold at all.  But as I have written elsewhere, there is a major problem trying to get a short sale through these days.

This is a true story, although I have changed the numbers slightly and not revealed any names to protect the guilty, although in this case most of the players are innocent victims of a banking system out of control.  (This is not to suggest that the seller is not responsible for his speculation and mortgage debt, because he is.)

I represented some great retirees from the east coast, and having found the ideal home, which happened to be a spec home, I drafted the offer on behalf of my clients, and it was accepted by the seller subject to the bank’s acceptance of less than the balance owed on the mortgage.  The seller had some inkling from his bank that they would accept this price, and my buyer clients were excited to be getting the home of their dreams at a price less than what it would cost to buy the lot, develop it, and build the same quality home.  The seller was glad to get this home out of his inventory and move on to put out some other fires in his portfolio.

A short sale is a necessity today if a bank is to get a house that is in default out of it’s bad loan inventory.   The reality is that the fair market value of homes is low enough and far too many homes were over appraised and refied, so many homes are upside down.  In this case, the buyers and sellers agreed on a price of $329,000.  The balance owed the bank was about $405,000.

Immediately after the parties reached mutual acceptance, the agreement was sent to the seller’s bank for their stamp of approval, and then the agreement would go to escrow for closing in about 30 days.

Alas, after waiting and waiting for weeks and over two months, the deal is dead.  Why?  Because like the other four short sale transactions I’ve been involved with this year, the banks simply won’t respond for months and months until at last the parties just move on with their lives, and eventually the banks foreclose.  In this case, the bank actually did something even more interesting.  After making us wait two months with no response at all, they suddenly raised the price to $405,000.  (Obviously, they forced the seller’s hand here, and made him raise the price, since they would not accept less than what they were owed.)

That’s right.  The fair market value of the home is $329,000, plus or minus, because that is what a ready, willing, and able buyer will pay, and it is the price at which the seller is willing to sell after having this spec home sit on the market for about two years.  (One could argue it is worth $340,000 or even $370,000 maybe, but the market is really weak right now, and this home has been on the market for two years.  My client’s offer was the only show in town.)

Isn’t it amazing that the bank raised the price to $405,000, the amount they are probably owed?  Why would they do something so ridiculous, effectively killing this transaction or any other transaction on the horizon?  This home is doomed to sit empty for another year or two at $405,000, at least in my opinion.

The answer is that the “system” has caught up with the seller (and my buyers), and the system is now in control.  Let me explain.  The bank that originally had this loan was taken over by the FDIC and all the customers and accounts have been assigned to another bank.  But the toxic loans are kept and managed by the FDIC, in this case a Seattle administrative office.

The banking and federal deposit insurance rules and regulations are very complicated, and there are things the FDIC case manager simply does not have legal or administrative authority to do.  He may not have authority to sell a house for less than the amount owed on it.  The FDIC is not a bank or a mortgage institution.  It is governed by different rules, rules that do not necessarily address the facilitation of short sales.

What the FDIC has told me is that they will be wholesaling toxic loans to other financial institutions for pennies on the dollar, maybe only 25% to 50% of the loan balance.  But that will take time.  Maybe in a year or two this Sequim spec home will have finally worked itself through the labyrinthian bureaucracy, at the end of which it will probably sell for less than $329,000, since it will have been sitting vacant and appear to be rundown and worth less.

My argument to buyers is that the best buys in this market are not Sequim spec homes for sale, because these homes are often short sales disasters.  There are many better deals to be had in the multiple listing service in Sequim and Port Angeles, homes for sale by homeowners who are not in default, but are selling at extraordinary prices.

There are some beautiful homes that are not spec homes that are listed as short sales.  If you make an offer on one of these homes, be sure you have a buyer’s agent who knows the process and how to walk you through it.  It is a labyrinthian path for the uninitiated.  I recommend a professional guide.

You can search all Sequim spec homes for sale and all other homes listed for sale here.

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Finding your next Sequim home is full of adventure, but not always the kind of adventure buyers think.   It’s hard work, there’s plenty of driving and discussions, and major transitions are always accompanied by a certain amount of stress.   All of this may be obvious to the mature, but what isn’t so obvious to many is that once you find your home and make an offer, the negotiating process is not typically a cake walk.   In fact, sometimes after several counters back and forth, buyers find themselves emotionally stretched and often a bit tense at the 11th hour of the negotiations.   Many buyers will express a feeling of frustration and anger directed toward the seller just before getting mutual acceptance on the last volley of counteroffers.   This is true not only for individual sellers, but for banks handling foreclosures and short sales.

Just before mutual acceptance on a price, many buyers often feel like their dream home is just out of their reach, but this is when victory is so close.   Sellers often play hard ball up to the last moment, but buyers who are discerning, have good judgment, are getting sage advise from a knowledgeable and professional Realtor, can reach their goals if they are patient and persevere.

This is not a game for beginners, and it certainly is not a game for a novice Realtor.   Negotiating is a serious game, and a lot of money is at stake–your money.   Be sure your Realtor as your adviser can   walk you through the mine field of legal and financial negotiating, as well as the emotional and psychological challenges you will face.   It’s important to have a professional you can talk to during this process.   Believe me, there are a lot of issues to discuss, and they are not the same for every buyer.

Your money, your future home, and your mental health are reasons you must gain the upper hand in negotiating.   Buying your next home in Sequim must be a victory for you.   It can be.   Email me with your questions anytime.   I’d love to help you gain the victory and your new home.

chuckmarunde@gmail.com

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With all the talk of foreclosures and short sales, I thought this brief article on why short sales don’t work 99% of the time might be helpful to homeowners in financial stress (or foreclosure), to buyers seeking to find a steal in this real estate market, and to real estate agents wanting to handle a short sale (as a listing or as a buyer’s agent).

First, I don’t want you to think I have no clue on this subject.   Between practicing real estate law for 20 years (and having done many foreclosures and forfeitures and short sales) and being an Real Estate Broker now, I know the process of foreclosures and short sales intimately.

Second, I also don’t want you to think I am insensitive to sellers who need help selling their distressed property or to buyers who are looking for a good deal.   I love helping people.   That’s why I do what I do.

After handling hundreds of transactions over the past 30 years involving many foreclosures and short sales, I would say to any buyer wanting to buy a property prior to the Trustee’s Sale date (foreclosure) via a short sale, or to any seller wanting to sell their home as a short sale (assuming there is not enough money to continue to make the monthly payments on the mortgage) . . .

Don’t bother.

Here’s why.   The short sale departments of banks and other large corporate entities in the sky have been forced to accept extremely cumbersome investor requirements that will make the transaction all but impossible for both buyers and sellers.

I recently decided to help a good client by listing his home and trying to sell it as a short sale, because it is worth less than the mortgage balance, and because he ran out of money and no more monthly payments would be made on the mortgage.   I did my comps, listed it, advertised the heck out of it, promoted it in the MLS, fielded dozens of calls from both Realtors and prospective buyers, spent a lot of time working with the short sale department, put together all the documents they required in their checklist, got all those documents signed and faxed to the short sale folks, coordinated two offers on the property and submitted those to the short sale department, only to be told when I did a follow up call . . .

“Oh, we have another checklist of items we now require in this phase of the short sale process, and we need the seller’s last two year’s tax returns, his complete financial statement (income and expenses, assets and liabilities), his bank statements for a period of months, a HUD-1 Settlement Statement, and . . . ,” and the list went on.   But this was only the second checklist.   I was informed there would be another.

When a homeowner loses their job bad things happen.   There are ugly consequences to running out of money in this life, and some of the typical consequences include constant harassment by creditors on the phone and by mail, arguments at home under the financial stress, often divorce, separation from family and loved ones, loss of important possessions of great personal value, loss of connectedness with loved ones and friends, feelings of depression (often accompanied by thoughts of suicide), and additional crises with their own devastating consequences, such as the inability to meet child support payments, which results in automatic suspension of a driver’s license and possibly the suspension of professional licenses so you can’t drive to work or even making a living anymore, assuming you even have a job.   I have learned about these terrible consequences through many clients over the years, and I’ve learned some of them through my own personal trials.

On top of these consequences, homeowners are often forced to move out of the home and to another area to search for work.   Have you ever seen a psychological checklist of stress items?   Check a bunch of them, and the stress level goes through the roof.   That’s where many people are when their home is in foreclosure and when they are trying to get it sold.

In the midst of this the short sale department of almost every bank will “require” that the items on their multiple checklists be completed in order to “process” the short sale.   Does anyone really think a distressed homeowner is emotionally capable of spending many hours putting all this information together with narrative explanations of how their life has fallen apart?

Not likely.   “Let them foreclose on the home.   My credit is shot anyway.”   That’s the logical answer of a homeowner.

What about buyers?

If you’re trying to purchase a home as a short sale, without the seller’s full cooperation with the short sale department ad infinitum, it is impossible to get through.

Someone who knows just enough to be dangerous might say, “Well, I’ll just bid at the foreclosure sale.”   That may be a dead end, too.   The bank is going to want the current balance of the mortgage plus accrued interests and costs as the minimum bid.   No one will do that in an upside down situation.   So the bank will bid minimum, take it back, process it to get title in their name, send it to an REO to get it listed with a Realtor, put it back on the market at a listing price still too high, and it will be listed for sale for 256 days   (or longer) while it either gets terribly run down and is worth far less, or the bank continues to pump money into this black hole in the form of property taxes and maintenance.   So now we are about two years-literally-from the date of default on the mortgage payments by the homeowner.   No one claims the banks or their short sale departments are wise (or should we say their investors who lay down all these requirements).

By the way, I’m told by the local rep conducting the Trustee’s Sales that virtually no one is bidding on the dozens of homes he is taking to the court house steps.   The prices are way too high.   If it’s not a good deal, no one will bid, and that’s what is happening.

I can count on two fingers the number of great short sale deals I’ve seen out of hundreds of possible transactions, which makes all the work and the low probability of success just ridiculous.   You can make more money working at McDonald’s than you can chasing foreclosure deals or short sale transactions in the present system.   I know, someone out there knows someone who knows someone who popped a $75,000 profit on a deal.   Right.   And I know someone who knows someone who won the state lottery back in ’82.

This whole scenario is a disaster for Realtors, too.   On a $225,000 short sale, the selling side commission is about $5,000 and maybe $7,500 if you get the bank to pay a really high percentage.   But the odds of getting this sale through are 1 in a 1,000, or some low probability.   It would be one thing if a Realtor was working at minimum wage, but to work for nothing for six to 10 months when the sale cannot be consummated is a serious waste of time and energy.   Once answer for Realtors would be to charge a reasonable up front fee, such as $3,000.   But sellers in foreclosure can’t afford to pay that, and buyers simply won’t pay a buyer’s agent $3,000.   In theory they will, but in practice no.   Would I spend a lot of time on a short sale if I got an up front fee?   Yes, but seriously it would have to be $5,000, and no one is willing to pay me $5,000 up front for six to 10 months work, which works out to be about minimum wage.   If there were a guaranteed result, maybe, but there are no guarantees with short sales.

Life is too short to waste it chasing pipe dreams.   I say, “Let the banks go through the entire foreclosure process, list the homes at excessive prices, and end up selling them at garage sale prices two years later.   Maybe if they lose enough money, they will finally start to realize they need a system that actually works.

Read more articles on this site about foreclosures and short sales at Foreclosures and Short Sales.

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What effect does a foreclosure or a short sale have on your credit score? Negatives on a credit report are scored by three factors: recency (how recently did the negative event occur), severity (how late is the payment) and frequency (how many times you’ve been reported delinquent on credit obligations). If you have payments in default on a mortgage, your credit score is taking some hits, but if you have a foreclosure, you will not be able to get a Fannie Mae or Freddie Mac backed loan for five years.

If you have a home for sale that is threatened by a possible foreclosure, you may have to try to sell it for less than the current mortgage balance. If your mortgage company accepts less than what is owed, that is a short sale. Trying to do a short sale is not for the inexperienced homeowner or the inexperienced real estate agent. It’s very technical, and you don’t want to screw it up.

Lenders prefer short sales over foreclosures because they net more from them. Foreclosures incur additional legal costs and fees, carrying costs, and marketing costs. Your credit score is downgraded with a short sale, but not as much as a foreclosure.   Borrowers can be considered for loans following a short sale after 24 months, if the sale was caused by extenuating circumstances outside of a borrowers’ control, or 48 months if it was the result of financial mismanagement on the borrower’s part of the homeowner.

There are potential tax implications with a short sale.   The IRS code penalizes you if you do a short sale by taxing you on the forgiven portion of the loan, the difference between what you owed and what the mortgage company accepted in the short sale. It’s hard to believe that our government would tax you on a short sale when you are already in severe financial hardship, but who said our tax code was fair?

Because of public outcry, congress made an exception to the IRS code. The Mortgage Forgiveness Debt Relief Act of 2007 and the recently passed Emergency Economic Stabilization Act allows you to exclude up to $2 million of income ($1 million if married filing separately) from debt that’s discharged through mortgage restructuring, or that’s forgiven in connection with foreclosure, for the years 2007 through 2012. The exclusion must be connected with a decline in the home’s value or the taxpayer’s financial condition, and only applies to a principal residence, not investment properties.

If you own a home you need to sell, this is absolutely not a time to experiment with selling prices and marketing.   It’s not a time to hire an inexperienced real estate agent.   You may only get one chance to do it right, and time is your enemy.   If you do everything right from the beginning, in four or five months, if your lucky you’ll have a closed sale.   Trip along the way on any of dozens of steps, and you will lose, and the consequences could be devestating.   The key to getting it right is finding an experienced professional who knows exactly what to do and when to do it.

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