(Part 1 is available on Oceanic Cable’s Aroundhawaii.com under June ’08)
The short sale is now causing a lot of anxiety in the Hawaii Real Estate Market. Most of the anxiety is a result of the Buyer’s, Seller’s and Real Estate Agent’s expectations versus the reality of the process.
Print news of the short sale throughout the United States coming from the National Association of Realtors, U.S. News and World Reports, Reuters News Service, The New York Times and the Honolulu Board of Realtors is causing much concern among buyer’s, sellers and real agents. News concerning the short sale can found all over the Internet and anyone who wants to know more about the process can readily obtain vital information from these internet sources and I strongly encourage you to do so.
Real Estate Practitioners are not licensed Lawyers for the most part unless you happen to work with someone who is not only an agent but a licensed, current, in good standing lawyer as well. Most agents cannot give legal advice. This is the law. It’s on the books. Do not listen to any agent who is not a lawyer in good standing in addition to being licensed as an agent with the State of Hawaii who offers legal advice. You if you do, you may find yourself in trouble. The agent and brokerages involved in a transaction will be in trouble as well.
I like to think that there two types of short sales. One is the true short sale where the seller has been given permission from their lenders to put their home on the market with the promise of reduced mortgage payoff total upon the consummation of the sale of the seller’s property. The second short sale I call ‘the inadvertent short sale.’ This short sale occurs when the seller puts their home on the market and accepts an offer to find that they cannot pay off their mortgage and or closing costs associated with the sale without having to produce cash at closing to make up the short fall. Believe me, this can and is happening with frequency.
I am always looking for ways to further my education and last year I decided it was time to volunteer at the Honolulu Board of Realtors. I chose to become a member of the Grievance Committee which consists of approximately 10 Realtors with Brokers Licenses who review all complaints that come in from the Public and agents. It is our job to work in small groups and decide on the merit of each complaint. This procedure often includes interviews with the Complain tent as well as the Respondent. We meet every month and during the next month’s session we present our findings to the group. It is increasingly becoming apparent that the short sale process is a growing concern among all agents and the public.
To illustrate how important this issue is becoming, please see the following addendums from various brokerages that are now in use to protect brokerages, agents and their clients. These addendums will help explain what you are getting into before you sign on the dotted line. Be aware of what you are doing and if your agent cannot explain to your satisfaction the issues of getting involved in a short sale, I strongly urge you to seek legal council. Agents and their Brokerages are not a substitute for legal advice nor can they legally provide legal advice.
What has started this concern for short sales is fairly simple and it involves the market conditions that have occurred primarily from 2005 to currently, 2008. If you had purchased a home (condo, town home, single family) between the years of 2005 and 2008 you most likely will be in a short sale situation today if you have to sell. The chances of this happening are greatly increased if you had purchased with very little cash and are heavily mortgaged. In addition you may have purchased at the market peak, with a 1st and 2nd mortgage and may now also have an Equity Loan.
Between the years of 2005 and 2008 the following occurred:
The market hit its highest point in late 2006.
The market ‘turned’ in approximately December 2006
The market has been steadily loosing value ever since.
This means that if you had purchased during these years you most likely have lost value. You’re property may be subject to a short sale if you find you have to sell right now due to personal circumstances and if your current financial situation is desperate.
It is obvious from the above that if you are contemplating getting into a short sale you pay particular attention to these forms. From the first form titled “RE/MAX Short Sale Addendum to Listing Agreement”, you should pay particular attention to the “Seller is aware…” section at the bottom of this form. I have not seen any other brokerages using this language or this type of Listing Agreement Addenda yet but I would expect this to change shortly.
On the second form titled “RE/MAX Short Sale Addendum”, points numbering 3 through 7 are the ‘meat’ of this addendum and you should thoroughly read its content and ask questions. Pay particular attention to #4 where if you are buyer of a short sale you must realize that the starting date of the contract and the opening of Escrow will not occur until the lender of the property approves the contract. The Acceptance Date of the offer will then be that date the lender approves the sale.
#5 is of major importance as it reads: “All costs associated with this short sale shall be paid in full, and any remaining sales proceeds shall be paid to the lien holder(s) of record. I am not sure if the lenders are going to agree to this form and there may be some negotiation that will be needed between the lender(s) and the brokerage, before the offer is accepted. The reason for my thinking is that the lender is going to be the one who wants to get paid first. Both the primary lender or first mortgagor and the second mortgagor if applicable are going to want to be paid first. If I were the lender, that is the way I would want it and I would not be too concerned with whether or not the realtors get paid, any other liens get paid, like taxes, Association Dues and such. The wording of this document in #5 is very much the same it seems, regardless what Short Sale Addendum are used by each of the brokerages.
#7 is of major importance as well. Remember that #5 of the RE/MAX Short Sale Addendum states that the Acceptance of the offer will not occur until the lender approves the contract. This is the time the lender agrees to reduce the seller’s mortgage and finalizes its negotiations with the seller. The lender will issue a letter stating what they agree to specifically. The letter may not mention payment(s) still due to others before closing, like taxes, association dues, other liens, commission, etc.
This means that you can make an offer for a short sale property as an example on Sept. 1st 2008 and on November 30th the lender issues the letter of what it is agreeing to and after all parties sign the agreement which will be in the form of another addendum, escrow will be opened and the Date of Acceptance will be the day all parties sign the addendum. Now, a typical 45 days closing begins. Since the time you presented the offer and the seller has signed it on Sept. 1st and the Acceptance Date is November 30th, you have been waiting approximately 60 days and now you still have a 45 day escrow to deal with that should close somewhere around Jan. 15th 2009.
Note: #7 states “Buyer is aware that until lender(s) have given their written approval of this Purchase Contract that was accepted by the Seller, Seller and Lender(s) may receive and accept offers from other Buyers.”
This entire process will certainly make any short sale buyer nervous, impatient and possibly exasperated by the time they receive an acceptance from the lender and then the buyer may find out that his/her $350,000 offer was accepted but now the buyer is notified they have to pay an additional $5,000 in back taxes, $2,000 in past due association dues and make repairs to the property before moving in for maybe another $2,000. The buyer may also find out, later in escrow, that the seller cannot pay all of their closing costs associated with the sale in escrow and the buyer now needs to pay additional $8,000 in seller closing costs on top of their own traditional buyer closing costs. Closing costs typically run 60% to the seller and 40% to the buyer. That is a lot of unknown associated costs.
Short Sale Addendum example #3, first line reads: “Purchase Contract”, #2 states that “the seller understands and accepts that some lenders will affect a deficiency judgment requiring you to pay unpaid debts after closing.” This in effect covers any future liens, such as Mechanics Liens (plumbers, electricians, yard service, etc.) that have not yet been filed and are filed against the property after closing. You own the property and you now are liable for the liens.
Still looking for a Short Sale?
First, go to google.com and type in keywords like “Hawaii short sales” or “Honolulu short sales” etc.
You may find something like this:
Verification through Tax Map Records
Personally, I like happy clients. I like working with people who are happy. I do not like working with people/clients who are so stressed out and dissatisfied with the short sale process that they want to try to sue everyone involved. This is precisely why these short sale addendums are becoming more and more prevalent. It is an ongoing process to educate the short sale buyers, its agents and to protect them. These addendums help explain what a short sale buyer and agent are getting themselves into.
I have made a business decision not to take on any short sale clients. I can still help anyone who needs questions answered concerning the short sale. Just email me at email@example.com
In summation, there are some great deals out there in short sales for buyers. The $350,000 accepted offer, upon closing may get you a property that has a current market value at closing of $425,000. Only you can decide if it’s worth it.
Remember, this is a declining market. I don’t see the bottom occurring until possibly 2011. Expect price depreciation on your home assets. Buy only for the long term.
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Thank you for your article it has cleared up a lot of confusion on our part. We are looking at properties to purchase a home as you said for long term. We are amazed at the amount of properties that are for sale and short termed (Ewa, Ewa Beach, Kapolei areas). Although we are represented by a realtor and brokerage firm, it's articles such as yours that makes sense of it all.
The short sale does have its complexities, very thorough article Mike!
Very informative article, thanks. Was wondering how a buyer can avoid the inadvertent short sale? Seems like there's no way to know if a seller is under financial pressure.