Foreclosure / Short Sale Mess in Tacoma

We’ve seen plenty of these kinds of articles and news reports about the foreclosure situation down in southern California, but I don’t think many people ever would have expected to see such a piece written about the Seattle area: Foreclosures mean work for “trash-out” specialists

Contractors who specialize in cleaning and maintaining the nation’s growing inventory of bank-owned properties are finding gold in the rising foreclosure rate.

They’re busy handling so-called “trash-out” projects to prepare these homes to sell for institutions often based far from the homes they’ve repossessed in foreclosure.

“It’s the busiest I’ve seen it in 25 years,” says Tim Rogers, owner of Tim Rogers Construction in Tacoma, which handles trash-out gigs in Pierce County and South King County. “There are so many jobs to deal with, I can hardly keep up.”

And on a related note, I thought this letter to the editor of the Tacoma News-Tribune was interesting:

Re: “Few in mood to buy a home” (TNT, 1-7).

My husband and I are fortunate enough to have the ability to buy a second home. What we have found is that all of the homes we looked into are short sales. This is a nightmare for buyers. You have to wait up to 60 days before you find out whether your offer is accepted.

We refuse to make a full-price offer on most of the homes we have seen. Most of these short sales are in major disrepair and would never sell at those prices in a normal market. The houses we have seen have been purposely destroyed by the owners taking out their anger at this whole mess.

We are very disenchanted with the whole house-buying market. The weather did not keep us from looking, but there is nothing new on the market, except short sales. This is why few are in the mood to buy a home, in my opinion.

Have those of you that are currently actively searching for a home noticed the same thing?

(Jane Hodges, Seattle Times, 01.17.2009)
(Sherri Rice, Tacoma News-Tribune, 01.18.2009)


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

74 comments:

  1. 1
    David Losh says:

    In an earlier comment I mentioned my company A Spring Cleaning has been preparing properties for sale since 1988. We work for Real Estate agents or at the direction of the home owner for the most part. From time to time we would get calls for foreclosures and I do work with distressed properties. Thanks for the shameless plug, but there is a point.

    We did a job for a company out of North Carolina last year. It was a complete fiasco. We were hired obviously after the “trash out” was done. I bid the job, but left myself an out because the garage was locked without a key. Yes it was filled with all the trash from the house which adjusted my bid. The problem is that I floated the cost of disposal, to be paid later. We finished the job and had to bypass the “vendor” in North Carolina and be paid directly from the lender by submitting a bill to escrow. Sound complicated? It is.

    Here’s the point. The house is a blocker in Shoreline. The person foreclosed on borrowed $425. The new buyer was happy to pay $350K and the property is pobably worth $250K on a good day. It is a few blocks from the freeway, nice, big lot, but still it’s hard to demolish a blocker.

    The “vendor handling the contract for the “trash out” collects fees for work done. They had already been paid by the lender, but as I said they were duped by the previous contractor. It is a mess within a mess and ultimately the properties are, in many cases is some deeper state of distress.

    As another example; a very nice house we looked at and declined was beautiful. When you walk through it it looks great. As you add it up there are several things about the house that would never meet code. They were small things like the width of the stair case. Outlets were in places they shouldn’t be and a second story bath room had a very bizarre path to the sewer.

    It’s a foreclosure so there is no Form 17. Your inspector may or may not warn you about the descrepancies, but he is not pulling a permit package. Even the things that look good can be a disaster inside the wall.

    It all sounds good about buying foreclosed properties, but in todays market lenders still want top dollar. They would rather keep them then sell them for less. I don’t know where that inventory is but it must be extensive.

    In terms of short sales, Real Estate companies and agents have the idea this is a revenue stream. They take a class and off they go knowing nothing about the process in today’s market. It changes. It’s much different than it was a year ago. Lenders are holding off on short sales. They want eighty cents on the dollar. The process has gotten longer because there are so many. The criteria changes and the service companies are changing with bank buy outs. You need to know where to go, who to talk to, and what’s going on with the banks to get some one to respond.

    It’s complicated and getting worse.

  2. 2
    Aaron says:

    “This is a nightmare for buyers. You have to wait up to 60 days before you find out whether your offer is accepted.”

    So? Not all of us feel the same way. Make an offer and keep looking. If you find something better, just retract the offer and get on with your life.

    Also: boo-hoo.

  3. 3
    dailyt says:

    The rising foreclosures seem to be inevitable for Seattle. I only hope that social programs won’t be cut too deeply by the government; desperate people will only lead to a spike in crime. Whether your for the insane Fed gov. bailouts or not, I’m sure none of us want watch that story unfold.

    My thought is that there will not be any “shockers” in terms of price swings. The fed gov. bailouts are essentially guaranteeing the orderly drop in prices. 5-10% declines per year for the next 2 years at least.

  4. 4
    Hector says:

    Are we talking about Short Sales here, or plugging our businesses?

    It’s amazing how many short sales we have come across lately, and from a buyers view, 75% are not labeled as such in the MLS. I’m guessing it’s the same for our agens, because they never know until the contact the listing agent to discuss.

    We read all about how desperate banks are to desperate to unload these properties, but the truth is they still put the buyer through drawn out processes, and in the end aren’t likely to move from the original asking. Our 10 house neighborhood for example currently has 3 formerly short sale homes that are now foreclosures because the banks weren’t willing to move on price.

    We recently put an offer on a bank owned house in the south end that was within 10% of the banks asking. The bank responded quickly (within a week, surprisingly) because they were supposedly motivated, but refused to budge on the price even a dime even though neighborhood comps were sitting vacant at lower prices. Rather than look at the comps we provided, they could only look at their own numbers.

    Bankers taking on the roll of sellers is not good for the market.

  5. 5
    anony says:

    Seems odd that people would revenge trash their short sale property before it was shown to buyers. Could the interviewee be confused about short sales vs REOs, or does that commonly happen?

    Hector, scary.

    I thought short sales were always labeled as such in the agent comments, but not the public comments. Could it be your agent isn’t exactly the cream of the crop?

  6. 6
    BondsOfSteel says:

    The problem is that the banks don’t ‘own’ the loan, they just service it.

    A short sell would require the owner of the loan to take the write down. Most likely there are multiple owners since it’s part of some CDO somewhere. This is much more likely too if the loan was a jumbo or non-conforming loan… something I suspect we’ll see a lot of in 2004-2007 Seattle area mortgages.

  7. 7
    Interloper says:

    “Seems odd that people would revenge trash their short sale property before it was shown to buyers. ”

    Agreed. That’s simple vandalism. If people made bad choices about their personal property, they shouldn’t take it out on the next owners.

  8. 8
    patient says:

    As long as the government and state is proposing and hinting towards foreclosure bailouts the market will be bizarre, without knowing the rules it’s understandable that sellers and banks, loan holders etc are confused on what to do.

  9. 9
    Hector says:

    Anony, she seems fairly competent (after a talking to), I think other agents just are not. Not only are they failing to specify them as short sales, those agents are also listing the properties at prices the banks would never be willing to accept just to get some attention.

    In this market we are seeing agents lose their shirts from lack of sales and reduced somission due to falling prices. It think that’s turning more of a few of them into machines of desperation.

  10. 10
    Jillayne says:

    Hi David, From comment #1:

    “In terms of short sales, Real Estate companies and agents have the idea this is a revenue stream. They take a class and off they go knowing nothing about the process in today’s market. It changes. It’s much different than it was a year ago. Lenders are holding off on short sales. They want eighty cents on the dollar. The process has gotten longer because there are so many. The criteria changes and the service companies are changing with bank buy outs. You need to know where to go, who to talk to, and what’s going on with the banks to get some one to respond.

    It’s complicated and getting worse.”

    Speaking as a person who teaches these classes, I can validate your point of view. Further, I do not believe that the majority of agents feel that short sales (SS) are a revenue stream. Well, maybe there’s a small minority who are planning on working with investors who want to purchase SS and foreclosures. Instead, most of the agents I meet are trying desperately to learn about short sales because 1) they snubbed their nose at them back in June when the Distressed Property Law came about, 2) they heard that banks will always try to cut their commission and didn’t want to work 5 times as hard for half the price, and; 3) SS *were* a minor part of the inventory.

    It’s all different now. SS and pre-foreclosure homes are a growing portion of the available inventory. Along with that, many agents haven’t closed a transaction in several months and are more willing to take a short sale listing or sell a short sale home.

    Aaron references the long waiting period for banks to say “yes.” That’s true, unless the listing agent really knows what he/she is doing. SS can go through much faster with an experienced, competent short sale agent.

  11. 11
    Jillayne says:

    Hi Hector,

    “It’s amazing how many short sales we have come across lately, and from a buyers view, 75% are not labeled as such in the MLS”

    There’s a strict MLS rule that says a listing agent is duty bound to disclose the short sale status to the other members of the MLS.

    NWMLS Members can refer to NWMLS Legal Bulletin # 178 dated April 4, 2008. If anyone wants a copy, I can fax it to them. Send me your fax number at jillayne at gmail.

  12. 12
    Hector says:

    haha, thanks Jillayne, maybe it is my agent.

    Since we are talking about the hassle of SS’s, I’ll ask why they are dutybound to share with other MLS members, but not the general public? The cynical side of me says it’s a tool to keep buyers from doing it completely on their own, but I’m sure there is a more logical reason. Also, doesn’t the NWMLS also require them to not price them unreasonably so as to gain attention when they know the seller/bank will never approve the list price?

  13. 13
    jon says:

    “Also, doesn’t the NWMLS also require them to not price them unreasonably so as to gain attention when they know the seller/bank will never approve the list price?”

    Seems like it is bait and switch advertising to show a list price that the seller is not willing to sell at. Has the Attorney General gotten involved with these?

  14. 14
    Hector says:

    Jon, I think bat and switch does not apply because they are drawing you in with one product and then offering a substitute, instead are saying “The house is available. The list price hasn’t been approved by the bank. Make an offer at the list price and maybe they will accept it.”

    Maybe in agent-land that’s ok, but as a buyer it’s making me frustrated with the land that exists behind the MLS.

  15. 15
    jon says:

    If they came out and said “The list price hasn’t been approved by the bank. ” then it would be fine, but they aren’t.

    “Make an offer at the list price and maybe they will accept it.”

    If a store tried that, the AG would be down on them like a load of bricks.

    From the wiki:

    “A bait-and-switch is an offer of a service or product at a very low price (often a loss leader), with little or no intention to sell said service or product as advertised.”

  16. 16
    The Tim says:

    This bait-and-switch conversation reminds me of a discussion we had back in late ’06 / early ’07: If the MLS is an advertisement…

    The MLS and its members have never been held to “truth in advertising” standards, despite the fact that they want to treat their system as essentially a big advertising database. Maybe if enough people get fed up with it some lawyer will do the work to create a class-action lawsuit. Outside of that, I don’t see the shenanigans changing any time soon.

  17. 17
    softwarengineer says:

    I’M HEARING PLACES LIKE HOME DEPOT ARE CUTTING EMPLOYEE HOURS LATELY

    Who’s got money to fix up homes for short sale, even just paint and elbow grease, anymore?

    I worked with a realitor who sold repos in the 90s and he’d buy it for 50 cents on the dollar then live in the repo for 6 months, paint it and clean it, then sell it for 75 cents on the dollar….win/win for both the realitor and buyer…..now-a-days, who’s got money for even paint?

    Try to find the total recent repo percentage in America on a Google or Yahoo search…..lol, its likely covered up and your search will come up blank or give you data from like a year or two ago. I heard it was about 10%, please correct me if I’m wrong.

    I’m thinking when repo rates hit hypothetically 20-30%; the cow manure will really hit the fan on price collapse of Seattle area homes.

    Remember, statistics don’t lie, but pink pony RE statiticians from Seattle do…lol

  18. 18
    TheHulk says:

    but I don’t think many people ever would have expected to see such a piece written about the Seattle area

    Tim, are you saying that we are *gasp* special?

    Since we have always been 18-24 months behind Southern Cal, I am not surprised to see this at all. It would be instructive to compare the Case Schiller decreases with the number of foreclosures and see how well this compares.

    In fact, I would say we have seen *less* foreclosures that what would have otherwise happened under “normal” market conditions. With the government stepping in all over the place, they have artificially lowered interest rates and thus punted the ARM-reset time bomb for now.

    Given all the bad news that is happening right now, I expected to see far more foreclosures, not just in Tacoma but also in King county. People payed insane prices for houses from 2003 thru 2007 and took on an insane amount of debt. Sure as a homeowner you may still be able to afford your mortgage, but if it is consuming 40% of your after tax pay, what do you think you are putting away towards the future (considering that your leveraged loan is depreciating 10% every year on principal, with no hopes of recovery for at least 10 years). All these people are one bad incident away from foreclosure and as prices tumble lower, you will see more and more jingle mails in WA (at least the buyers are lucky this is a non recourse state).

  19. 19
    Groundhogday says:

    I’m not seeing short sales, but we have certainly run into a lot of sellers who “have” to get a certain minimum figure… always far more than the house is worth. I figure in a year or two we’ll be negotiating directly with the lender. (Pullman, WA)

  20. 20
    Jillayne says:

    Hector asks, “I’ll ask why they are dutybound to share with other MLS members, but not the general public? ”

    Great question. I’ve been teaching the Short Sale class for over 8 years now and I use this exact question as part of an ethics case study. (I believe in ethics across the curriculum and not just one stand-alone ethics class) The class is usually divided. Half of the students (Realtors) say the reason why they don’t want to disclose the short sale status to the general public is because it might attract low-ball offers from vultures looking to do a quick flip and they are bound to represent the seller’s best interests under their duties of agency. On the other side, some home buyers are actually investors who are seeking out short sales and wish they could do a public MLS search on those keyword terms. So then one could make the argument that disclosing the SS terms is actually in the homeowner’s best interests. Others would disagree.

    This is what makes it a good ethics case study. Article 12 of the Realtor Code references the importance of honesty in advertising and making accurate and true representations to the public.

    I believe the NWMLS rules should be changed to include two things:

    Cummulative days on the market and the short sale status. Perhaps in the future the NWMLS will change these things. However, we must realize that at this time, the seller is paying the commission out of the sales price so many of these rules favor the seller.

    Not every member of the NWMLS is a member of the Assoc of Realtors. We are one of a few states in the U.S. who does not make it mandatory to join the Realtor assoc in order to be a member of the MLS.

  21. 21
    Jillayne says:

    Hi Groundhog day, how’s the weather in Pullman?

    “I’m not seeing short sales, but we have certainly run into a lot of sellers who “have” to get a certain minimum figure… always far more than the house is worth”

    If the comparable sales do not support the list price, and the Realtor is listing it high in order to avoid disclosing the short sale status (if it was listed at a price in which it would sell) then once the Realtor drops the price to fair market value, then at that time the Realtor would be duty bound to disclose the short sale status.

    It’s to the detriment of the seller to list it way too high, only to avoid disclosing the short sale nature of the transaction. Typically people in a short sale scenario *have to* sell. Listing it too high kills the homeowner’s chances of a fast sale. The agent is increasing his/her liability in this instance.

    However, as David Losh mentioned at the very top, many agents take these listings with no support from their broker, no experience, and no idea what the F they’re doing. This is not in the seller’s best interest. At minimum, they should partner with an experienced agent on these transactions or get smart fast.

  22. 22
    Jillayne says:

    Hi software engineer,

    Stats are readily available on California REOs (real estate owned, or reposessed homes) but not so much here. I have a feeling that banks are holding on to the REOs, hoping they can dump them into an new RTC2 (resolution trust corp). But I have no proof, just a hunch.

    If anyone has access to the MLS I’d love to do a keyword search on terms like “lender owned, bank owned, REO, repo…..or…..”seller undisclosed” which could mean a lot of things but I’m hearing that’s how the REOs are being tagged in this area: “seller undisclosed.”

    I’d like to be able to track the percentage of homes on the MLS that are REOs. When we see those start to grow, then we will also see further price declines follow.

  23. 23
    David Losh says:

    Doing short sales takes practice. Classes are dangerous for the consumer. The consumer needs an advocate and that was the point of the Distreesed Home Owner Legislation. Most people need legal advice in a short sale situation. The second part is that they need an advocate.

    You need to know when to call BS on the Investor. “You either want to make money today or you don’t,” needs to be said in the very nicest way. You also need to know what the foreclosure action is in your neighborhood. You need to be able to say with absolute assurance that the house will bring a lot less at auction and say, for a fact, how much less.

    There is a women in my office who now does a short in about thirty days. It can happen for you if you hire a person, and it only takes the one side, who knows what to do, think, and say, at what intervals.

    I do shorts for people I know. I always recommend a person talk with an attorney before deciding on this course of action. Never use an attorney to write the transaction because it makes the process impossible.

    In a short sale both agents work in the best interest of the seller. It’s a change in the law that was needed. The person in distress needs to have added protection because we saw what agents will do to them. It’s important that an agent can handle a short sale rather than make empty promises.

    A short sale being advertised as a short sale is not in the sellers best interest. That’s why it’s in the agent’s comments.

  24. 24
    EconE says:

    Question…

    When a bank sells a house as a short sale, is the former owner off the hook for the difference? Not just with regards to taxes on the forgiven amount, but with regards to the amount forgiven.

    The reason that I ask is that I have seen many many houses listed as short sales in L.A. over the last couple years that languished at the asking prices and ultimately were sold as foreclosures at a steep discount to the short sale price. My understanding is that when the people refinanced, the loan becomes a recourse loan. Does the bank have a greater ability to come after the borrower in the future (wage garnishment) if the house is sold as a foreclosure rather than a short sale?

    Finally…WRT the “teaser” asking prices…If I saw something listed at X dollars and was willing to purchase it for “X” I would just fall back on what I learned about contracts in my business law classes.

    Offer + Acceptance + Consideration = Contract.

    I’d send in my offer with a check (appropriate “consideration” amount), and if there was any foot dragging on the part of the seller, the next correspondence they would receive would be notification of a lawsuit naming the owner, the agent representing the sale and the bank.

  25. 25
    Hector says:

    Jillayne, you are awesome. I appreciate your response even in the face of my cynicism.

    Jon, we are on the same page, but while bait and switch is a form of false adverstising, what the agents are doing is baiting with no switch. For it to be a B&S, the advertised product (ie the house) is not available.

    Tim, appreciate the link to the old thread. It’s something I have thought about quite a bit lately. The ‘new on market’ topic is one that I am especially frustrated with. It’s great to see the guys at Redfin implementing features to accurately report how old a listing really is.

  26. 26
    Hector says:

    sorry, for the hoirrible grammar, rushed my last post….

  27. 27

    “I’d like to be able to track the percentage of homes on the MLS that are REOs”

    Jillayne, I’ll get on that. It may take me a little while, but I’m pretty curious. I know that there are a lot of REO properties not on the MLS, but how many are?

  28. 28
    David Losh says:

    I also have the feeling that REOs will end up in a variety of Trusts.

    While researching a comment a couple of days ago about WaMu I found Murphy Favre as:
    Murphy Favre Housing Managers, Inc.
    Murphy Favre Properties, Inc.

    They were the in house investment branch of the bank. I’ve been thinking for a very long time that some investors will pool large numbers of properties, especially housing tracts in some areas as rentals, the way condo projects are now rentals.

    I’ve seen this done on a small scale while some investors have waited out a market. This time may be a different story.

  29. 29
    Ray Pepper says:

    Don’t get me started on shorts sales. The fact is this. Its not the seller. Its not the Bank(s). ITS THE LISTING AGENT! In fact, this is what I think many of them are doing during the day.

    http://www.youtube.com/watch?v=R1C4E3RUXc4&feature=related

  30. 30
    permarenter says:

    Aren’t foreclosed homeowners still personally liable if, after the home is foreclosed an sold, the bank still doesn’t recoup the value of its loan?
    ———-
    “Seems odd that people would revenge trash their short sale property before it was shown to buyers. ”

    Agreed. That’s simple vandalism. If people made bad choices about their personal property, they shouldn’t take it out on the next owners.

  31. 31
    anony says:

    Permarenter,
    I believe so, and I think it is the same for a short sale.

    However, the thing that surprised me about this is it wasn’t people getting kicked out of their foreclosed homes, it was people selling a short sale. If the article is correct, these are homes that the individual still owns, they have contracted a listing agent to try to sell it short, and they may still be living in the home. They are trashing their own short sale home before it sells.

    Can anybody confirm that people are trashing their short sale properties while they are still on the market, or was the person quoted in the article just confused?

  32. 32

    “I’d like to be able to track the percentage of homes on the MLS that are REOs”

    Can’t tell a percentage, but of all of the single family homes currently on the NWMLS in all of the Seattle area from Dash Point and Federal Way on the south to Woodinville, Kenmore, Bothell on the north, to Vashon on the west to North Bend on the east, there are 164 listings with the keywords : lender owned, REO, bank owned, repo, or seller undisclosed. Of these 164, 27 are in Kent, 18 are in Auburn, 9 are in Federal Way, 9 in Renton. Within the City of Seattle, the vast majority are in the south end, 98118 zip code, and a bunch in my zip code just south of the city limits 98178….One is in Bellevue, two are in Newcastle, three in Sammamish, one in Redmond, three in Kirkland, two in Woodinville, one in Kenmore, one in Magnolia, one in Fremont, two in Ballard, one around Northgate, and a couple in the Central District.

  33. 33
    Jillayne says:

    Ira that’s not enough. I’d guess there are far more out there and the banks are sitting on them. Thanks for doing the search!

    Anony, if there is any “trashing” going on, it typically takes place when the house is going to be foreclosed and NOT on a short sale.

    The owner is enraged that he’s being evicted and takes out his anger on the house, ripping out appliances, punching holes in the walls, and so forth.

  34. 34
    David Losh says:

    It is both the listing and selling agents. I had a short approved last year when the agent told his buyer to lower his offer, another pulled his deal after thirty days because the “locked” on thier thier loan expired, another was an all cash low ball offer who couldn’t understand why the bank wouldn’t just approve it. She told me she had done lots of these, maybe back in the day, but not today. Don’t get me started on Real Estate agents and short sales.

    You see Ira, those seem like low numbers to me. I look at the same things and have for the past six months and I don’t see a lot of Bank Owned properties compared to a year ago. Also Undisclosed sellers are always used for high end properties, or investors who own multiple properties. With the aavilablity of tax records the point is kind of moot, but still used for LLCs or Corporate owned.

  35. 35
    mukoh says:

    The seller in a short sale is not liable, it is an agreement to get rid of it in most cases.

    Post foreclosures though the previous owner can be held liable. It is only done when the bank can see some ready assets to go after post judgement.

  36. 36
    Jillayne says:

    Regarding if the owner has to pay the bank back, we need to divide the answers between two catagories. First, let’s confirm we’re talking WA state only. Foreclosure laws vary state to state.

    Deed of trust type of foreclosure is different from foreclosing on a mortgage instrument. We should make the assumption that the vast majority will be a Deed of Trust. Now let’s further assume that the first lender is foreclosing. The opening bid at the trustee sale is the amount owed, plus interest, penalties, attorneys fees, and any other fees owing such as county real estate taxes. If there are no bidders then the home is deeded back to the bank using a trustee deed.

    The homeowner is not pursued by the bank for any losses. The bank has the option of turning the deed of trust into a mortgage and taking the homeowner to court and trying to get a deficiency judgement handed down by the courts, however, this is really expensive for the banks. This is rare these days and would only occur if the bank has clear evidence that the homeowner 1) committed egregious fraud, and; 2) the bank has evidence that the homeowner actually has lots of money and would be able to pay the judgement. When going to court on a foreclosure, the homeowner has many more rights so again, the banks simply won’t do this very often at all.

    If there is a second mortgage, the answer whether or not the homeowner is pursued becomes way more complicated due to a recent state supreme court opinion.

    This comment is not legal advice. Homeowners needing legal advice should consult an attorney.

  37. 37
    Jillayne says:

    The above comment addresses the question “does the homeowner need to pay the bank back” in the situation of a full foreclosure.

    Next I will answer the question as it pertains to short sales.

    Short sales are reserved for people who owe more than what their home is worth and MUST sell. If the homeowner did not have to sell, then the assumption is that he/she would continue to make their payments. So the assumption with all short sales is that the homeowner has no other choice but to sell.

    Short sales are also reserved for people with NO MONEY. If the homeowner has money, then that’s a different kind of transaction. We call that, “seller brings cash to closing” transaction or, “making your downpayment in arrears.”

    With a short sale, the homeowner is going to have to PROVE to the bank that they have NO MONEY. This means the homeowner must show bank statements proving that they’ve liquidated everything in order to make their payments up to this point. There is no fast and easy process to approve a short sale. It takes time.

    Ira and Ray have addressed the Listing Agent problem and I can’t stress this enough: They’re both right. The listing agent needs to know several important steps and the above paragraph is one of them.

    So what about 401Ks or IRAs you may ask? Well, as I mentioned above, short sales are reserved for people with no money. Aww, we shouldn’t have to make the homeowner liquidate his IRA, should we? Well, would you if you held the note? Someone with assets is not going to receive “Debt Forgiveness.”

    If a homeowner has other assets, then the bank will ask the homeowner to sign a brand new unsecured note at closing to pay back the difference. If the homeowner owns another piece of real estate, then the bank will ask for the short selling homeowner to put a deed of trust on the other piece of real property and pay back the short fall.

    If a listing agent fails to explain all this to the short selling homeowner, then the transaction could fall apart, wasting everyone’s time. The agent, the seller, and the potential buyer not to mention the people at the bank.

    There are, I would guess, a certain percentage of homeowners who have the cash to make up the short fall but don’t want to tell the bank. Realtors, once they know about the extra cash, cannot take part in hiding a material fact from a lender. I have only met one Realtor who would consider this. All the other Realtors I’ve met wouldn’t touch clients like this. It’s not worth losing one’s license over.

  38. 38
    Jillayne says:

    @mukoh, “The seller in a short sale is not liable, it is an agreement to get rid of it in most cases.”

    This is not entirely accurate. Please see above comment #37.

  39. 39
    Jillayne says:

    @mukoh “Post foreclosures though the previous owner can be held liable. It is only done when the bank can see some ready assets to go after post judgement”

    This is not entirely accurate. Please see above comment #36. Rarely does a bank go to court in WA State to obtain a judgement. That’s only done of the bank decides to turn the deed of trust into a mortgage instrument. Most banks foreclose non-judicially which means there is no deficiency judgement.

    A second mortgage is a different story altogether.

  40. 40
    Scotsman says:

    What a mess. The banks are going to be very sorry they held onto any forclosed properties, as their values will only deteriorate going forward. In my reading today I ran across some quotes that do a nice job of summarizing the current economic climate.

    First, the most recent analysis of Obama’s economic recovery plan, that includes adjustments for decreasing tax revenues puts the 2009 deficit at just over $2 trillion. Ouch! Think about that in the context of these two quotes:

    “Monetary policy works by creating the environment for a renewed borrowing and lending cycle. This cycle would require that the debt to GDP ratio, which is already at a record level, grow even higher. Would such an outcome really be that desirable when the controlling problem of the U.S. economy is too much improperly financed debt? If the Fed were able to engender an increase in the debt to GDP ratio, this might merely serve to postpone the reckoning of the current debt levels while laying the foundation for an even more vicious unwinding down the road.”

    In sum, more debt will only make it worse. The solution? Here:

    “Summers goes on to say that the plan “relies on both government spending and tax cuts to raise incomes and promote recovery.” Obama adviser David Axelrod reinforces the notion of economic stimulus: “People need money in their pockets to spend. That’ll get the economy going.”
    Will it? We think not. What the economy needed in 1933, and what it needs even more so now, is vast deleveraging: using assets to pay down debt. Like a household with finite income and too many credit cards, there comes a time when the piper has to be paid. Getting more credit cards only temporarily makes the problem go away, and surely makes it worse.”

    Unfortunately, the FEDs think they have a really big credit card. They may be surprised to discover the bond market has put a limit on it.

  41. 41
    ARDELL says:

    1) Searching for “bank owned” properties does not give you an accurate read, as many simply say “owner of record” in the owner name field, with no reference to it being bank owned.

    2) The commission promised to the buyer agent is “subject to lienholder approval” and that is why mls members must advise other mls members that the commission stated to be paid, may be less than the amount shown. That is in the commission “field” and the “agent remarks” regarding commission, and a required agent to agent disclosure.

    3) Some people “trash” the home because they added improvements since they purchased the home. If they bought and paid for all brand new stainless steel appliances, even new kitchen cabinets, from their own monies or on a credit card, they often take these things out and sell them separately to get moving money. They view these items as theirs, if they were not in the house at time of purchase.

    4) On new construction and flip properties that are going to foreclosure, sometimes the sub-contractors break in and take out the things they put in that they were not paid for.

    5) Most often the bank will not indicate the amount they are willing to accept until they have an offer. The mls has recently “complained” about agents who list at prices without knowing if the bank will accept that price, but practically speaking the owner and the listing agent have no way of knowing in most cases.

    6) No agent is well versed in all aspects of every short sale, as it depends how much the seller owes, how close the property is to foreclosure, how much the house will appraise for, and different lenders will accept different amounts. Some want 100% of current appraised value, which may or may not be 80% or less of the amount owed.

    7) Many companies who are hugely successful at getting short sales “done” are using tricks like getting an appraiser to provide a low appraisal, getting a home inspector to say there is a huge problem with the house, and other means to trick the bank into accepting a low offer.

  42. 42
    Ben says:

    I would love somebody who knows about this stuff to explain to me the difference between a short sale and a foreclosure, with regard to the effect on the owner. How is your credit affected? What is your legal exposure?

    From reading this thread it seems like there is no point in trying to get a short sale, because the bank will ruin you first. Far better off to just stop paying rent until you get kicked out. At least you get to keep your other assets.

  43. 43
    Alan says:

    So far this month, there have been 459 Notice of Trustee sales filed (which I think is the trust type of foreclosure) and 35 Lis Pendens file (which I think is the type where the bank pursues a deficiency judgement).

  44. 44
    David Losh says:

    Holy Cow, by the comments here you can see why a home owner needs an attorney who is familiar with short selling a property. The problem is they are heavily booked.

    These, my comments included, or especially, are opinions. Be very careful of what you think you are learning here. We all have opinions about short sales that are no substitute for legal advice concerning your particular situation.

  45. 45
    Fran Tarkenton says:

    @22:
    “Finally…WRT the “teaser” asking prices…If I saw something listed at X dollars and was willing to purchase it for “X” I would just fall back on what I learned about contracts in my business law classes.

    Offer + Acceptance + Consideration = Contract.

    I’d send in my offer with a check (appropriate “consideration” amount), and if there was any foot dragging on the part of the seller, the next correspondence they would receive would be notification of a lawsuit naming the owner, the agent representing the sale and the bank.”

    ———————

    The answer to this situation isn’t found in contract law. There is an acceptance (your manifestation of an intent to be bound to the seller) and there is consideration (your money), but there isn’t an offer because the seller isn’t manifesting an intent to be bound to a specific buyer. That advertisement serves as a solicitation of offers (then, to form a contract, the buyer would offer, the seller would accept and the consideration would remain the money and the house, respectively).

    So, there isn’t redress in contract law because there’s no contract, but it still feels like the short seller in your example is a bad actor. It’s also not simple fraud, because you’ve suffered near-/de minimus/ damages – your time spent putting an offer together due to a bad faith advertisement. The answer lies in advertising law, but I have to stop here because I can’t speak to that off the top of my head. I can fill in the details on that tonight.

  46. 46

    “Ira that’s not enough. I’d guess there are far more out there and the banks are sitting on them. Thanks for doing the search!”

    I agree, the low number surprised me too. As Ardell inferred, there may be a lot more REO homes that re listed without the keywords in there. And some are homes that banks are just sitting on. Also, I am aware that some lenders sell the REO homes on their own without listing them on the MLS.
    So, how many REO homes are truly out there on the market?

  47. 47
    ARDELL says:

    Ira,

    I am aware of several homes that were purchased at foreclosure and are now on market by the person who bought at foreclosure. The owners are not banks. Many are exceptional “values”. Where do we put these homes? Are they not the same as “bank owned” in that they are homes for sale that have gone through foreclosure, and re-entered the market immediately following the required wait period?

    I would lump most vacant homes on market at asking prices that are substantially less than 2008 assessed values, in the same boat, whether bank-owned or not.

  48. 48
    ElPolloLoco says:

    Interesting and educational thread. Thanks to everyone who’s taken the time to post detailed explanations and opinions.

  49. 49
    ARDELL says:

    David,

    I’m sure you know that most attorneys do not agree with one another on many points regard short sale vs. foreclosure. The “antideficiency” wording is now up to interpretation due to recent case law, and that case did not involve the 2nd lienholder being the same as the 1st. So for many…there is no case law for even an attorney to rely upon.

    There is a difference between a “Trustee Sale” and a “Judicial Foreclosure” and the remedies available depending on which is used. Many states in this Country do not operate via “Deeds of Trust”. The tradeoff is supposed to be that the lender foregoes the ability to pursue deficiency, if they regain possession via Trustee Sale vs. Judicial Foreclosure.

    The #1 issue for anyone who cannot make their payments to consider, is the hidden agenda of those who offer to assist them. An agent makes nothing if you go forward using the Trustee Sale or Foreclosure (lienholder’s option; not owner’s option). An agent makes a commission if they can talk you into a short sale.

    Is there an attorney site or blog that outlines the consequence? Can’t this matter be dealt with generally in print somewhere that is available for all to read?

  50. 50
    kfhoz says:

    We have been looking at short sale homes, and all have been in undamaged except for varying degrees of deferred maintenance. When people are out of money they tend to do things like use duct tape on cracked windows instead of replacing.

    My understanding is that sellers will owe taxes on any amount “forgiven” by the bank, so it is hurting their own finances to damage the house if it lowers the price. Maybe they donot realize they still have some skin in the game?

    Turns out I have a conflict for the meet-up tonight, but my lurking spouse is planning on attending.

  51. 51
    EconE says:

    Question for Tim…

    Is there a chance that you could have an RE Atty do a guest post on SB regarding the differences between short-sales and foreclosures and the varying consequences for the borrower? Perhaps even compare and contrast different states, such as WA vs. CA as many of your price/time lag/etc. comparisons seem to be between these two states.

    Ardell…

    great posts. One question…do you think that it would be better for the foreclosures to end up in a final users hands vs. an investors hands? I read an article recently that said that these flippers on the way down actually slow the correction and maybe do more harm than good. I know business is business and what they are doing is legal…I’m just thinking logistics and what would be better for the “big picture”…economically speaking of course. If the bank is willing to give an investor a comparably “good deal”, why not just give it to the homeowner at that rate?

    Who is the Leo Nordine of Seattle? I think that the RE agent that focuses on finding their clients foreclosures, rather than buying them for themselves and trying to flip (I see lots of this in L.A.) will end up being a top producer…and the word of mouth advertising would be invaluable.

    Finally. Seeing that the banks are (seemingly) dictating the commissions for REO’s for the buyers agent…(Am I correct in assuming that they are lower than normal?)…if they are in fact low…can a potential buyer “tip” his/her agent if the agent truly finds them a good deal?

    I’ve seen 500k 1BR condos in L.A. bought for 289k at auction and then relisted for 499k. I personally would rather give a Realtor 5-10% tip for finding one of those deals.

  52. 52
    EconE says:

    Oooops….almost forgot to thank Jillayne also. Great info. Still would like to see a guest post on the subject. The comment sections can get pretty long and good posts like yours can end up overlooked.

  53. 53
    Marc says:

    I’m a real estate attorney and I’ll mention a few things regarding the consequences of short sales and foreclosures. However, this should not be construed as legal advice. Anyone faced with a short sale or foreclosure property should seek independent counsel.

    First and foremost, either one has a dramatically adverse effect on the borrower’s credit score. I read just recently that it immediately knocks 200 points off you score (although such a broad statement should always be taken with a grain of salt). The end result is that the borrower will have a very difficult time obtaining new financing (of any sort) in the future. Both will continue to appear on the credit report for at least 7 years. A mortgage expert could chime in on whether foreclosures last 10 years.

    As for continuing personal liability, most home loans in Washington take the form of a deed of trust (DoT) and a promissory note (as opposed to a mortgage and a promissory note). Under our deed of trust statute the lender may conduct a non-judicial foreclosure in order to regain possession of the property but, by doing so, the lender gives up the right to seek a deficiency from the borrower if the property brings less than the amount owed at the foreclosure auction. The benefit to the lender is a much speedier and simpler process than that required by a judicial foreclosure (i.e., no lawsuit in superior court needed). If the lender wants to go after the borrower (e.g., if it believes the borrower does, in fact, have substantial assets), it can always skip the non-judicial foreclosure and proceed with a judicial foreclosure which permits auctioning of the property and then a claim against the borrower for the deficiency. It just takes a lot longer and involves additional redemption rights.

    If properly conducted, a non-judicial foreclosure of a first position DoT wipes out any junior DoT’s (as well as many other sorts of junior interests) in that those junior DoT’s can no longer execute against the property (i.e., the collateral) so as to recover the funds they lent the borrower. However, the junior promissory note continues to be binding on the borrower and the junior lenders may proceed in court against the borrower for breach of the promissory note to recover the borrowed funds.

    A short sale involves the lender agreeing to accept a reduced amount in order to release its lien on the property. Traditionally, lenders required the borrower to sign a new promissory note whereby the borrower agreed to repay the deficiency to the lender over some time period. These days more lenders are agreeing to waive this repayment requirement but the borrower should be careful to make sure whether this is the case in his or her transaction. Thus, whether the borrower will face continuing financial liability if he or she completes a short sale is a very significant factor and the seller should make certain he or she understands what will happen in his or her transaction before agreeing to complete a short sale.

  54. 54
    Marc says:

    As for income tax ramifications, under the Mortgage Debt relief Act of 2007, homeowners who complete a short sale have a chance to avoid the tax liability that normally accompanied a short sale. Until this Act, such debt relief was treated as personal income and taxed at a person’s ordinary tax rate. Now, short sellers can avoid such tax if they meet the qualifications. Unfortunately, the qualifications are not simple so good advice from a professional is very important. The IRS’s website has some useful information here: http://www.irs.gov/individuals/article/0,,id=179414,00.html

  55. 55
    ARDELL says:

    EconE,

    1) “Do you think that it would be better for the foreclosures to end up in a final users hands vs. an investors hands? If the bank is willing to give an investor a comparably “good deal”, why not just give it to the homeowner at that rate?”

    I once saw the lienholder sell the property to the current “defaulted” owner, at the price they would sell it for at foreclosure. But it is rare, very rare, and there were extenuating circumstances. The problem with answering “better” is that from the standpoint of young people, lower home prices generally is “better” for the future. At my age, I hope for a better tomorrow for my children and grandchildren, so yes, I would have to agree that providing a better means for “end users” to buy these would be a good thing. But investors will simply lie, and pretend they are end users, or find “straw” buyers. That is one thing we learned from the last few years.

    2) “Who is the Leo Nordine of Seattle?”

    LOL…have to laugh at that one. How would you know that I know who Leo Nordine is? I once bumped him on a 72 hour clause, somewhat unheard of at the time. Matt Steel…perhaps? Still, aren’t the Matts and Leos primarily selling to investors? One thing that The Tim and others fail to recognize in the “dim” 4th quarter “sales” is that the Leo’s and the Matt’s of the world are selling approximately HALF of the property, outside of the mls system. Not sure if that’s true for Leo, but I’m pretty sure it’s true for Matt and others like him. Most people are not willing to assume the risks, EconE. They need their home inspection and resolution of the home inspection. “End Users” often need the process, that investors forego when buying at foreclosure. Might make more sense for a non-profit group to buy these at foreclsoure and make them available to end users. Perhaps “affordable housing” groups should…and yet, just aren’t interested.

    3) Finally. Seeing that the banks are (seemingly) dictating the commissions for REO’s for the buyers agent…(Am I correct in assuming that they are lower than normal?)…”

    It’s a non-issue. The average “savvy” home buyer pays less than the banks do. It really is a load of crap.

    4) “I’ve seen 500k 1BR condos in L.A. bought for 289k at auction and then relisted for 499k.”

    Now tell me if it sold and what it sold for. The ones I am seeing here do not have that kind of spread. There are costs over and above the price paid at foreclsoure. I am seeing the “end user” price to be substantially less than fair market value, in many cases, even though that price is higher than someone paid for the property at the foreclsure or trustee sale.

  56. 56
    ARDELL says:

    Marc,

    Is there a difference if the owner refinanced and the loan in place at time of foreclosure is not the original purchase money loan? Is there a difference if that refinance was a “cash out refi” obtained many years after the original purchase loan?

  57. 57
    ARDELL says:

    “Now, short sellers can avoid such tax if…”

    You say “short sellers”. Is it a non-issue if the debt foregiveness is via Trustee Sale or Judicial Foreclosure vs. a Short Sale? Is there a distinction regarding the potential taxable income consequence of these three types of “sales”?

  58. 58
    Marc says:

    Ardell,

    Those are very good questions and should give readers some insight to why professional advice is a good idea. The link I posted earlier to the IRS page has some useful information that will shed some light on the answers. Unfortuately, I don’t have time to give a proper response to your questions.

  59. 59
    Tsuru says:

    Here’s an OT question, but since we’ve got some agents in this thread I’d be interested in their opinion:

    How close are appraisals coming to Zillow et al. estimates these days for closed sales? Any ideas?

  60. 60
    David Losh says:

    It got worse durng the day.

    Be very careful about what you think you are learning from the internet. You need legal counsel and an advocate. Be very careful as either a buyer or seller of a short sale. I’m going to include foreclosures in this as well.

    There is a ton of liability here. Your situation and circumstances are unique.

  61. 61
    mukoh says:

    Jill that is not entirely correct. Banks do not go after 401ks, assets in cases when there is small amount. If you are being forgiven $50k in debt and you have even $50k in your IRA, the bank is not going after it. It is a legal process with judgment and collections which is easily resolved in bankruptcy court in which case retirement accounts are not touched. Now if you have $200k in your portfolio of publicly held stocks, its a different story.

    Jill banks routinely go after assets if they have a clean loan, and a buyer they can get a judgment to collect against. Want to look up Mccourts case? How many banks are in there?

    THey do not do it in typical situations with regular joe the plumber owner as it is not worth the fees and times to collect.

  62. 62
    Jillayne says:

    Right, they don’t “go after” the 401K. However, joe the plumber is not going to get debt forgiveness for that short sale with assets showing up in his 401K. Instead he’ll be asked to repay the bank the shortfall in regular monthly payments. The shortfall becomes a new, unsecured note. Joe doesn’t have to cash out his 401K, but he also doesn’t get debt forgiveness. Debt forgiveness happens when people are financially insolvent. Joe is clearly not.

  63. 63
    David Losh says:

    Please seek legal counsel. What ever you think you know today is far different from last week, last month, or six months ago.

    I have worked with distressed properties my entire life in Real Estate since 1972. We are in strange times. Banks react very diferently today from the way people have been taught.

  64. 64
    Marc says:

    Hi Jillayne,

    Hope you’re well. Good comments above, unfortunately, I missed them before I posted my comments above. I think you and Mukoh both make good points.

    In re-reading my post I noticed a mistatement. I said “Under our deed of trust statute the lender may conduct a non-judicial foreclosure in order to regain possession of the property.”

    This was incorrect because the lender doesn’t want “possession.” Rather, the lender wants to auction the property as soon as possible to get the proceeds from the sale or, if there are no bidders, to regain possession of the property so it can sell the property on the open market.

  65. 65
    ARDELL says:

    Tsuru,

    The appraisal industry is undergoing dramatic changes. Oddly I am seeing some properties over-appriasing by as much as I am seeing others under-appraise.

    As for Zillow, I can easily tell you exactly how Zillow is doing compared to closed sale prices, but I cannot see what those closed sales appraised for, as the appraisals are not of public record. You would have to assume that if they closed, they also appraised, but that is not always the case.

    More and more in this recession, as in the last recession, buyers may end up increasing their downpayments to compensate for low apprased values.

    I will evaluate sale price vs. Zillow value in a blog post, and then post the link here for you.

  66. 66
    BK Attorney says:

    In Bankruptcy you can do the short sell quickly, agents get paid, buyer discharges debts, keeps IRA and 401k, and has no cancellation of debt issues under Internal Revenue Code section 108.

    I don’t know why anyone would do a short sale any other way.

    Let me know if you have any questions.

  67. 67
    EconE says:

    Ardell said…

    “The appraisal industry is undergoing dramatic changes. Oddly I am seeing some properties over-appriasing by as much as I am seeing others under-appraise”.

    Makes me wonder if it’s the “house” that is getting appraised…or the “buyer”.

  68. 68

    […] over in Seattle Bubble comments, asked me for a comparison of Zillow Zestimates vs. Closed Sale Prices in the current market.  To […]

  69. 69
    ARDELL says:

    Here Tsuru. It took a long time, but the results were interesting for many reasons.

    http://www.raincityguide.com/2009/01/21/zestimate-vs-sold-price/

  70. 70
    ARDELL says:

    EconE,

    The lender is managing risk. Each buyer comes with a different risk level. If someone has 40% down and an 800 credit score and lots of assets beyond income, the appraisal may be “pushed”, if not initially, then on appeal. If the buyer is exactly 20% down with a 720 credit score, little other assets and a salaried job…often the appraisal is coming in low, especially if it is the nicest house in the neighborhood due to having been remodeled, and little chance on appeal.

    The lender isn’t really looking at the house as much as their investment in that house. They are determining and minimizing their risk factors.

  71. 71
    mukoh says:

    Jill,
    Legally in order to get an unsecured note or collect on shortfall a bank has to get a judgment. They are not going to do that knowing that a bankruptcy is possible. I have not seen any recent outcomes of banks going after people who have no liqudity in their actual bank account. Banks do not care for 401ks or IRAs unless they are absolutely sure that a person cannot declare bankruptcy.
    Also banks do not like to go into getting judgments as the loan file gets reviewed by the defending attorneys for missing disclosures, and checked boxes.

    Ardells comments are right on. I am still likewise seeing people who are doing refis or anything else with appraisals above REAL market by 5%-10%. Banks are probably doing them in such a way to justify the refi.

  72. 72
    David Losh says:

    Holy Cow, what a mess.

    The problem today is that there are so many foreclosure above fair market value. Core value of Real Estate is determined by what it will rent for. The prevailing thought is that rents will decline. As much as lenders lower interest rates to prop up prices the march of people walking away from properties continues.

    A second thought is that since lenders are getting government bail outs they are less inclined to sell for cheap. They are thinking and maybe hoping to have the loans “bought” by the government. That process is complicated, but bought is a good term.

    If you are buying a short sale or foreclosed property you are in most cases today paying what will be a going rate for the property of few months or a year from now. Prices are declining. You can buy fifty cents on the dollar and resell for a profit depending on what the bank is owed. Some foreclosures are still for seasoned loans with equity. Many properties are not selling period, so they do end up at auction.

    All of that being said, and of course I could go on and on and on a deal is a deal if it makes sense. The best way to judge is if the property will rent for the mortgage payment, as some people are saying today, maybe a little less.

    If you are short selling you need to be listed at what the bank will take which is in many cases eighty cents of the loan amount. The lender is interested in what they will “net” on the HUD1. For those agents thinking there is a commission involved remember all commissions are negotiable. I have been asked more than once to kick in a portion of, or all of my commission to make a deal work.

    I have given up portions and in some cases only covered my costs. It’s all fair and legal. You are asking for a lender’s money. There are no guarantees. Yes a lender can go after a seller tooth and nail to prove a point. They have attorneys on retainer.

    If the property sites, or seasons on the market at the given price of roughly eighty cents on the dollar the agent can lower after a couple of weeks, then again until it sells. The bank will to an independent Broker’s Price Opinion, BPO so you need to show cause including a listing history why it didn’t sell.

    I could go on and on and on as most of you know. get an attorney’s advice, then get an agent who has done a bunch of these lately. Avoid the “one stop short sale shops.” They are usually buyer based investment groups who will drag the whole process out to get a good deal. If it goes into foreclosure they know another one will come along. It’s shady, and in most cases illegal in the State of Washington.

    I mean as long as we’re rambling, why not me?

  73. 73
    ray says:

    In September of 2008 we were told by Countrywide that we qualified for a remodify . In December we could start the process. December comes and we were invaded by a property management Mid American. Countrywide had ordered an inspection, while we were at work the locked my family out!
    They admitted to doing this and said they were real sorry! They started a foreclosure in September and never finished the foreclosure. They instead locked us out. We just recently hired an attorney but we are not sure who we need to sue, the property management or Countrywide or the new servicer Bank of America ? As of right now we decided to go after Mid American Property Management. The company riffled though all our belongings and left a big mess. How illegal is this crime ? Thank you

  74. 74
    AMS says:

    RE: ray @ 73 – If necessary, hire another attorney.

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