Monday, October 22, 2012

My Short Sale Experience - From a Real Estate Agent's Perspective

Note : Please feel free to share and link to this blog post with any friends who may be in a similar situation. But any reproduction of this article needs prior permission. Also, this experience was based in Washington State, so please keep in mind that different states may have different laws. The experience explained here may differ from your experience.

And if you would like more specific detail on any part of my story below, please just ask me directly or contact my real estate partner, Mitch Greenblatt. We work in the Puget Sound area, mostly representing clients in Seattle and the Eastside. We're happy to answer any questions; there is no obligation to use us as your real estate agents. We think of this more as a public service announcement, to educate those who are curious or in a similar situation.

Jin Lee -
Mitch Greenblatt - - cell: 425-765-8460

My Scenario
I know that a lot of people are in a very similar situation that I was in, because I continue to hear identical stories to this day. I purchased my home in Issaquah (a suburb of Seattle and Bellevue) in 2006, based on income I had made on my 2005 tax return. I started in the real estate industry, as a real estate agent, in 2004. 2005 was my best year and I had found a niche selling to first time homebuyers, as well as representing a pair of home builders and selling a lot of new construction.

I, too, thought, "I better buy something now before prices go up too high." I found the lowest priced home at the time in Issaquah. Even at an asking price of $400,000, it became a bidding war and I was afraid that if I couldn't get the last single family home for around $400K, I would never get to own a house.

I ended up winning the bid at $406,000, and didn't put any money down because I was told, "With your income, you don't have to put any money down." I received a first mortgage for $324,800 and a second home equity line of credit for $81,200. My total monthly loan payment, including both loans, interest, property tax, and insurance, was just under $2500 per month. For someone with 6-figures of income on 1-tax return, the loan made sense from a numbers perspective. $30K in annual house-related payments, over $100K in income, and I would have a debt-to-income ratio of under 30%; well under the 38% limit that most lenders were using.

To be clear, I have never blamed my loan officer or bank. I only blame myself. I bought into all the hype. I was in my mid-20s and was spending more than I should have. I was keeping up with the Joneses. There were times I thought, "I should have put 20% down, I would have a much more manageable monthly payment." But that became a lucky break for me, as the home's value would start to plummet.

2007 - The Crash
Everything was great in the new home, for about 6 months. Then in mid 2007, the real estate market crashed. By crash, I mean, it became impossible for new buyers to secure loans. All the sub-prime (and some regular) lenders were going out of business, even with contracts / pending loans on the table. We had heard about a possible crash in Seattle, since it was already happening in states like Florida, California, and Nevada, but everyone was hoping, stupidly, that it would skip Washington. Wow, we never expected anything like this.

With new borrowers having a tough time getting loans, and as buyers hesitated due to the dropping home prices, many new niche markets emerged within the real estate industry; distressed homes / short sales, REO / bank owned homes, and really cheap condos that nobody could get financing for. For the next 3+ years, my real estate business was about half of what it was at the peak, but I was still relatively okay (relative compared to other agents that is). I would be just as busy as before, but the commission checks weren't as high. I continued to win Seattle Magazine's 5-Star Agent awards and thought, "Man, if I can win this award 4 years, other agents must be doing REALLY bad."

During the 3 years from 2008 to 2010, I avoided showing / selling short-sales, mainly because I just didn't understand how they worked. I remember early on, putting an offer on a short-sale for a client, waiting a month, and deciding, "This is a waste of time," and helping my client back out. There were plenty of bank-owned homes on the market from foreclosures, so we stuck with showing those.

What Changed
In late 2010, as I was planning on getting married, I realized several things.

- The house I bought for $406K, and still owed $406K on, was now worth $275K at best. Even if I continued paying $2,500 / month, what would the house be worth in 5 years? 10 years? I could wait 10 years and spend $300K in housing payments, yet the home may not even be worth what I originally paid for it.
- I am now paying about 60% of my income towards housing, and my savings has been depleted as a result.
- There were now several homes in Issaquah for around $300K. Boy, was I wrong about waiting to buy a house.
- I sure am glad I didn't put $80K down, although that doesn't really matter anymore. Since, like I said, my savings has been depleted.
- I can't get refinanced due to my lower income.
- I've tried several times to get Bank of America to do a loan adjustment, and I received 2 rejection letters for my efforts.

So I made a really tough decision. I would miss the first payment of my life as of January 2011. I wasn't sure what would happen. Would Bank of America finally do a loan adjustment / loan modification? Would I foreclose on the home after 3 months (which is the minimum time before a bank starts the foreclosure process)? The thought of short-selling didn't cross my mind.

What I Thought Before The Short Sale
I knew a lot of people were short-selling, but also that most people had no idea what a short-sale was. I had a general idea. I knew short-sales were a way to negotiate a lower pay-off with the bank. If my property would only get an offer for $275K, I would present that to the bank and tell them, "Hey, I can't pay off $406K, would you take $275K? Please?!"

But beyond that, I was lost. Who do I contact at the bank? Surely, I can't just walk in and talk to a teller. Would they try to take my car and other assets? And the worst part, I heard I would be on the hook for the difference in one way or another. That the $125K difference would be considered income on a 1099 (a tax form if you're unfamiliar), and I would pay income tax on it, or that Bank of America might come after that $125K difference directly from me. Either scenario scared me. And eventually, I thought the best idea would be to just walk away and let them (Bank of America) take it over.

What Happened in 2011
So after missing my first payment in January 2011, nothing. Nothing happened. I received a phone call once a month from Bank of America notifying me that my mortgage was late, but I would just say that I couldn't afford it and didn't have anything in savings. Their response, "Well, just try to get that payment in whenever you can." After about 6 months, going into June, these calls would stop.

So there I was, 6 months in, and no letters, threats, or foreclosure notices. I was living mortgage / rent free. The only downside at this point, my credit has dropped 200 points (and has remained there to this day).

I thought I would ride it out as long as I could.

So 2012 hits and still, no notices. To be honest, I'm a little nervous at this point. Just the feeling of not knowing what's going on can be scary. But then a friend came to us and said, "Hey Jin and Mitch, would you help me list my place? It would be a short-sale." We definitely wanted to help but had our usual reservations about short-sales. We had worked with various short-sale negotiators over the years, but with mixed results.

This time it was different, my friend said he was already working with a law firm in Kirkland that specializes in short-sale negotiations. He just wanted our help listing and marketing the property. This sounded ideal; Mitch and I could focus on listing, marketing and getting an offer on the property, while the law firm dealt with the short sale and closing. They charge a flat fee (usually between $200-$300 up front) for the initial consultation, and the remaining $3K at a successful closing. The remaining $3,000 can be (and is usually) paid by the buyer, especially since most sellers in a short-sale are broke. The buyers don't seem to mind though, as they are usually getting a great deal.

So doing my due-diligence, I met with the law firm and asked all the questions I had. I even asked my friend (client to-be) to meet with some of the more popular short-sale listing agents and negotiators in the area before making a decision. After all was said and done, we agreed, the people at the law firm seemed to already know what the outcome would be. We didn't hear words like "maybe" or "ideally." Of course, nothing was guaranteed, but they worked quickly to help our friend short-sale his property in under 90 days from start (listing date) to finish (closing date). We surprisingly got an approval from the bank in around 30 days.

I ended up meeting with the law firm again to discuss my personal situation and I realized that walking away from the property by foreclosing would not be the smartest route (it's definitely an option, just not the best option for me). The 1st mortgage would go away in a foreclosure, but Bank of America has a 7 year statute of limitations to try and collect the $82,400 (second mortgage) from me. The second mortgage (and any 3rd, 4th, etc) are considered lines of credit that the bank can come after. It would be best to negotiate a pay-off up front and to get that dismissal letter from Bank of American that says, "We will not come after the difference." Specifically, I would say, that is why I wanted to use the law firm, to get that letter. I didn't want to live the next 7 years fearing that I may have to pay back that second mortgage.

Who Should Short Sale
- From my experience, short sales seem best for people with multiple mortgages who need them ALL dismissed.
- People who have had a hard-ship, including drop in income, change of marital status, medical issues.
- People who have a high debt to income ratio.
- People who have negative equity and want to sell.

Who Maybe Shouldn't Short Sale
- If you only have 1 mortgage, it goes away with the house when you foreclose / walk-away. There would be nothing for the bank to go after.
- People who have plenty of income to support their mortgage.
- People who have plenty of money in savings.
- People who have positive equity in their home.

So I made the decision to list the property in mid-June 2012 for $275,000. Within 2 weeks and a lot of interest, we had an offer at $270,000. Now began the waiting process of getting the price approved. As it turns out, Bank of America appraised the home even lower, at $266,800, so that ended up being the purchase price. In this case, it took just around 2 months to get our price approved and to get the letter saying that I was off the hook for the amount of the difference. Bank of America is even paying me for relocation assistance to help me find a new place.

From start (listing date) to finish (closing date), it has taken just around 4 months to get rid of the property. As of early October, the house now belongs to a new owner who, at today's interest rates, is probably paying HALF what I was paying every month. Pretty crazy if you ask me.

FAQs - These are some of the questions I've asked, or others have asked, throughout the process.

Why wouldn't Bank of America just foreclose on me and sell it themselves? This was one of my first questions to the law firm. Bank of America, currently, is so backlogged with people who are late on their mortgage, that it easily could have been another year before they got around to foreclosing on my home. During that time, prices could drop even more. Or I, the owner, could potentially not care for the home during that time. It was in the bank's best interest to assist me in getting rid of the home now. Instead of waiting for something bad to happen.

Who Set the Initial Listing Price Before the Price is Even Approved? Mitch, my real estate agent, and I agreed that $275K would be a fair starting point. We try to set it at a price that 'we think is best.' That's a vague answer, but we just have to set everyone's expectations to be realistic. If we listed it at $250K, and the buyer thought they were paying $250K, they would be upset with an approved price of $266,800. On the contrary, if we listed it at $300K, we probably would have had to wait longer to get an offer and thus, delayed the approval process. We make sure that any potential buyers know the process before they commit to waiting. As long as the buyers are in no hurry and are willing to wait for a great deal, the entire process seems worth it to them.

How Much Did You Get For Relocation Assistance?
I've heard this can be anywhere between $1,500 and $15,000. In my case, it was on the lower end of that range.

Don't You Feel Like You Should Have Toughed it Out Instead of Breaking Your Contract / Commitment To Pay Back the Mortgage?
This is a question I asked myself several times. And I know plenty of people out there who would say, "So Bank of America now has to pay for your mistake." I would just say, that, I'm paying for my mistake as well. I'm paying for it with credit that's been destroyed, not having the ability to get any kind of financing, and not being able to open or keep any credit cards.

I do wish I could have toughed it out, but it was really difficult on my personal life and finances. When it came down to it, I thought of it as a business transaction. If you make a bad investment, you should be able to cut your losses and move on. Doing a short-sale was my exit strategy.

You Kinda Skipped Over The Short Sale Approval Process. What Happens During that Process?
The thing is, after meeting with the law firm initially, I filled out some forms explaining my current financial situation and that was about it. There was a lot of waiting around, although I did receive weekly updates from the law firm. They would tell me things like, "The bank received the paperwork." "The bank is sending out an appraiser." "The appraisal is done." "They're about to send out an approval letter." Things like that. I didn't think about it too much while I was waiting since it was beyond my control.

If you have any additional questions and would like to discuss short sales, please email my real estate agent friend, Mitch Greenblatt. He is licensed to work in Washington State (and for the sake of full disclosure, I am also licensed as a real estate agent in Washington State).

I hope this post has been informative and has helped answer questions you might have about short sales. Thank you for reading!

Jin Lee -
Mitch Greenblatt - - cell: 425-765-8460


Unknown said...

This is encouraging. We are working with a law firm and a local agent for our short sale. We received a full price offer and are now submitting our paperwork and the purchase agreement to the law firm. Keep your fingers crossed for us. Hope ours goes as smoothly as yours.

Anonymous said...

We lost my home in California through a short sale. We received a 1099-C (cancellation of debt). There is a debt forgiveness by the IRS for your primary home. The limits are provided by the IRS on their website or in the pamphlet. I use Turbo tax and I entered the information on the form for the 1099-C. This raises your income by the amount forgiven (CRAZY!!). I had to do research and found that one needs form 982 to access the debt forgiveness. Anyway, this is what I did.