Short Sale Statistics Report- 2nd Qtr 2012

Distressed property sales were down overall throughout the Puget Sound area in the second quarter of the year, according to the Washington Property Solutions 2nd Quarter Short Sale Statistics Report. The fall was due to a significant drop in the sale of bank-owned properties. Short sales showed moderate gains.

Short sales in King County increased year over year from 11 percent of all home sales (single family homes and condominiums) in the second quarter of 2011 to 13 percent in the second quarter of 2012. Bank-owned sales fell from 23 percent of all home sales in the second quarter of 2011 to 15 percent of all sales in the second quarter of 2012. 

In Snohomish County, short sales grew from 13 percent of all home sales in the second quarter of 2011 to 16 percent in the second quarter of 2012. Bank-owned sales decreased from 35 percent of all home sales in Snohomish County in the second quarter of 2011 to 23 percent of all sales in the second quarter of 2012. 

Pierce County short sales rose from 14 percent of all home sales in the second quarter of 2011 to 15 percent in the second quarter of 2012. Bank-owned sales fell from 38 percent of all home sales in Pierce County in the second quarter of 2011 to 29 percent of all sales in the second quarter of 2012. 

The full report includes historical statistics for both Short Sale and Bank-Owned properties in King, Snohomish, Pierce and Kitsap counties.

How Short Sale v. Foreclosure Affects Credit Scores

A key issue for clients facing a short sale or foreclosure is how each affects their credit score. There are a number of factors that favor a short sale over foreclosure.

If the homeowner is participating in the federal government's Home Affordable Foreclosure Alternatives (HAFA) Program, there are definite credit benefits to choosing a short sale over foreclosure. Recent changes to the HAFA Program dictate what the lender can state on the borrower's credit report after a short sale, and lessens the impact on the borrower's credit rating. Credit bureau reporting of HAFA transactions where the deficiency is forgiven is now to be reported as "Paid or closed account/zero balance" or "Account paid in full/a foreclosure was started", as applicable.   A short sale is usually reported as “Account paid for less than the full balance”, or similar statements which have a negative affect on the homeowner's credit score.

While doing a short sale will negatively affect credit, short sales by their very nature may well have a lesser effect on credit than foreclosures. For instance, a completed foreclosure means the borrower has, at a very minimum, missed six months of payments (often considerably more). The property has also gone through a completed foreclosure sale. So while a short sale negatively impacts credit, the effect has been shown to be less than a full blown foreclosure which followed months, if not years, of missed payments.

Here are a few additional benefits of doing a short sale v. foreclosure:

• With a short sale, the homeowner is in control of the sale, not the bank. In fact, today cash incentives may be available to homeowners who decide to do a short sale instead of foreclosure.
• When the consumer wants to obtain a loan to purchase a property in the future, more opportunities will be available to them sooner if they do a short sale. For example, contrary to popular belief, one can be current on their payments and still do a short sale.  And if a homeowner is current on their mortgage through a short sale, they can qualify for an FHA loan afterwards without any waiting periods.  The same option is not available following a foreclosure.
• Some people feel there is a much stronger social stigma attached to foreclosure as compared to a short sale.

Every homeowner's situation is different, so we always recommend speaking with a real estate attorney who can offer advice on the legal and tax implications for each individual's circumstances.   Washington Property Solutions partners with a highly respected real estate tax attorney who can answer any financial questions your client may have and help them make the right decision. Call us at 425-381-2233 and we can refer you for a consultation.

Why agents are better short sale negotiators than attorneys

I have nothing against attorneys.  In fact, we always advise our clients to speak with an attorney about how a short sale will affect them. However, there are concrete reasons why agents experienced with short sales typically are more successful at negotiating a short sale than attorneys.

1) A short sale transaction will succeed or fail based on how experienced and effective the real estate agent is, not the attorney.

The structure of the purchase and sale agreement is critical to a successful short sale transaction. The number one reason that short sales fail is a lack of understanding on the part of the negotiator about how the short sale process works. Maybe they are unfamiliar with the intricacies of all the forms that need to accompany the purchase and sale agreement. Or they don't understand how lenders manage short sales. Or they insist on including language in the agreement that banks are not willing or able to approve. For example, a P & S agreement we saw recently that was written by an attorney included a 25 day closing deadline. Since the average short sale takes 60 to 90 days to close, the inclusion of this impossible deadline guaranteed the sale would not go through, creating frustration and lost time for buyer and seller alike. 

Deep understanding of the real estate process, knowing what lenders want, qualifying buyers, setting the right price, providing constant communication with all parties-  these are the keys to short sale success. And these are  skills unique to a real estate agent who specializes in short sales, not an attorney.                 

2) If you use an attorney to negotiate a short sale, will you or your client get stuck with the bill?

All short sale negotiators are paid for their work.  If the negotiator is a real estate agent, negotiating the short sale is part of the professional service that they provide and are compensated for through their commission.  There is no additional fee to anyone.   

Attorneys typically charge a fee of 1-2% of the purchase price to negotiate a short sale. Sometimes the lender is willing to pay their fee, but more and more often they're not. Since short sales sellers typically don’t have the money, that leaves the listing agent, buyer or buyer's agent to pick up the tab.   The listing agent certainly doesn't want to get stuck paying the fee. And it's tough enough to sell a short sale property-  why make it harder by adding the possibility of additional fees to the buyer and/or their agent?  

We were recently involved in a situation where a law firm negotiating a short sale neglected to have the listing agent or seller sign a services contract, leaving it unclear who was responsible for paying their 1% fee. Once the short sale was approved, the firm asked the listing agent to pay the fee of $3,100 and threatened to not allow closing until they were paid.

If you depend on a third-party negotiator that charges an additional fee for their service you are to a large degree at the mercy of their process and their timing. The best way to avoid being taken hostage by a third-party negotiator is for YOU to be in control of the sale.

The bottom line:  

• We believe that short sales are first and foremost real estate transactions, and they should be handled by real estate agents who are highly experienced in short sales.   

• Negotiating the short sale should be a part of the professional services that the real estate agent offers at no additional fee to anyone.  

If you're looking for legal advice, see an attorney.  If you're looking to sell a home, see a real estate agent.  

Tips For Pricing A Short Sale

We often get questions about the best way to price a short sale. In reality, many of the same principles that go into pricing a non-distressed property  apply equally to setting the list price of a short sale. Price depends on the location of the property, its condition, the availability of strong comparable properties, and the amount of competitive inventory.

When pricing a short sale,  the key is to strike a balance between what a buyer will pay and what a bank will approve. It's not unusual to see agents apply an across the board discount to a short sale property (for example, a 10% price reduction). This is a mistake. In so-called "hot" neighborhoods, short sales often can be priced at market value.  When the bank's appraiser does a value determination of a short sale property, they generally will try to seek out comparable short sales in the neighborhood. If there are none, the appraiser will use non-distressed properties as comps. If an agent lops $30,000 off the value of a home just because it’s a short sale, it's unlikely that such low offers would be approved by the bank.  

An added note: If you want to dispute a short sale valuation, and your client's loan is with Bank of America, BofA has launched a streamlined process for considering an alternate value.      

BofA launches faster way to dispute short sale valuations

Listing agents that disagree with bank valuations of short sale properties now have a new option. Bank of America has streamlined their process for settling valuation disputes during a short sale, making it faster and easier for agents to get the bank to consider an alternate value.  

The value of a property is established by independent third-party vendors shortly after a short sale is initiated. If a listing agent wants to contest that value, this is the new process:

How to dispute a Bank of America short sale valuation

1. Tell your BofA short sale specialist that you would like a reconsideration of the value.

2. The BofA short sale specialist sends you an investor-specific, easy-to-complete form that specifies all requirements for a successful value dispute.

3. You fill out the form and attach specified evidence.

4. You can expect a value dispute review within 10-12 business days once all required information has been received.

Evidence you need to provide to Bank of America to dispute a value

When contesting a home value, Bank of America requires compelling evidence to support your claim. Here are the guidelines outlined by BofA: 

• Do not reference property pricing amounts in the narrative on the form. This violates appraiser independence policy and is against industry standards. Any reference to pricing will disqualify the dispute. 
• Provide comparables that are recent, proximate (nearby) and similar to the property in question.
• “Recent” means sold within 90 days of the actual value document date.
• “Proximate” varies by location. In a rural area, for example, a home five miles away could be considered proximate.
• You will be able to provide additional notes to highlight characteristics of the comps.

When the dispute centers on property condition or hazards:

• Provide an itemized estimate from a licensed contractor on the contractor’s letterhead.
• Provide photos to illustrate the repair, condition issue or hazard you want to highlight.

The above is a summary of the new changes. Your Bank of America short sale specialist can provide additional guidance about the process.

3 Landmines That Can Destroy a Short Sale

There are some assumptions that a short sale negotiator can make that will wreak havoc on the process.  Here are a few common mistakes inexperienced negotiatiors make, and tips on how to avoid them.

Landmine #1: Assuming lender approval of an offer will automatically postpone foreclosure proceedings. 

In Washington State, lender approval of a short sale does not automatically halt a foreclosure sale. Once foreclosure proceedings are initiated, there are three parties involved in your transaction: the lender's loss mitigation contact, the lender's foreclosure contact (who is in a separate department), and an independent local trustee who has been hired by the lender to sell the property at auction.  Once lender approval is obtained, the relevant parties are supposed to take the necessary steps to take the foreclosure sale off the calendar.  However, there are instances where that does not happen, and the results can be disastrous. We recommend that agents always follow up with the loss mitigation department and local trustee to make sure they've received directions to cancel the scheduled foreclosure.  

Landmine #2:  Assuming that the short sale approval letter includes satisfaction of the seller's debt. 

Lenders may or may not issue a short sale approval letter to satisfy the buyer's debt or waive the deficiency in full.  Unless it is clearly stated in writing that the debt will be satisfied or the deficiency waived, you should assume that it is not.  While it is getting better of late, lenders can be notoriously vague on this subject in many of their letters. If you receive an approval letter that does not clearly outline satisfaction or a full settlement of the debt, it may require you to do further negotiation with the lender on your client's behalf. 

Landmine #3:  Assuming all banks have the same timeline. 

In the over 800 short sale transactions we've completed, we have seen timelines vary significantly from bank to bank. In our experience, after mutual acceptance is received it can take from 30 to over 90 days to get lender consent, depending on the bank. The investor on the loan may require another level of approval, and the existence of second liens and mortgage insurance can add yet more time to the process.  Knowing individual lender timelines is key in managing the expectations of the buyer and seller upfront.  

Some good news: Banks that use the Equator system- including Bank of America, Wells Fargo and Nationstar- have sped up the process considerably. The system includes deadlines and specific lender contact information, so it adds a level of accountability that helps you identify bottlenecks in the process and allows you to escalate things if necessary.           

Chase and Bank of America Paying Large Cash Incentives for Homeowners to do Short Sales

If you know someone who is underwater on their mortgage and has their loan with Chase or Bank of America, there's some good news. Both banks have started paying significant cash incentives to encourage sellers to do a short sale and avoid foreclosure. We've had clients in the past month get checks for up to $30,000.  Find out more information about Chase and BofA relocation assistance programs.