After losing her job and then unsuccessfully trying to sell her Auburn home for a year and a half, Jeanine Washington is frustrated. She has already defaulted on her loan payments, and it increasingly looks as though her only remaining options are foreclosure or bankruptcy.
But there is still a third option. It's a long shot, but she's crossing her fingers. She hopes the two banks holding the mortgages on her four-bedroom home will agree to engage in a short sale with a buyer she landed in April.
Never heard of a short sale? It's where a bank agrees to accept less than the full amount owed on its loan in order to avoid the troubles and cost of foreclosure. It's a term that's becoming increasingly common as the recession takes its toll on those who have lost a job and are trying to sell their home because they can no longer afford it, but owe more on the property than it's worth.
Jeanine's hopes are slowly diminishing because her short sale deal has stalled. "I think I will still be sitting here six months from now, waiting," she says. "And I'm probably going to lose my buyer. I need to move on but I can't because I have this on my back."
Jeanine Washington is just one of nearly 75,000 homeowners in the state who have faced foreclosure since the beginning of 2007. Unemployment here is moving into the double digits, and the gap between the number of houses for sale and the number that sell each month continues to widen. The number of people filing for personal bankruptcy protection jumped a whopping 70 percent in the first half of 2009.
Unable to sell their houses and make their mortgage payments, some distressed homeowners are negotiating loan modifications with their banks. Others are tapping into their credit cards and retirement accounts or hope to land a new job to right their economic ship.
THE SHORT SALE
A small but growing number of homeowners is turning to a new kind of company to guide them through these waters. Short sale investors are those individuals or companies that buy houses for less than the outstanding mortgages.
While a short sale is not an ideal outcome, it provides a way of resolving a tricky problem that is less bad than others. The investors-companies such as Bellevue-based Washington Property Solutions and individuals such as Paul Galasso of Issaquah-based Galasso Holdings LLC-see an opportunity to buy a home at a discount and immediately sell the property at a mark-up for a nice profit. The owners are able to sell off their property and avoid the erosion in their credit rating that comes from a foreclosure or bankruptcy. And while the mortgagee banks can take a loss greater than the $30,000 to $50,000 the bank would lose if the house was sold at foreclosure, the process may help banks unload underperforming assets.
Where others see headaches, these investors are carving out growing and profitable businesses. Like bankruptcy attorneys, they are experiencing a flood of new business.
Every short sale investor has a different strategy. Some, like Washington Property Solutions, will sometimes line up a buyer while still negotiating their own discounted purchase price with the bank to effect a double close. Others, like Galasso, buy in a certain price range and neighborhood, fix or remodel, then either rent or sell after winning a property through a short sale.
Such investors make money at the expense of the banks and the homeowners, essentially becoming "equity stealers" as they extract the equity a homeowner may have built up but can no longer recoup.
Banks don't like to admit they engage in such transactions. Banks with significant mortgage offices in the Seattle area declined to comment for this story. A JPMorgan Chase spokeswoman says the bank neither releases the number of short sales or foreclosures it is dealing with, nor does it talk about short sales, a statement echoed by US Bank, Bank of America, Wells Fargo, HomeStreet Bank, Washington Federal Savings and Columbia Bank.
The banks don't want to reveal their strategies for liquidating their huge portfolios of non-performing assets. What bank, for instance, would want to admit that it took a $1.5-million loss on a more than $3-million mortgage for a Clyde Hill home purchased in 2006 that sold in a short sale-one, as it happens, that was recently facilitated by Washington Property Solutions?
NOT A QUICK BUCK
Investing in short sales is neither for those looking for a quick buck, nor for the faint of heart.
"This is more like rolling a boulder uphill than it is flipping a house," says Galasso, who founded Galasso Holdings in 2003. He says short sale investing is a small part of his real estate business.
Short sales are not new. But it took this unprecedented economic turmoil to make them popular. Many real estate agents are learning the ropes as they go along. The deals are often less than lucrative because buyers and sellers can end up insisting at the last hour on lower commissions as a requirement.
To be successful, short sale investors have to be patient. Arrangements often take a long time to put together with banks and loan-servicing companies, and they frequently fall apart when the lien holders don't agree on the value of the house or a potential buyer suddenly loses interest. It's not unusual for a deal to continue more than a year.
"We've negotiated from three months to 14 to 15 months on deals, and it is never a sure thing," says Galasso. He and other industry players say more than 30 percent of the short sales initiated end up collapsing. "It might come across as a screaming deal, but sometimes the banks won't negotiate," Galasso adds.
THE BANK STALLS AGAIN
Jeanine Washington is frustrated by the repeated delays since she turned to Washington Property Solutions in hopes of keeping her credit rating from sinking any further.
She purchased her home in 2005 for $320,000 and owes two banks a total of $304,000. Part of that amount includes a US Bank second mortgage loan of $74,000, which she used as a down payment. Her house was put on and then taken off the market several times while Washington Property Solutions tried to negotiate with the banks.
Richard Eastern, chief executive of Washington Property Solutions, says he couldn't reach a deal with the bank on a price for Jeanine's home that penciled out favorably for his firm. Jeanine says that WPS found her a third-party buyer, one who wanted to do a short sale at $225,000, when the house went back on the market. But at press time, the bank had yet to approve the deal.
One obstacle was the $74,000 second mortgage. US Bank recently sold the note to a third-party collection agency, which, acting on behalf of the bank, will not agree to the short sale in part because it wants real estate agent commissions cut. Under the current terms of the deal, the real estate agent would receive about $13,000, while US Bank would only receive $3,000. The rest would go to Chase, the first mortgagee on the loan. US Bank declined to comment on the deal, but if the house goes into foreclosure, the bank could end up with nothing.
Jeanine is reluctant to file for bankruptcy protection, even though she knows doing so will wipe out that $74,000 second mortgage, a fact that Kent bankruptcy attorney Jay Jump says very few people realize, but should consider. At the same time, she doesn't want to increase her personal debt, which, without the second mortgage, totals less than $4,000.
AN OLD OPPORTUNITY REVIVED BY RECESSION
Jeanine Washington's deal is just one of approximately 100 that Washington Property Solutions was handling as of the end of June. Eastern and his partner, intellectual property attorney Martin Goldberg, launched the company in 2003 after Goldberg stumbled upon the market opportunity created when distressed homeowners file for bankruptcy.
Washington Property Solutions completed 30 transactions in its first year of business, Eastern says. In the past six years, it has completed more than 300 short sales, acting solely as a consultant on about a quarter of them. At its current pace, the firm could easily top 300 short sale transactions for 2009 alone. In about half the cases, the business acquired the houses itself for resale.
The Bellevue company may be the area's largest short sale investor. Eastern says revenues will top $500,000 this year, and he's expecting a similar number in 2010 as the real estate shakeout continues.
Because so many homeowners and real estate agents have come looking for help, the company now offers agent training and transaction negotiations. Presently, about half of Washington Property Solutions' sales come from negotiating short sale transactions.
The Northwest Multiple Listing Service is just beginning to track short sales and couldn't offer statistics at press time. But Eastern estimates that 25 percent of the region's residential real estate sales today are short sales.
Steve Kish, a negotiator who works throughout the Puget Sound region and has experience with 500 short sale transactions, agrees with that estimate. He saw the market opportunity seven years ago, when he realized there was no competition for homes in pre-foreclosure, while many people bid on homes at a foreclosure auction. As a negotiator with experience, he says he can pocket a fee of 1 to 2 percent of the sales price as a commission.
Kish is seeing more cases like Jeanine Washington's, where the holder of the second mortgage, knowing it is unlikely to receive any money in a short sale, ends up opposing a deal.
And although Washington remains frustrated, she says that having an experienced short sale negotiator and investor on her team has made all the difference.
"I would have given up a long time ago," she says.
Short Sales Hit the Wealthy, Not Just the Poor
One short sale industry player used to joke that "the aroma of Tacoma smelled like money" because many of the short sales happened in the city and involved the city's poorer residents.
But today, "That's changed dramatically; most of our business is now in King and Snohomish counties," says the investor, who doesn't want to be identified.
Washington Property Solutions has handled short sales for a $3-million Clyde Hill home and a $1-million Bellevue property. Kent bankruptcy attorney Jay Jump says he used to help those making $25,000 salaries through the bankruptcy process, but now he's more likely talking to a couple making $150,000 to $300,000 with two kids. They've just lost one or both of their jobs and can't find a new one at an equivalent salary; they have credit card bills and they can't pay their mortgage.
"There are many more foreclosures in the higher-end properties," adds short sale negotiator Steve Kish. "They overreached, used financing they couldn't afford and probably shouldn't have been purchasing at that level to begin with."
No Job, No Money, Too Many Houses Create Short Sale Opportunities
Selling a house in a short sale has become more commonplace as a result of state's economic turmoil.
The numbers paint the picture:
- In Washington state, 123,200 people lost their jobs from July 2008 to July 2009, pushing the unemployment rate to 9.4 percent.
- Of the more than 50,000 houses listed with the Northwest Multiple Listing Service in June, only 5,146 sold.
- Homes somewhere in the foreclosure process by the end of June numbered 4,678, according to Realty Trac, bringing the state's total in the first half of 2009 to 19,855, up 48 percent from a year ago.
- The 10,931 people who filed for personal bankruptcy protection in western Washington in the first half of 2009 are likely to contribute to a sharp rise in foreclosures.