How Hawaii's New Foreclosure Law Affects Short Sales

Short sales accounted for about 30% of my business last year, about equally split between Hawai’i resident homeowners and second-home/investment properties. My Big Island team and I are set up to represent sellers, even in complex situations with multiple partners, and we don’t hesitate to write offers for buyer clients on short sales if we believe the listing agent has the ability to get the deal done.

Until recently, one of the most time—and energy—consuming aspects of doing short sales was fighting to postpone foreclosure auction dates. Banks mostly pursued foreclosure in Hawai’i through the fastest, least expensive option, non-judicial or “trustee sale.” We’d learned from experience that even once the lender told us their system was showing a postponement, it was crucial to use our contacts at the offices of the two trustees to be sure they had received the word. We’d heard horror stories of other agents who did not, only to see a property auctioned off after short sale approval only a few days before closing escrow!

Along with the trustees, and our favorite escrow officer at Title Guaranty who sends us a list of new foreclosure filings each month, our two best “friends” were the websites of Reliable Posting and Publishing and usa-foreclosure.com, which show us what instructions the trustee law firms receive.

Here is a snapshot of what you get in foreclosure auctions if you type in “96743,” which is the zip code covering Kamuela (Waimea) as well as Mauna Lani Resort and Mauna Kea Resort. You can sum up the non-judicial foreclosure status in one word: CANCELED.

	Trustee Number	Property Address	City	State	Zipcode	Status		Original Sale Date	Previous Postponed Date	Current Sale Date
	7518.21192		Kamuela	HI		Cancelled
	7518.21304		Kamuela	HI		Cancelled
	7518.21514		Kamuela	HI		Cancelled
	7518.21462		Kamuela	HI		Cancelled
	7518.21551		Kamuela	HI		Cancelled
	7518.21603		Kamuela	HI		Cancelled
	7518.22850		Kamuela	HI		Cancelled
	7518.21915		Kamuela	HI		Cancelled
	7518.22113		Kamuela	HI		Cancelled

The most recent list from Title Guaranty came with a note saying “no new non-judicials were filed last month.” On the other hand, several properties that once appeared on these lists already showed on the lis pendens as having been filed in the judicial system.

What does this mean in a practical sense? My Hawaii Life colleagues Ron Margolis, RA and Tracy Stice, R (BIC) have written excellent articles on Act 48 and its consequences. What I can add to the conversation are a couple of observations from my standpoint as a practitioner.

FOR SELLERS/OWNERS OF DISTRESSED “UNDERWATER” PROPERTIES IN HAWAI’I:

Several of my second home owners went into a panic when they saw their cases switched from non-judicial to judicial, as their lawyer’s advice up until that point had been to avoid judicial foreclosure with its higher probability of deficiency judgment.

My response to them is that, on the contrary, this may be a good thing. With the court completely swamped, I’m finding more of my short sale negotiators forwarding the file directly to the investor and putting effort into expediting the short sale approval.

While we can’t always negotiate away deficiency judgment language in the short sale approval letters, the lawyers are also reminding us that the process for filing means getting a slot in the same overloaded court. Of course, each seller’s circumstances are different, and so, it is up to the seller to check with tax and legal advisors before choosing to attempt a short sale and in evaluating a lender’s conditions for approval.

For our sellers and for us as short sale listing agents, the bottom line is I feel more confident than ever that with cooperation from the seller (which means providing all requested information in a timely fashion), genuine hardship as defined by the lenders (being underwater on the value of the property does not constitute “hardship” in itself), and a reasonable offer on the table (in the ball park of sold comps), we can get a short sale approved.

Beachfront Kolea villa 3E (MLS# 239266) is one of the few active short sales in the Kohala Coast Resorts!

FOR PROSPECTIVE BUYERS OF SHORT SALES AND REO/FORECLOSURES IN HAWAI’I:

I can’t speak in general terms outside of the two geographical areas in which my own real estate practice is focused, namely the Kohala Coast resorts and North Kohala. In these districts, my team and I track what’s in the foreclosure pipeline. We know of failed short sales that went to auction, of withdrawn listings that the coconut wireless informs us could be tied up in bankruptcy, divorce or other circumstances of distress, or mysteriously empty homes.

The bottom line for prospective buyers looking for a foreclosure in North Kohala or the Kohala Coast is that, despite what they may read in the press about the real estate market in general, or in their home state, in my geographical areas there will be very limited REO buying opportunities over the next year or so.

For second home and investment properties in the resorts, sellers are still more likely, in my opinion, to attempt a short sale than to simply allow their property to linger in judicial foreclosure limbo. The pressure delinquent owners face from banks and homeowner associations, and the inability to “get on with their lives” inclines them towards dealing with the property now rather than later. If they are already behind in payments, the penalties to reinstate are often substantial.

While some primary homeowners may take advantage of the mediation process, or simply wait it out, most also just want to have resolution and move on.

My prediction is that we will continue to see multiple offers on the relatively few short sale and foreclosure opportunities as they dribble out in my markets, rather than a deluge of these properties hitting the market and negatively affecting prices years from now. Check with a local real estate agent knowledgeable about the market area of interest to you for how Hawaii’s new foreclosure law seems to be affecting availability and prices of homes for sale there!