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Buying a Short Sale 101: An Interview with Ken Koenen, LLM-Taxation, Attorney at Law

By Ken Koenen

Please tell us a little bit about your company and the services you offer.

I am a sole practitioner, and work in the areas of taxation, transactional real estate (residential and commercial), business law, estate planning, probate and mediation. My practice began in 2001, and I received a master's degree in tax law in 2004. I also maintain an active real estate broker's license, which I have held since 1991. I am currently working on membership to the Arizona State Bar.

Can you briefly explain how buying a short sale is different than a standard home purchase?

In a standard home purchase, there are three phases. 1) Making the offer to the seller and getting it accepted by the seller. 2) Doing the due diligence of obtaining inspection reports, reviewing those reports and preliminary title reports and finalizing your loan. 3) Closing the escrow by bringing in the remainder of the down payment when the loan funds.

In a short sale, all of those factors remain. However, there is a fourth phase, which is waiting for the seller's lender to approve the sale. The lender will not receive all of its funds through the sale, and in most cases will be responsible for the commissions and possibly even back property taxes.

What are some of the main ways that a real estate lawyer can help when you're buying a short sale?

Unfortunately, there is very little that a real estate attorney can do to help a buyer of a short sale. Perhaps an attorney may be able to provide advice related to the preliminary title report, because there could be items in that report that may not seem like much to the buyer but could have a greater impact down the road.

My help has usually gone to the seller before they even put the house on the market. The sellers have issues to contend with, such as deficiency balances and possible tax ramifications. Both short sales and foreclosures could have tax consequences to the seller for what is known as cancellation of debt. Cancellation of debt is considered ordinary income by the IRS, and unless there are exemptions to that income, could cost a seller thousands of dollars in taxes.

What is one of the biggest challenges for homeowners when it comes to purchasing a short sale?

Patience. A normal transaction would take 30-45 days from the day the offer is accepted until the day of closing. In a short sale, it is not uncommon to add another 30-90 days to that time frame, just to get the seller's lender's approval. One good thing for the buyer is that he or she is not legally obligated to go forward with the purchase agreement until the lender gives the final approval. The buyer is not required to proceed with any inspections until that time, and if the buyer finds another property while the lender is working on the file, the buyer can make an offer and, if the new one is accepted, cancel the original contract on the short sale without penalty.

I purchased a home in a short sale about three years ago, and I know how frustrating it can be to wait. I actually made an offer on another house while waiting, but did not get the contract. The point is that you are in a good position to find another home if the wait is too long.

How can a buyer help make sure the sale goes smoothly?

Make sure that you have a real estate agent working for you who is familiar with short sales. The agent must be tenacious in following up with the other agent and communicating with you. Ask if the seller's agent has experience in working with short sales and whether he/she negotiates with the lender herself of hires a third-party short sale negotiator.

The other thing is to make sure that your ducks are in order. Have your down payment money ready to go. Have a firm loan approval, where the only contingency is the preliminary title report and an appraisal. A qualification or pre-approval letter from a loan broker is not sufficient. You will want to be approved by the actual underwriter for the lender you are using. The seller's lender is less likely to give out an approval on a transaction where there is still a chance that the deal will not go through.

What advice would you give to first-time home buyers who are considering a short sale?

Be patient. Every lender who is going to lose money on a short sale is different. The way loans were packaged and sold in the 2004-2007 time frames will make the parameters by which the servicer of the loan operates different from another loan that the same servicer may be representing. Don't stop looking at houses unless you have the time to wait. This is especially true if you are in a market that is experiencing price increases. Demand of your real estate agent that they keep you informed - both good and bad. I would rather hear the bad truth before I hear a good lie or no communication at all.

What's the best way for people to contact your company?

My office can be reached by telephone at 925-924-0100 (California) and 623-888-6340 (Arizona). We can also be reached by email at ken@lawken.com or through our website.

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