Big Island

How Bankruptcy Affects the Foreclosure Process in Hawaii

Oceanfront amenity area called The Grotto for owners at Ke Kailani at Mauna Lani Resort

Local newspapers reported Friday on a bankruptcy filing one day before a scheduled foreclosure auction on the unsold parcels of Ke Kailani, an oceanfront development at the Mauna Lani Resort on the Big Island’s Kohala Coast. (For background on the project, you may want to look at this post about the unsuccessful fire sale of 2009.) The news is particularly sexy because of the celebrity angle: the developer is Michael Fuchs, former HBO chief executive.

It may be many months before we know how the Ke Kailani story ends, let alone before any of the remaining lots or duplex homes are put back on the market. However, the topic is timely, since it is not unusual for distressed real estate owners to explore several options, including short sale and bankruptcy, when they fall behind on payments, or receive notice of a foreclosure auction date.

Both potential sellers and prospective short sale buyers need to understand at least the basics of how a bankruptcy filing affects foreclosure or short sale processes. If you are a property owner considering any of these options, and you have not yet checked with your attorney and accountant, please do so, as my explanation is only intended to provide some key points we’ve encountered representing clients on recently completely short sale transactions.

My first—and longest—short sale

In 2009, a client to whom I’d sold a Kolea condo called me to ask a favor. A year previously he’d attempted to do a deed-in-lieu of foreclosure. To his surprise, the mortgage holder had never moved forward, and was now telling him they would not do so unless the condo had been on the market for 90 days at a fair market price. He asked if I would list it, although we thought there would be little probability of it selling. To our surprise, there was plenty of interest and a quick offer.

Meanwhile, however, his bankruptcy attorney was preparing a filing. The day he filed, our short sale process came to a halt. I quickly spoke with the bankruptcy trustee, who appreciated my call, understood that there was no equity in the property, and said that he would not be asserting an interest, and would agree to the property being “abandoned” from the estate. However, Bank of America’s bankruptcy department was more conservative, and would not move forward until the bankruptcy was discharged.

There was good news and bad news the day we were free to move forward:

  • The lender immediately sent a foreclosure notice.
  • The homeowner’s association had written off the previous amount of delinquent dues, but the clock started ticking again from the day of discharge.
  • The short sale buyer who had hung in through the entire delay now wanted to resubmit at a lower offer price which did not fly with the lender; luckily a new offer came in quickly.
  • By then, BofA had begun processing short sales through the Equator system. However, they required less paperwork from the seller to demonstrate hardship (only a hardship letter). They then bumped me out of the system, introducing me directly to the investor, with whom we quickly negotiated and closed.

Time start to finish: 13 months.

Hawaii Tax Considerations: HARPTA, GET, and TAT

Shortly after that closing, I noticed a foreclosure auction scheduled on another condo that had been long withdrawn from the market. Figuring it was a similar situation, and with a solid buyer wanting that floor plan, I called the owner.

Our learning curve on this sale was not about bankruptcy per se as that was behind us. Hawaii has a law known by the acronym HARPTA, modeled on the federal FIRPTA, that requires 5% of the purchase price be withheld at close of escrow when the Seller is not a Hawaii resident. It is possible to get this requirement waived by submitting proper paperwork, at least 10 business days before the planned closing date, demonstrating that either (a) the Seller is losing money on the sale; or (b) there will be insufficient funds to pay the 5% withholding.

It should seem self-evident that at least the second choice applies in a short sale, but contrary to what one might expect, the tax department seems to require even more paperwork with a short sale. Bankruptcy filings do not get the seller off the hook. We were asked to provide a copy of the short sale approval letter, and schedules from the Seller’s tax returns. In addition, since the property had been rented, they required annual reconciliations for both GET (General Excise Tax) and TAT (Transient Accommodation Tax) to prove that taxes had been paid. In a year when it was not rented, they want to see a filing of $0.

Closing this transaction involved several trips by my business partner, Pam Deery, R(B), to personally meet with the tax department in Hilo, and a very patient and savvy buyer!

Choosing an agent to list your short sale

Because of our team’s commitment to properly listing and pursuing short sales, we’ve started off the new year by adding to our team a non-licensed professional with a background in mortgage lending and escrow. She will assist us with the paperwork part of short sales, leaving Pam and I free and fresh to conduct the actual negotiations. Everything we’ve learned has become part of our written short sale protocol, to make sure each future transaction is conducted with greater efficiency and probability of success.

The rules of the short sale game are constantly changing, and whether you are buying or selling, your chances of success will be much higher using an agent who is both experienced and committed to doing them. They are not for the faint of heart. As a Seller, your experience will be less stressful if you choose an agent or team having a blend of strong organizational and negotiating skills, and compassionate listening skills. If you own a property in Hawai’i and are considering a short sale, feel free to contact us.

A hui hou,

Beth Thoma Robinson, R(B)
Direct: 808.443.4588 
Email: beth@hawaiilife.com

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January 10, 2011

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January 10, 2011

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Martha Tumbleson, R(S)

January 11, 2011

Good info, Beth. I now know who to contact with any questions I might have regarding a short sale! mahalo

Martha Tumbleson, R(S)

January 11, 2011

Good info, Beth. I now know who to contact with any questions I might have regarding a short sale! mahalo

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