SHORT SHORTER SHORTEST
SHORT, SHORTER, SHORTEST – What you thought you knew about
short sales and more.
A common myth in the real estate market place these days is that a Short Sale gets you, the Buyer, a great deal. The truth is that usually is does not.
A Short Sale is when a Listing Agent and a Homeowner decide to sell a property for less than what is owed on it. This “owing” can be to any or all of the following: a first trust deed loan holder which is usually a bank or credit union, a second trust deed loan holder, a third trust deed loan holder, a county tax collector, a homeowners association dues collection agency, and a mechanic’s lien for repairs or services.
In a horrible market these “owed to” folks were usually willing to take what they could get and run for the exit doors. As the market turns, and it is turning upward now, they are less and less willing to take a discount on what is owed to them. The banks, and particularly the others, usually know the market value of the subject property – what a ready, willing, and able Buyer will pay a ready, willing, and able Seller.
So the Seller, the current Homeowner who is often the occupant, may agree to the Short Sale price but that doesn’t mean that those they owe will agree to the contract price. The home is usually marked Contingent Sold in the MLS because the Seller has agreed on the transaction but no agreement has been reached with those owed.
The banks may be writing off several missed payments of $2,300 per month but it is altogether different for them to write off, say, a $400,000 mortgage at a sold price of $295,000. This they do not want to do. And more than that, if they must write it off as a loss, they will hand pick a time in their annual calendar to do that. So you might be in a transaction to buy and close on October 31st and the bank wants to wait to March 30th , closer to the end of their fiscal year.
Short Sales, therefore, can involve months of frustration, multiple lenders and owed parties, and the uncertain future of a transaction upon which so much is depending. You may have sold a property to get this one. It is not uncommon for a bank to get another offer some two to six months into the “transaction” and then just tell you they refuse the transaction (translation - want to sell it to someone else.) Or they sold the loan, and now you are starting all over again. Or they may assign a new Asset Manager who makes everyone start over again.
And here is a real corker! Sometimes the bank lets the property go to auction on the courthouse steps, even when it is in escrow. I saw one property sold at the courthouse eight days before it was closing escrow in the short sale.
I strongly advise my clients not to participate in any short sales and not chase after the ghost of MLS-marked Contingent sales. Sometimes driving a neighborhood they come across a new property on the market but can’t see the specter of a short sale laying in the paperwork beyond the front door. I check the county records to determine how much is owed on the property no matter what the MLS says. Often we find that the property is overpriced for the comparable sales and a reasonable offer would turn it into a short sale.
Ultimately an appraiser is going to examine the property to justify the loan. This throws a final wrinkle into the pie crust of the transaction. Since the bank with the debt does not HAVE to perform under the rules of escrow, they can change their minds at the last minute if the appraisal comes in higher than the agreed selling price.
Short sales are a mess not worth jumping into and usually derives no financial reward for the Buyer, whatsoever. Let me repeat that - USUALLY DERIVES NO REWARD IN BETTER PRICING FOR THE BUYER. The bank knows the market and will not usually sell it lower than the comparable prices. When you add to the mix that the property may have deferred maintenance, it is rarely a good deal, and certainly not worth the EXTRA trouble of going through the mind numbing process.
Once the Seller loses the property to the bank it becomes Real Estate Owned (REO) by the bank. The story is different now. The bank has written off the huge loan but now has a non-performing asset – that is one that does not generate any payments to them. It often is a drain on their resources and becomes one that they want to sell. Not as clean as working with a traditional Seller, but still a much better transaction than a Short Sale.
As the market continues to heat up with the demand from the millions of retiring Baby Boomers and the Millennials coming into the market, the traditional non-short sale properties will become harder and harder to find. Pockets of homes in desirable neighborhoods, better school districts, and fair climates are actually increasing in value now. This is a signal that we are near the bottom of the market. NOW is the time to buy. AND with interest rates at a 60-year low, mostly in the low four percent range it is a double win.