In my zip code, 92562, I ran a search this morning, for houses built in the year 2000 or newer, under $500,000, with at least 4 bedrooms, and 2000 square feet. 131 listings came up in the MLS (Multiple Listing Service: How we agents all list and sell homes). This was an experiment to see how these listings break down in #'s of short sales, repos, traditional sales, etc. Here are the results:
Bank Repos*: 59 (45%)
*Also called REO's, Bank Owned, Lender Owned, Corporate Owned, etc.
Short Sales*: 57 (44%)
*Also called Short Pay, Subject to lender Approval, etc.
Traditional Sales*: 15 (11%)
* Seller's have, or claim to have, an enough equity in the home or money out of pocket to make up the difference between what is owed and what it sells for.
What do the #'s mean? I'm glad you asked!
Ever since the peak of the Real Estate Market Boom (the date will vary depending upon the neighborhood), there has been a surplus of inventory on the market. If there is a much larger # of homes on the market than what is actually selling, then which homes are selling, and why?
Using the same criteria as above, I searched for closed sales from last month, May 2008. There were 43 matching my criteria. Of these 43, this is how the #'s broke down:
Repos: 37 (86%)
Traditional: 4 (10%)
Short Sales: 1 (2%)
New Home: 1 (2%)
Interesting... Why do repos and short sales have almost the same market share of inventory, but repos have an overwhelming 86% market share of the sales vs. short sales' miniscule 2%?
There are a number of reasons for this, but first, it is important to understand the differences between these types of sales.
New Home Sales: This refers to new construction being sold by a small to large size developer.
Traditional Sales: As described above, refer to an owner who either occupies the property or owns it as an investment (ex. 2nd home, rental, etc.), and has enough equity or cash out of pocket to break even or sell for a profit..
Repo: A property that previously became an asset of a financial institution through the process of foreclosure.
Short Sale: Similar to a traditional sale in the type of owner, but the owner is upside down in the property. Meaning, the total of the mortgage balance and costs of selling exceeds the value of the property. For Example: John Smith owes $450,000 but he would only be able to find a buyer for his home at a price of $300,000.
This hypothetical example shows how the $150,000 difference between what is owed and what the property is worth presents a big problem for the seller. Their only option is to convince the bank(s) holding their mortgage(s) to take a loss on what is owed to them to avoid taking an even bigger loss through foreclosure. The concept makes sense, but several problems tend to be encountered along the way. Here is a list of some of those problems:
1. Multiple Mortgages
Many short sales are so because they were purchased through 100% financing or other high loan to value percentage financing. Financing is generally split up into a 1st (usually up to 80% of the purchase price), and a 2nd making up the remaining amount financed of the purchase price. Also, many people who didn't use multiple mortgages to buy their homes took 2nds out on their homes later for improvements or to pay off other debts. The problem with these multiple mortgages is that each loan is often with a different financial institution. In a foreclosure the bank in second position often gets nothing, and the first takes a loss as well. Because of this, bank's holding the seconds are generally, AT FIRST, willing to participate in a short sale because their chance of recovering a portion of their money is much higher. However, the banks in first position know that the 2nds will get nothing in a foreclosure and are reluctant to take a loss if the second gets anything through a short sale. The 1sts will often agree to a short sale if the seconds get nothing, but the 2nds won't agree to it because that's no better for them than a foreclosure.
2. Delayed Response
Because of the multiple parties involved and the limited staffing in the loss mitigation departments of various financial institutions, it is generally a lengthy process to get an acceptance on a short sale in the VERY FEW cases that are accepted. On average, short sales take several months to get an acceptance before the escrow period can even begin.
3. Changes in Financing Terms and Interest Rates
First, Processing & Underwriting Guidelines for Mortgage Lending have been extremely volatile ever since the Rea Estate Market Bubble "Burst". This means your loan program could disappear while you are waiting months for a response.
Second, the interest rate on your loan cannot be locked until you have a property in escrow, and then it costs extra to extend a rate lock more than 30 days. So, either your rate could go up before you get the property in escrow, or if the seller opens escrow and only submits your offer to the bank for approval, you could have to pay to extend your rate lock while you wait for a response, just to get turned down.
4. Foreclosure
Most short sale properties are already in some stage of the foreclosure process. Many a foreclosure has been completed while a short sale deal is still trying to be worked out with a buyer. Once foreclosure is complete, a short sale offer can no longer be negotiated.
5. Unstable Occupants
Most Owners or Tenants Occupying short sale properties know they are most likely about to lose their home to the bank. And they don't consider a short sale to be much different. Because of this, people have a tendency to damage the home through either vandalism or gutting (Ripping out and selling fixtures), much of which often gets repaired/replaced once the property has become bank owned. In short, if your purchase of a short sale does go through, the condition of the property could be much worse, upon closing, than it was when you originally viewed it, or even had your home inspection or final walk through.
6. Loosing Equity While You Wait
This is a problem of both New Home and Short Sales in the current market. Whether you are waiting for a new home to be built or a response to your offer on a short sale property, the value of the property is CURRENTLY declining. This isn't to say that you shouldn't buy any property until prices stop declining (I will address this issue in a future blog), but if you are going to buy now, shouldn't you pay TODAY's market value, not the value from 3 months ago when you first submitted your offer?
7. Unrealistic Prices
Agents and homeowners know that most buyers know that short sales are a waste of time. It is very difficult for them to compete with Bank Repo's, so they have to go after the unknowing buyers. How better to do this than with the price they list their home for? If you don't know any better, of course you are going to think that short sale priced $20,000 below anything else on the market is a great deal, along with several other new buyers. The problem is that banks will not approve a short sale where the purchase price is discounted below the current market value. Why? Because if they did, it would increase the rate of decline in property values causing the same financial institution to lose even more money on future short sales and repos. The Sellers are counting on buyers getting emotionally attached to the property, first because of the price, then bidding the price up through competing offers, until it reaches a price the lender taking the loss may approve.
8. Multiple Offers
MOST short sales will take all the offers they get and send them on to the bank for approval, keeping the property available for additional offers while they wait for an answer. Perhaps your offer is the best one at the time you make it, and maybe even high enough for approval, but while you wait, somebody else can come in and bid $500 more than you and they will get the property if it actually does go through, without you having an opportunity to negotiate. It seems silly right?
Do I need to continue?
I have a personal policy that I will not waste my time or my clients’ time looking at short sales. After reading this, if you are still considering short sales for potential homes to purchase, you may be asking yourself, WHY???
I hope my web site users and clients find this first blog helpful. Please send me an email if you have any additional questions.
Thanks,
Scott Johns
California Foreclosure Network
Oak Tree Realty Group, Inc.
(951) 471-3238 Direct
(951) 848-9330 eFax
Scott@CaliforniaForeclosureNetwork.com
www.CaliforniaForeclosureNetwork.com
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