The Following Article is from the Fall 2011 Newsletter
Although the rest of the country has been swimming in short sale transactions since the mortgage fiasco and subsequent economic downturn in 2008, the Westside has, for the most part, avoided the fun. Recently, I have been seeing more of these short sales on our turf, and I expect that we will continue to see them for a few more years. So, with that in mind, I thought I would give you a general understanding of what they are and write about some of the truths and misunderstandings associated with this type of real estate transaction.
A short sale is the sale of a property that is owned by a private individual (not the bank), but is being sold for less than what is owed to the bank (i.e., less than the amount of the outstanding mortgage). In order to execute this sale, the seller must obtain the bank’s approval of the sales price. The bank may be willing to accept a lower sales price because it is usually preferable (especially in this market) to the bank than foreclosing on the property, taking over from the owner, and selling it themselves. A short sale (as opposed to a foreclosure) is preferable to the owner as it is less damaging to the owner’s credit than a foreclosure.
The Myth: If I find a property in short sale I will get a fantastic deal.
I have had many buyers approach me with the idea that they want to find a short sale because they will be able to buy a house for significantly less than market value. This is not true. In fact, a short sale transaction can be a long drawn out process that often ends with the buyers NOT getting the house at all, certainly not getting the house for a value.
First let’s address value. After a seller accepts an offer, they submit it to the bank for approval. Once the bank has an offer, they will do their own independent appraisals of the property called Brokers Price Opinions (BPO). BPOs are performed by real estate agents that have relationships with the banks, but are in no way affiliated with the property. Banks typically will do 3 BPOs to determine the true value of the house. If the offer is not within a few percent (typically 5%) the bank will reject the offer. They do not consider that they may get substantially less after a foreclosure- it seems logic has no place in a short sale. If you endure the process and are successful in buying a house in a short sale, there is only a small margin for discount in that price. The only real reason to pursue a short sale is if you love the house and want to buy it for reasons other than a perceived discount.
Furthermore, you can be six months into the process, having paid thousands for inspections, appraisals etc., and the bank may foreclose on it before the deal closes. This just happened to a property in Santa Monica. A condo was in escrow as a short sale for $875,000. The offer was accepted and the buyers and sellers were waiting for the deal to close. I got a call from one of my clients from the foreclosure court asking me what I thought it was worth. He ended up buying it that day for $660,000. It seems that the bank’s short sale and foreclosure departments do not communicate. They could have closed the short sale transaction for over $200,000 more, but instead they sold it in foreclosure for a huge loss. As I stated, logic has no place in a short sale. Short sale buyers lose out! Our client who bought the property ended up listing it for sale and subsequently sold it a few weeks later for $875,000! They were the big winners.
In short, it doesn’t make much sense to chase short sales. If you love the house, by all means, pursue it….however, reduce your expectations regarding the economic deal and be prepared for a long drawn-out process. Super deals can be found in foreclosures, but those are not for the faint of heart or inexperienced(to be discussed in a subsequent article) . The best deals are made by purchasing a property from a motivated seller that is not short on the mortgage but is still motivated to sell.