As promised, here is a new column about SHORT SALES. Many of my buyers have noticed, as I have, that the market is flooded with these seemingly great deals known as SHORT SALES. Are they bank owned properties? Are they really a great deal? What are the risks? Today I will explain what a short sale is and whether or not it is, in REALITY, a better deal opportunity than a regular sale.
Before going into my opinion about short sales, I wanted to first give newer buyers a basic understanding. I did some reserach online and have found that Redfin.com has a great section explaining Short Sales. The definition below is an excerpt from Redfin.com:
WHAT IS A SHORT SALE?
From Redfin.com:"A short sale listing is one in which the seller still owns the property, but owes more money on his mortgage than he will get from selling the property. Most often, more than one bank holds a mortgage on the property and each bank has to approve the sale. These banks and lenders will be evaluating multiple offers at once, many coming from wealthy investors with all cash offers and the patience to wait it out.
Unfortunately, there's nothing short about the process of buying a short sale. In fact, the chance of closing a deal on this type of home sale is a long-shot. If you'd like to make an offer on a short sale listing, you should be ready to wait several months for all the parties involved in the process to approve or reject your offer."
HOW ARE SHORT SALES DIFFERENT FROM FORECLOSURES?
From Redfin.com: "Short sale homes are still owned by the home-owner, while foreclosures are owned by banks. If the home-owner cannot sell the home through a short sale, the bank initiates foreclosure to try to sell the home directly, often in an auction. If the auction fails to turn up a buyer willing to pay at least what the bank was owed on the home, the home becomes Real Estate Owned (REO), where the owner is the bank. The bank then typically sells the property through a real estate agent."
Also, a foreclosure sale is always being sold my one primary seller. In a Short sale, one major problem most buyers encounter is that it requires the approval of all the lien holders of the subject property. If a property has a first, second and third loan, not only do all three need to sign off on the approval, all three lenders also need to negotiate with each other for how the proceeds of the sale will be divided up. Imagine how hard that must be for 3 competing lenders, who are all losing money, to agree on something like that. Sound difficult? You better believe it is.
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So...Now that we've layed out the basic definition of a short sale, the question everyone would like to know is: ARE SHORT SALES REALLY SUCH GREAT DEALS OR ARE THEY JUST EMPTY PROMISES?
The truth of the matter is, Short Sales are probably the most difficult transaction to complete with a very low success rate. However, I know many of you out there are saying, "Jerry, I'm willing to wait it out and jump through the hoops if it means I can get a good deal."
This leads me to the first THREE QUESTIONS which I am asked the most regarding short sales. Once you see my answers, I think it will open up your perspective a little.
QUESTION 1: WHY ARE SHORT SALES ALWAYS PRICED SO LOW?
ANSWER: When a seller who is in financial trouble calls a Realtor to sell their home as a short sale, the first thing the Realtor advises the seller is: "We must price this property lower than market value and get offers AS SOON AS POSSIBLE." If a property is a short sale, the seller is usually in desperate times and foreclosure is looming. If the Realtor can not get an offer to the bank immediately, then the foreclosure will usually happen before the short sale can be done. In fact, often times, even with a short sale process started the home will still be foreclosed on anyways.
As a buyer, you may be thinking. "yippee, time to get that property for CHEAP!". Not so fast. What do you think will happen when every buyer in Los Angeles sees the home hit the market for 15% under market value? Do you really believe there will not be multiple buyers who will be jumping all over it just like you. This is the first thing you as a buyer must realize about short sales: They are priced low with the intention of starting bidding wars that will drive the price up. The most common strategy in Short sales is to list the property so far below market, that many buyers will submit offers over asking. Therefore, if you are the buyer willing to pay list price competing against multiple buyers who all willing to pay much more than the list price, you will end up spinning your wheels with no results. Second, even if you are the highest offer on the property, it does not guarantee that the bank will accept that offer. In fact, the only way a bank will accept your offer is if, after your offer is reviewed, it is deemed a "fair market" offer.
Think about that. The only way the bank is going to accept an offer is if they feel you are NOT getting a "below market" deal, but are paying "fair market" pricing for it. If you are paying a fair market price for a property, is it really worth waiting around and jumping through hoops for 6 months just for the chance to be accepted or rejected by a bank?
QUESTION #2: HOW DID SHORT SALES GET THE REPUTATION OF BEING GOOD DEALS?
Ever since bank foreclosures began flooding the market in late 2007, they have represented some of the best real estate bargains. Anything related to the bank or that would involved the bank or lender automatically became the best thing since sliced bread. Unfortunately, this included "Bank Short Sales" which would require not only the seller's approval but, lucky you, the bank's approval too.Another reason Short sales were perceived as such great deals was that they always hit the market with very low initial list prices. When new buyers saw these list prices that, time after time, said "Short sale", they became the hot property to chase after.
Now that reality has set in, most buyers who have been burned a number of times, can attest that Short Sales are most often more trouble than they're worth. Short sales can still be good deals, but you need to be realistic, and you also need to make sure your agent, as well as the listing agent, are working hard to get the deal done. If you sense a complacent listing agent, don't waste your time, the sale will not be going through anytime soon.
QUESTION #3: CAN ANY TYPE OF SHORT SALE CLOSE WITHOUT HAVING TO WAIT?
Suprisingly, YES. A Short Sale that is Bank Approved can open escrow and close as soon as the buyer is able. So if you see a bank approved short sale at a price you are happy with, you should jump on it as soon as possible because there aren't many!So I'm sure you're asking: "What exactly is a bank approved short sale?". A bank approved short sale is a short sale that has already been on the market for some time and the property had an offer from another potential buyer. After a number of months, the bank finally approved that offer at that purchase price. However, for one reason or another, the buyer bailed before they were able to close the sale. If you as a buyer are willing to now make an offer at the approved purchase price, you can open escrow immediately.
However, please understand just because it is an "approved" short sale, does not mean things are negotiable. If you are not happy with the property at the approved price, you might as well not even submit an offer; The time it will take to renegotiate an approval at a lower price will likely be more work and more time than the listing agent, seller, or bank has. Also, if there is something wrong with the property, I would not count on getting a credit as the bank usually draw a hard line once an offer has been accepted.
IN SUMMARY.......
WHAT'S GOOD ABOUT A SHORT SALE:
If you find the home of your dreams and it is a short sale...I'm sorry for you. However, if it is the home of your dreams, and you are willing to wait it out, you may be able to get a property that other buyers simply weren't willing to wait for.The other good thing about Short Sales is that they usually send appraisers out to determine whether your offer is at "fair market" value. If you get lucky, you get an appraiser who knows nothing about the area and will severely under value the subject property. If this happens, you should be able to get an approval even if your offer is much lower than market value.
WHAT'S BAD ABOUT A SHORT SALE:
If you find your dream home at your dream price and it is a short sale, be prepared for a long road ahead. First off, Short Sales are almost always priced severely under market value with the intention of starting a bidding war. As long as you know this, you may be able to save yourself from running all over town looking at properties you thought were a good deal only to find out there are 25 offers on the property.If you are the "accepted" offer on the property, this means your offer is the one that will be sent to the bank. Offers submitted to the bank usually take anywhere from 60-120 days (as of Sept 2009) to get in front of a negotiator to review for approval. During this time, all you can do, literally, is wait. A pro-active listing agent will make sure that things get done as quickly as possible. If you sense that you have a lazy or unmotivated listing agent, you may as well find another property, because chances are, they will not be organized or pro-active enough to get everything needed to the bank in time. I'm serious about this: IF THE LISTING IS NOT WITH A MOTIVATED LISTING AGENT, YOU ARE WASTING YOUR TIME.
If after many months of waiting, you are the offer that is finally approved, you get to open escrow. However, what makes a short sale much less attractive than a regular sale is that the bank will very rarely approve and credits or price adjustments once the approval has been issued. If you have a foundation issue, your choice is simple as far as the bank is concerned: Accept it or walk away. I know what your thinking: you're wishing the bank wasn't involved in this sale anymore, right? :)
If you have any other questions about real estate in Los Angeles, feel free to give me a call anytime.
Jerry
310-228-8856
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