Update 3-19-09: This post is OLD. See new Post from 2-09 Short sales are closing, if done correctly. They can be the best “deal” (I hate saying “deal”). The post below is still great background info.
Update 1-22-09: Still reading this #1 blog post on short sales for a background on the process? Well it was written over a year ago. Short Sales are now closing MUCH more frequently in SOME areas (an 0 in areas like McLean). Subscribe to this blog for I plan to run some numbers on the % that are closing. My guess is the range is 1 in 3 (vs 1 in 20) before. However closing rates can be as high as 80% if your buyer agent asks the listing agent these questions: Top 10 Short Sale Questions.
(Update 6-16-08: This post was written on 2/08, this marketplace is changing ever month. Make sure to subscribe to the blog to get updated on the marketplace, like an upcoming post on more Short Sales starting to close.)
As of 2-08, most Short Sales in Northern Virginia are what I call “FAKE Listings.” (note that this is Virginia, every area is drastically different)
Only 1 in 20 sells.
In Arlington only 3 have sold out of 65 attempts.
I briefly went over Short Sales when I defined all SOL Homes including REOs, Bank Owned Etc. But Short Sales need more attention, as they are very tricky and misleading.
A Short Sale is a listing for sale that requires “Third Party Approval.” That means that 1, or 2!!, banks are owed MORE than the list price.
- Home is bought for $500,000 with 5%, or $25k down.
- Home has a $475,000 mortgage.
- Value dropped below $475,000
- If the seller is facing foreclosure, they slash their price for a quick sale
- A Short Sale is attempted at $450,000
- If the bank accepts it, the BANK eats $25,000 (see Phantom tax for Seller)
The Theory Behind Short Sales: Banks would be better off to accept a loss now, versus going through the legal expense of a foreclosure, just to end up selling it for less later. Win win, right? Wrong. Read on.
Bank Trick 1: “Sure, we will consider a Short Sale, IF YOU KEEP PAYING US.”
Yep, a bank sees a desperate seller, and a potential $50,000 loss. They then mislead them into thinking that they might consider taking a bath on the deal IF the owner keeps paying their mortgage. The bank then ignores offers for 2-4 months in order to squeeze out another $2,000 x 4 or $8,000 profit. Brilliant. The bank then takes it over after foreclosure and sells it for $10,000 OVER the Short Sale List price. $18,000 better off, NOT doing a Short Sale.
Bank Trick 2: Sometimes the bank has mortgage insurance and it is CHEAPER for them to let it foreclose versus allowing a Short Sale, which is NOT insured.
For example, I was at an NVAR short sale class and a Realtor asked the speaker, “Why after 60 days, calling 2 times a day (120 calls) with a full price Short Sale offer, did the bank not call us back?” The speaker claimed it was due to an overworked staff.
- Did they tell you they would consider a Short Sale IF you kept paying $3,000 a month? The answer was Yes.
- Was the home bought with Mortgage insurance? The answer was Yes.
- Bingo! Why eat $50,000, by accepting the low offer, if the bank a) gets $3,000 a month and b) is insured against a foreclosure and NOT a Short Sale.
She was pissed. She realized that she had been “had.” But this goes on ALL THE TIME. It can take MONTHS to hear back.
- A seller in Clarendon 1021 tries to sell his property and profit $30,000 at $600k. (Yeah right!)
- Then he drops it to $570,000. No bites, but the foreclosure is pending!
- They SLASH it to $530,000
(sidenote, I get flooded with calls from friend that want to pick it up for a steal at $470,000! I said that it was impossible… since I’d buy if that price was a possibility.)
- It sits for another month, then the listing disappears after 100 days!
- A month later it is “bank owned” and listed for $560,000
- It sells for $540,000 in 26 days.
The moral here is banks are not dumb and the market isn’t so horrible that they will take all these lowball offers. They sold it for $10,000 OVER the previous list price (which probably had lower offers).
Reston homes from $300k to $400k.
- 20 Active “Short Sales” in Reston (watch out for “Not a Short Sale” listings)
- 73 were Withdrawn, or Expired.
- 3 Under Contract (1 under contract since Nov 2007! Many UC do not close.)
Only 3 sold in the last 24 months. 3 closed sales in 100 attempts!
- Dropped From $480k to $400k, sold at $400k (Full list)
- Dropped from $430k to $400k sold for $380k (5% under list)
- Dropped from $380k to $350k sold for $345k (2% under list)
Arlington Short sales.
- 25 Actives
- 37 Withdrawn
Only 3 have sold in ALL price ranges in all of Arlington in the last 2 years.
- Listed at $335k, sold for $335
- Listed at 700k dropped to $620, sold for $600k
- Listed at 480k dropped to $420k sold for $420.
In Alexandria, only 8 have closed in 2 years out of 80 attempts.
(most were at list, or 2% under list, some were $20k over list)
I show this, so you don’t think “Wow, they are desperate, we can now lowball. These 3 were the ONLY successful ones. Probably because they gave the bank a real offer.
Ok, so enough already with the War N Peace, what should I do?
Advice for Regular Sellers
- Do NOT blindly compete with a Short Sale. If you get an inexperienced agent, and they see 3 Short Sales in your neighborhood, and they have you compete against these “fake” listings, you can lose $25,000. Hope you “saved a ton” on that agent. (see Realtor Rebates)
Advice for Sellers Facing Foreclosure
- Watch out for the bank tricks to “keep paying.” Talk to a lawyer that specializes in bankruptcy to help guide you. They MIGHT recommend stopping payments immediately and saving it up for a rental.
- Use an agent that has completed (as in CLOSED, not listed) at least 1 Short Sale.
- If you have mortgage insurance, be extra careful, the bank might prefer that you foreclose.
- Get bank approval for your list price before listing it. Put in the listing remarks “List Price approved.” Otherwise you will get lumped into all the other Fake Listings and ignored by smart buyer agents.
Advice for Buyers looking for a “steal” (see “deals” post)
- Avoid Short Sales, or expect to wait 2-3 months and expect to put in 5-10 offers on Short Sales before one is accepted. A Short Sale in my building now has 4 offers. He says he is expecting a reply any day now… sorry, but yeah right!
- Look for Approved Short Sales. Ask if the bank has been contacted and if a price has been approved. Multiply time estimates by 4. Ie. 3 days= 12 days.
- Consider offering near, full or OVER list. What! Over list! Are you nuts! CNN says this is a BUYER’s Market! I know it sounds crazy, but if you and your agent see the price is well under your other options… I’ve said time and time again, I’d rather you pay $10,000 OVER list on a house that is $50,000 under the competition versus “saving” $50,000 on a home that is overpriced by $100,000. Ignore list price, focus on VALUE.
- Focus on Bank Owned. These units get replies in a day or two. (See video of Realtor buying a Bank Owned property)
Advice for Buyer agents & Listing agents
If you get one to close, change the remarks to SHORT SALE, NOT TO BE USED AS A COMP in hopes that the appraiser will take that into consideration and not trash the neighborhood (buyer agents, demand it of the listing agent to try to help your client’s “deal” not turn into destroying his own investment).
Sidenote: A home should NOT go under contract until the BANK signs it, but many agents will make this mistake. The seller signing it means nothing, and it should stay on the market as Active.
- Updated Correction 2-29-08 I’d like to thank DAAR CEO Jeanette Newton for this correction. I’m excited that she is participating in blogging!
- My above sidenote about when to go Under Contract is 100% wrong. So let me explain… IF a seller signs the offer, as written, it is to be listed by default on the MLS as Under Contract with No Kick Out. The problem for the seller is that most MLS websites will remove the listing, so the chance of a better offer (and a higher chance for the bank to accept) is slim to none.
Here are a sellers’ options (please comment if you know of more options) :
- 1) A seller can counter the contract and add in a “Kick Out” so further offers can be reviewed. The listing then can be set to Under Contract with Kick Out (this was suggested by Loudoun Realtor Tony Arko). But only a buyer agent looking on the back end MLS can find UC/KO. (A Kick Out means “there is still a major contingency here, feel free to submit another offer, it still can be considered and the first contract might be kicked out.”)
- 2) Another way to keep it active (like the unit in my building with 4 offers) is for the seller to send the “offers” unsigned to the bank. Why not try and keep your home as “Active” for as long as possible? Some banks will require the seller to sign, so try #3.
- 3) Or lastly, the seller might add “acceptance of the contract is contingent on lender approval.” or “contingent upon review and approval of the lender.” That one line can keep it “Active.” I am not a lawyer, so please verify any additions you make to a contract with a lawyer.
- As a buyer agent I would prefer it to be “Under Contract” if I was the listing agent, I would want it to be Active. So it depends whose side I am on, it is part of the negotiations. You can even counter with “Increase your price $2,000 and we will place it UC/KO.”
New Trick: Now that Short Sales are getting a bad wrap, some listing agents are NOT disclosing that it is a Short Sale.
Conclusion as of 2-2008: Short Sales in Northern Virginia suck.
Question: Realtors, should you have a “No Show” policy for Short Sales that aren’t approved by the bank? Are they really “for sale” if the owner (the bank) doesn’t even know about it? Feel free to just tell your clients “read this blog.”
Please report typos.
p.s. See Washington Post Article on Short Sales
Feb 2009 Short sales are closing!