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14 May

Are Short Sales Fake Listings? Part 1

Posted May 14th, 2008 | View Comments

Are Short Sales Fake Listings? Part 1

It’s no secret that I hate short sales. As I wrote in Short Sales are Neither Short Nor Sales, I think they’re bad news from a buyer’s perspective. Furthermore, in Three Things Your Agent Should Tell You About a Short Sale, I shared my belief that they’re often oversold to sellers as false hope as a “way out” of foreclosure. Though there may be some advantages for the seller, in terms of credit damage most sources I’ve consulted with feel they’re just as bad a foreclosure.

To further point out some of the problems with short sales, I recently write a white paper that I’m making available as a PDF file, The Short Sale Fake Listing Fiasco (How to Avoid a Colossal Waste of Your Time and Money).

Since I think this is important information for buyers to have, I’m also republishing a version of this article beginning today as a blog series.

Buyer Beware — Not Everything That’s Listed Is Really For Sale

With the rising number of foreclosures in recent years, we’ve started to have a real problem with a type of listing that Virginia Real Estate Broker Frank Llosa calls a “Fake Listing” – the Short Sale. I agree with Frank that that’s just what they are.

Why do we say short sales are fake listings? Quite simply, a real listing is one where a qualified buyer can expect that if they made a full priced offer with no other buyers bidding, they would be able to close escrow and own the home.

Reasonable as it is, this expectation simply doesn’t hold water on a Short Sale. In Arlington, Virginia, for example, Frank Llosa documented that only 5% of short sale listings successfully sold. As we’ll see below for one local market, traditional sales outsell short sales by four to one even though they’re much, much more expensive. (But the good news is that bank foreclosures are listed cheaper than both and sell like crazy!)

If you can’t write a full priced offer on a listing and get your offer accepted with no competition, that’s a fake listing.

What Is A Short Sale?

A short sale is a listing where 1) the proceeds from the sale is less than the value of the loans on the property, and 2) the seller can’t bring in the difference to close, so they’re asking one or more lenders to approve the sale and accept a reduced payoff.

For example:

$350,000 Amount seller owes to lender(s)
$279,000 Proceeds from sale
________________________________

$71,000 Amount lender is asked to write off.

Why would the lender agree to such a write-off? Well, in principle the idea is that the lender will lose less by taking a reduced payoff now compared to how much it will cost them to foreclose on the property and sell it that way.

That Sounds Great – A Lot Of Them Should Sell, Right?

Wrong.

To give you an idea about how poorly short sales sell, let’s take one of our local areas that has a lot of listings, Elk Grove, and do a quick case study based on active homes available in early May of 2008 versus those that sold in April.

Active Listings as of May 7, 2008

Type of Listing Available Homes Average List Price Per Square Foot List Price as Percentage of Non-Distressed
Short Sale 568 $142.37 64.9%
Bank Owned 289 $138.09 62.9%
Non-Distressed 324 $219.42 100.0%

As you can see, bank owned properties (also known as foreclosures, REOs, or “bank repos”) listed for slightly less than short sales, but both fell in the range of 62%-65% of the price that non-distressed homes were selling for. (By non-distressed, we mean a regular sale where the owner owns the home outright or owes little enough so they can pay off the loans).

Based on the numbers above, for example, a 2000 square foot home might list for $438,840 as a non-distressed sale, $276,180 as a bank owned property, or $284,740 as a short sale. Short sales are discounted almost as much as foreclosures, and there are almost twice as many short sales available as bank owned properties.

Based on price and availability, we would expect the number one seller the month before to have been either short sales or bank owned properties, and the number three seller to be non-distressed sales, right?

Let’s look at what we actually find for April.

Listings that Sold in April, 2008

Type of Listing Number that Sold in April Percentage of May Inventory that Sold in April
Short Sale 25 4.4%
Bank Owned 177 61.2%
Non-Distressed 56 17.3%

In Part’s 2 and 3 of this series we’ll discuss why short sales don’t sell and what you can do as a buyer to find listings that aren’t short sales.

Related Links:

Are Short Sales Fake Listings Part 2

Are Short Sales Fake Listings Part 3

____________________

(Please note that I hope this information is intended to be used before you’re in contract, and should not be taken as any sort of inducement to cancel an existing purchase agreement.)

  • http://www.expertforeclosurehelper.com Tony Orlando

    Great Blog post. I am going to bookmark and read more often. I love the Blog template … if you need any assistance customizing it let me know!

  • http://www.sacramento-home.com/real-estate-agents/ John Lockwood

    Tony,

    Thanks for the kind words about the post and the theme.

    You might also consider subscribing in an RSS reader. Here’s the feed: http://feeds.feedburner.com/SacramentoRealEstateBlog. An RSS tutorial is here:

    http://www.inklit.com/blog/2008/03/12/what-is-rss-and-how-do-i-use-it/

  • Frank LLosa-Broker FranklyRealty.com

    THey thanks for the link.
    So I’m still hopeful with Short Sales. I wrote a new post on top 10 questions to ask the listings agent. Heck, if the agent knows what they are doing, and has closed them, they might be a good option.

    ALso I took a course that is taught by Realtors that are able to get a 90% close rate. So with some education, they can be possible.

    Frank

  • http://www.sacramento-home.com/real-estate-agents/ John Lockwood

    No worries. Obviously your article had a lot of good stuff in it and I’ve reworked some of that into my article as well.

    I’m more down on Short Sales than you. Why hope when you can work on real deals?

    Have you checked the closed rate on the Realtors selling the course and claiming 90%? Also, what’s that 90% from — surely not from open listing (it’s not that high in the best of markets). 90% from bank approval would beg the question.

    Sure, they’re “possible” if our colleagues get educated — I’ve even had one close — but as a buyer’s agent I have to look at what’s likely. As it turns out I was just working on a new article so I have “last 30-day” numbers for Sac County available for quoting as of today. 39% of active inventory in Sac County are short sales, compared to 34% for non-distressed sales. Also, compared to non-distressed sales, short sale properties that did sell were discounted an average of 24% (about $81,000) from non-distressed sales. Yet of everything that closed in the last 30 days, 22% were non-distressed compared to only 8% for short sales. So even though short sales are discounted 24%, non-distressed sales outsell them more than 2 to 1.

    But the real big seller is the most heavily discounted — the REO.

  • http://www.WillGrundyRealEstate.com Tim Soper

    John,

    Really well thought out article. As an agent who has been on both the listing and buying end of a short sale (both successfully and unsuccessfully), I agree that the short sale is not the panacea that it is made out to be. It is not a “get out of jail free” card.

    I hope, though, that you did not mean to imply that a short sale is no better than a foreclosure for the homeowner. Both have serious ramifications for the homeowner, but the SS is certainly the lesser of two evils.

    Finally, here in the Chicago area, I am seeing banks agree to short sale workouts. As our market did not get anywhere near as inflated as yours did, maybe that is the difference. That our short sales are considered “truer” hardships? Don’t know.

    Nonetheless, great article and I’ll be sure to bookmark you!

    Tim Soper
    RE/MAX Pinnacle
    “Will/Grundy Real Estate Report”

  • http://www.sacramento-home.com/real-estate-agents/ John Lockwood

    Thanks for the comment, Tim.

    Well, there are some benefits to short sales such as preventing deficiency judgments in the case of non-purchase money loans. But listing them when they’re not approved just leads people down a garden path, I think.

    I do appreciate the comment and the visit. I’ll check out your blog as well when I’m not so tired. :)

  • http://baltimorerealestateinvestingblog.com/ Ned Carey

    Great post. I found your blog from the real estate blog carnival.

    In addition to what you say here many agents that list short sales haven’t a clue how to do one.

    Ned

  • http://www.fanimation.com/ Fanimation

    I’ve been duped on a short sale before. Well, almost duped. When I found a deal on a house that seemed too good to be true, I told my brother. He took one look at it and told me, “You don’t want this house”. I was thinking he was jealous or something, but he wasn’t kidding. The hoops I would have had to jump through to get his house wasn’t worth it. I learned not to mess with these anymore.

  • http://www.sacramento-home.com/real-estate-events/2010/most-homes-in-foreclosure-in-the-nation-sacramento-not-on-the-list_2552.html Most Homes In Foreclosure In the Nation? Sacramento Not On the List

    [...] number is much smaller (22.3%) than the REO number (at least partly because short sales are often fake listings).  Still, adding that number in might change the mix of winners and losers [...]

  • http://minneapolisrealestates.com Minneapolis Home Sales

    I agree with much of your analysis on short sales. I can’t tell you how many times I’ve presented the bank with an offer that they’ve turned down because their BPO indicated that the value was much higher than the offer presented. The bank is almost never realistic about the true value of the property which means that the buyer can’t expect to get a deal any better that traditional homes that are for sale. Plus, who wants to wait six months for a bank to make a decision. It’s so frustrating.

  • http://www.sacramento-home.com/real-estate-agents/ John Lockwood

    @Ned, did I really take two years to say thanks for chiming in on that? Yes, looks like I did. Well, a VERY belated thanks for comment, with apologies.

    @Minneapolis Home Sales, yes short sales are tough and it’s the bank that makes them tough. I have found in our market that the deals are better than non-distressed homes, though not nearly so much as for REOs, and like you say, who want’s to wait six months? Banks doing a lousy job with them is why they’re the category that sell the least.

    @Fanimation, yes, short sales are quite a pain from the buyer perspective, and sometimes the ridiculously low asking price isn’t where you end up.

    I am looking to revise my opinion about this somewhat because an agent of mine has just informed me that he has met up with a really talented and productive short sale negotiator. That’s really what you need to have on the team to get the transaction done, as Ned points out. I may have a write up soon on the services she provides and how they can be of benefit to sellers who need to consider a short sale.

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