Short Sales - Bargain or Bait and Switch?
I had an inquiry today about a home in Placer County about a home listed as a short sale that turned out to be quite interesting as I dug into it.
For those not familiar with short sales, short sales are short in the sense of “short on cash”, and the term refers to any sale where the procedes from the sale won’t be enough to pay off the outstanding debt and the closing costs. So the seller, anxious to avoid the negative impact of a foreclosure, asks the lender for permission to do a short sale. In other words, the lender is being asked to take a reduced payoff on the note they’re holding.
After looking at the comparable sales, I have a feeling that the buyer may have had an interest in the home because it was priced very agressively. The home was listed at $320,000 (which worked out to $219.21 per square foot), in an area where the comparable sales showed an average pending sale price of $237.46 per square foot (list price) and an average sold price of $241.43 per square foot (sale price).
Why price it so low? When you think about it for a minute, you’ll realize that you’ll almost always see a pretty good discount on a short sale, for the following simple reason: short sales are one of the rare cases (possibly the only case except perhaps probate) where the person who’s pricing the home is different from the person who’ll decide if the offered price is high enough. You see, a short sale by definition is one where the seller makes no money, and the seller’s asking the lender to accept less than the loan amount. Because of this, the seller is inclined to price the home very agressively indeed, since it’s not the seller but the lender who’ll have final say over whether to accept the offer.
Our next step after checking the comps was to check out how much of a hit the seller is asking the lender to take. Checking the mortgage history in the tax rolls, I learned that the most recent refinance of the home had consisted of two loans taken out at the same time in 2006, one for $331,200 and the other for $82,800, for a total of $414,000. So the home was being listed for some 77% of the value of the loans on it, and the lender would receive something slightly less than that after closing costs.
The Plot Thickens
What caught my eye at this point was something really interesting — the name of the broker selling the home was the same as the name on the tax rolls. At this point I began to suspect some looming mortgage fraud conspiracy, but it turned out the broker only had one or two homes in Placer county. It could still be loan fraud, but I couldn’t easily prove it to myself based on a pattern.
At the same time, since I would be representing the buyer if I represented anyone at all, a question that was more interesting to me than the integrity / lack of integrity of the seller was whether the lender would go for the sale. What usually happens during a short sale is that the lender will order either a full appraisal or a Broker Price Opinion, and decide whether and how to negotiate based partly on that. So from a buyer’s perspective, the thing you should know (besides the fact that they take a long time) is this: unlike most sales, you can’t assume that even the asking price is one that will get you the home (let alone the discount that you’re likely to ask for because you know you’re in a buyer’s market).
In researching the issue further, I happened across a great technical bulletin (in PDF format), published by Land Title Guarantee Company, which goes into the sorts of details a lender will be looking at when deciding whether to accept a short sale. If you’re interested in getting a bargain through pursuing a short sale, this technical bulletin should be on your required reading list.
