Sacramento Real Estate Blog

The one and only Sacramento Real Estate Gal, Purva Brown, recently called my attention to some really important information for buyers about short sales — their abysmal closing rate.

Many readers of the blog will no doubt already know that a short sale is a sale where the seller has insufficient funds to pay off the loan(s) on the property, and has asked the lender to allow the sale to continue but approve a reduced pay-off instead of going through foreclosure.  Like homes that are already owned by the bank (REOs), short sales are often discounted compared to other homes.

Unlike REO’s — however — there’s a problem.  It’s harder to tell exactly where the problem is than it is to tell you the numbers.  In Sacramento County, for example, as of late November, 2007 short sales accounted for 2,890 of the 11,053 active listings — 26.1%.  At the same time, 16.8% of all listings marked pending sale (in escrow but not yet closed) were short sales.  The pending sales data, moreover, may tend to underreport short sales, since many listing agents will continue to list the home as active until the lender has approved the sale — or even beyond this point.  (Indeed, this practice is common enough that it’s become the subject of an MLS rule prohibiting the practice).

OK, so how many of these short sale transactions are closing?  In October, the number was only 3.8% of sales — so far in November, that number has only risen to only 5.3%.

5.3% of sales, versus 16.8% of pending sales.  In other words, two out of every three short sales transactions (or more) fail to close escrow.

Why the low numbers?

• First of all, understand that the lender doesn’t have to approve the transaction.  They can always foreclose.
• Sometimes buyers find out in the process that short sales are not for them.  When it takes a month or two or longer to get a short sale buyer, many’s the buyer (we’ve worked with some) who’ve simply lost patience or couldn’t wait because of their situation.
• I’ve seen cases where short sales were listed where the buyer was not even behind in their payments.  As a buyer, have your agent ask about the status of the seller.  If they’re not behind in payments, and if there’s not an adequate hardship, the chances of the lender approving the transaction trail off to something pretty close to zero.  Chances are that a large percentage of short sales shouldn’t even be listed.

Can you avoid the short sales and still get a bargain property?  Absolutely!  If you focus on the REOs — bank owned foreclosures — you’ll find homes that are typically priced below the short sales and are much easier to own.  When you look at REOs, the number of homes that close compared to the number that are for sale is actually higher, not lower.  For example, it’s not uncommon to see 12% REOs in inventory, but 25% in the sold statistics (about twice as many).