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
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$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
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(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.)