Short Sales | Sacramento Real Estate

Posts Tagged ‘Short Sales’

Short Sale Pros and Cons — Myth versus Reality

There’s a lot of misinformation about short sales, and at least some of that is coming from the real estate agents who get paid to do them. To be sure, there are some advantages to doing a short sale, but they may not be what you’ve been told, especially if you’ve met with any over-zealous listing agents recently.

The Myths

An Approved Short Sale Will Save You From Foreclosure If ever there was an appropriate for the Yogi-ism “It ain’t over till it’s over”, it’s in the short sale. What happens in a short sale will often defy logic. To be sure, the bank may stand to lose more money on a foreclosure than a short sale, but that’s not true of the loan servicer (the company working for the bank to collect the payments, and, in the absence of payments, to foreclose). Some of these fees are triggered by the foreclosure itself, so make sure the bank and the servicer are communicating.Certainly simply having your home on the market alone will not stop the foreclosure process. Your prospects for success improve if the bank accepts your buyer’s offer, but like it or not it’s the banks and their servicers who are in control up to the end. When and if the escrow closes and the deed on the sale is recorded with the county, you’ve successfully escaped foreclosure. Until then the best you can do is try to keep the communication open with the bank, work with a good listing agent, and hope for a successful outcome.
A Short Sale Will Save Your Credit

Generally, a bank won’t approve a short sale unless you are behind on your payments. Unfortunately, simply being late on your payments already has a serious impact on your credit.Moreover, it doesn’t appear that any difference between short sales and foreclosures on the impact on credit scores is minimal. In 2010, VantageScore Solutions, a company that aggregates data from the three major credit bureaus, did a study of the impact of various foreclosure-related scenarios on consumer credit. The study revealed that a short sale impacts your credit just about as much as a foreclosure. For those borrowers whose credit was clean otherwise, the average short sale cost them 120–130 points. In a foreclosure, if they continued making (presumably reduced) payments, they lost 115–125 points. In a foreclosure where they were behind in their payments, they lost between 130–140 points.

The Reality

Even though the chances are good that a short sale won’t save your credit, there are a some advantages to doing a short sale over letting the bank walk away with the keys.

Knowing You Did What You Can To Avoid ForeclosureLet’s face it, most people want to fulfill their obligations if they can, and even though there are plenty of folks in the same boat in this economy, they feel there is a certain stigma attached to losing their home by foreclosure. For this reason, being able to walk away with the feeling that you sold your home instead of having lost it is perhaps one of the main intangible benefits of a short sale.
Being Able To Buy Another Home Sooner Although your credit is affected more or less equally by a short sale and a foreclosure, there is still an advantage to a short sale in terms of how soon you will be able to buy again – assuming you want to and you can get your credit in order again. According to Fannie Mae guidelines, a buyer is eligible to buy a home within two years after a short sale, but has to wait up to seven years to buy after a foreclosure, though this period may be as short as three years if there are extenuating circumstances such as sickness, severe injury, or job transfer.This is important because Fannie Mae — along with the other major Government Sponsored Enterprise, Freddie Mac – buys some 50% of the loans in the US market from banks. Being able to resell your loan is one of the things lenders look for in a borrower, so as a practical matter, the guidelines in the secondary market make a huge difference in your ability to get financing later on.

Are there good reasons to do a short sale? To be sure, but if you decide to go that route, we believe you should go into it knowing what to expect.

Before Foreclosure: Before you Walk Away

While I was having my early morning cappuccino today, made with a rather indulgent birthday gift I gave my husband, this impassioned email sent to us by someone who had been to our website caught my eye:

“Their loss is your gain” Very tacky marketing! We loved that home & left it in great condition. We worked with your representive [sic], I actually that [sic] about sending her a thank you note. Were [sic] is your empathy! I truly hope someone can purchase the home that I designed & finish it right. I hope that you are happy that your posting sent me & my family into tears again. OUR LOSS? Yes we did have a loss I am sure you do not care about exactly what our loss was/is. Did it occor [sic] to to [sic] that terminal illness could have played a roll [sic]? You should think again before marketing a foreclosed home in such a ruthless way.

I hurried off a reply explaining that the marketing was not ours. We never use tacky terms like that and are hugely empathetic to sellers in this market, especially ones that have ended up in a foreclosure / short sale situation through no fault of their own and genuine financial hardship. Unfortunately, there are so many others that simply want out of their homes because they are so called “upside down” in them that even the banks are having a hard time distinguishing between the genuine cases and the ones that just sick of falling house values.

So let me reiterate: this post is for those with genuine financial hardship. Here are some of the steps you can take before you decide to walk away from your home.

Determine if there is Genuine Hardship: As I mentioned earlier, some people in this market simply want out of their homes and the mortgage agreement because they see the value depreciating. Depreciating value in itself is not a reason for the bank to accept a short sale. You must prove genuine financial hardship. Remember that the mortgage agreement you signed when you bought the home is a contract and letting someone out of a contract requires a strong reason. Depreciating value of an asset is in itself not a good enough reason.

Get on the Phone: The single biggest mistake people make when they are beginning to have trouble making payments is to avoid all phone calls. As a landlord, if the rent doesn’t get to me in the specified time and the tenant does not call, it is my first red flag. I can tolerate the rent being late for a long time if there is communication. Your mortgage holders have the same thinking. They really don’t want to foreclose. They just want the payment. So, your first response to a difficult financial situation should be to call your creditors. That would include your credit card companies, the IRS, your mortgage holders and so on. You might be able to get your mortgage holders to rewrite the loan (and have a different monthly payment and terms) and stay in your home.

Keep in mind also that a home is a secured debt, which means it is secured by your house. If you stop making payments, the mortgage holder can take your home. Your credit cards are unsecured debt. If you stop making payments on those, the credit card companies cannot technically come after your home. If you have the stomach for it, you can keep your home and see about negotiating with other creditors.

Begin Building a Case: A banking job is very paperwork-heavy. Remember the thick stack of documents you signed as a home buyer? Well, to get out of it, the stack will be just as thick. Start collecting any and all documentation of your hardship. Collect bank statements for the last entire year, tax returns for the last five years, pay stubs for the last year and all other documentation you have which shows and documents the reasons for your hardship. This may include a letter from your employer if you have lost your job, a medical letter if you have a disability or illness, medical bills, IRS bills – anything to establish in the eyes of the negotiator that you are not someone who simply wants out. A paper trail is very important to a successful short sale.

Start Looking for an Apartment or Rental Home: Do not plan on living in the house until the date of the foreclosure. While this might seem like a good idea on the surface because you are not making mortgage payments and getting free rent, remember that every month of a missed mortgage payment hurts your credit score – something most landlords check when you apply for a place to live in. Even if the short sale does not go through, you will have to leave and need a replacement place to stay. There is no doubt about that. Your credit is going to be in a downward spin. The smartest thing you can do now is get a place to live and explain to the landlord that you are losing your home.

Try to get an Approval or a Dollar Amount: This is unfortunately the toughest part of a short sale. Before you call a Realtor®, send in the paperwork to the bank and try to get an idea of what price they will accept. Lenders are notorious for not telling you their price and having you wait for an offer before they send someone out for a broker price opinion. The problem with this approach is that the buyers tend to get tired of waiting and walk away. If you can get the bank to send someone out before an offer comes in, it saves time (lesser time also means your credit will be hurt less) and you are more likely to get a home buyer to make an offer. This does require that your paperwork be complete however, so make sure to get that sent into the bank and follow up with them.

Call a Realtor®: At this point, all a Realtor® has to do is advertise your house as an approved short sale, be open to an offer and send it over to the bank for final approval. Approved short sales can close in less than sixty days. Also remember that you do not have to pay either Realtor®, as would be the case in a traditional sale where the seller pays the Realtors® involved. In this case, the lender would be the one making the payment for services rendered. That is why the lender will often ask for a net sheet from a title company before the final approval is issued.

Don’t Forget your Accountant! Your short sale or foreclosure may have tax ramifications and perhaps legal ones as well. Be sure to talk with your tax preparer and attorney regarding these. Deciding to walk away from your home is a difficult and painful process – one that we hope you never have to do. But if it is inevitable, I hope the tips in this post help.

Sacramento County Real Estate Market Update

Greetings, market statistics fans! Straighten up those pocket protectors and hang on to your slide rules, because it’s time once again for us to catch up on our REM sleep with yet another thrilling installment of our never-ending saga: Sacramento (County) Real Estate Market Updates!

And the crowds went wild.

The good news: 905 units sold in February, up some ten per cent from January. Unit volume was even up marginally from last February — and, yes, this still holds true when you adjust for the leap year. February’s unit volume was the highest since last July, when 977 units sold.

The average home sold for $273,603 in February, up slightly over January’s average of $269,301, but down 29.9% from last February’s average sale price of $390,043. The median sale price of $249,000 was down 29.2% from last February’s median of $353,000. Sold price per square foot is down 28.8% from February to February, at $162.76 this year versus $228.63 last year.

The 905 units that sold in February is not bad for a late winter month where the average over the preceding twelve months was 968 units per month. Currently there are 9,866 homes on the market, which works out to be 10.2 months of inventory. 33.9% of the homes in active inventory are short sales, but as we’ve reported earlier and a variety of our colleagues in other markets have reported since, the closing rate for short sales is much lower, at 6.6% in February. Bank foreclosures (REOs), in contrast, make up 28% of the current active inventory (2,763 of the 9,866 available units), but in February they accounted for 59.2% of the homes that sold in Sacramento County (542 out of 905 total sales).

Sacramento Area Foreclosures, Short Sales, Condos, etc. etc.

We’ve updated our listings database. It was getting pretty long in the tooth there.

Most people who are users of our web site(s) probably don’t know it, but many of our web sites including this one, our Roseville real estate site and our Elite Properties company site actually rely on two different databases of listings. When you use our search page, for example, you’re using a listings database that’s our IDX company gets from our Metrolist database. These listings are updated daily, so when you do a search, you’re looking at listings that are within twenty-four hours of being as current as the ones that we as Realtors® can look at..

In addition to the search tools that our IDX company provides, however, we also wanted to allow you to browse for certain types of listings. One thing our IDX system doesn’t do, for example, is show you short sales and foreclosures. Because we don’t have direct access to the database our IDX company uses, we’ve created a second database that we can use in various ways.

For example, our foreclosure search page lets you search for foreclosures and short sales, or browse them by county. Similarly our new homes section let’s you see homes that have just been built that are listed in the MLS, and our condo pages contain links to condos grouped by price and county.

As we mentioned above, we’ve also used this database on some of our other sites. Many clients find us through our the maps of listings by zip code that we maintain on our company site. These maps include zip codes in El Dorado County, Placer County, and Sacramento County. Within each zip code you can find active listings and get recent market data. We publish similar data for Placer County only on our Roseville site.

Unlike our IDX system, which is updated automatically on a daily basis, these other resources are updated manually as time permits.

We realize that from a software perspective, that’s not the brightest way to do it. But if you’ve ever tried to get someone from Metrolist to call you back about a data feed, you probably have a good idea that it’s not half-dumb from an organizational perspective.

The good news is, it’s up to date now. So as my wife is fond of saying, “Get your red hot houses here!”

Enjoy.

How Much are Sacramento County Short Sales / Bank Foreclosures Discounted?

I took a few minutes today to look at the discounts for short sales and foreclosures based simply on list prices. In other words — how much are they discounted before you negotiate with the seller?

Foreclosures may have a little more negotiating room between list price and sale price, but not as much as you may think. The reason is that homes that are priced well to begin with tend to get more competition, so even in the case of bank owned foreclosures, buyers typically only negotiate something between 5-6% off the list price for foreclosures, as compared to about 4% for all sales.

The real bulk of the discounts for foreclosures and short sales already appears in the MLS.

So with that, let’s look at the results. How much are foreclosures and short sales discounted in Sacramento County?

In active inventory, the list price for non-distressed sales are currently averaging $228.62 per square foot. Short sales are discounted, on average, 27.8%, with the average list price for short sales being $165.00 per square foot. Foreclosures are discounted even more — 36% compared to non-distressed sales — with the average REO in Sacramento County currently listed at $146.19 per square foot.

One caveat, however. If you look at short sales and foreclosures on a neighborhood by neighborhood basis, you generally see foreclosures still having better discounts than short sales — but the overall magnitude of the discounts are somewhat less than they are when you look at the entire county. This is because part of the 27.8% and 36% numbers reported above reflects the fact that in many cases more expensive areas also have fewer foreclosures.

In Antelope, for example, Short Sales are currently listed at a discount of 26.3%, and foreclosures are currently discounted 30%, from their non-distressed counterparts.

“Only” 30% off? That’s still not bad!

Sacramento County Real Estate – Market Update January, Part II

In our Sacramento Real Estate Market Update for January, Part I, I began rounding up the usual statistical suspects, but I decided to leave some of them to a future post, since I wanted to spend some time in part one having a discussion about the recent upsurge in demand.

Left out of part one was a discussion of where we are with respect to foreclosures and short sales. In January of 2007, foreclosures and short sales collectively made up only 7.3% of all sales. Foreclosures accounted for 4.6% of all sales, while short sales accounted for 2.7% of all sales. That’s about one home in every thirteen.

In January of 2008, in contrast, foreclosures and short sales accounted for 67%, or just over two out of every three sold homes. Of these, the vast majority are foreclosures, which accounted for 60.5% of the total sales in January, even though they only make up 27.5% of the current active inventory. Short sales make up even more of the active inventory at 32.1%, but in January only 6.5% of closed transactions were short sales.

Sacramento County Real Estate 2007 Year In Review – Franklin / Freeport

Depending on where you focus your attention, there’s news, there’s good news, and there’s bad news.

We began our look back on Sacramento County real estate in 2007 with a look at the overall “big picture” for the Sacramento County Real Estate Market for the entire year. Later last week, we reported on one area in the county market that’s consistently held it’s value better than others and enjoy’s low inventory and brisk sales, East Sacramento.

This week we turn our attention to an area that may well be the “worst case” in terms of rising inventory and price declines for Sacramento County, Sacramento’s Franklin / Freeport area (95823). I should probably point out before we begin that I have not sampled all the MLS areas, so my sense that Franklin / Freeport may be the worst case comes from the foreclosure numbers. There may be other areas that have fewer foreclosures but more inventory or lower prices, for example.

Franklin’s decline in 2007 has been rapid. Comparing full year numbers first, the average price lost 19.2% of its value from year to year, and dropped 21.1% in terms of sold price per square foot. The median sale price in 2006 was $314,850, in 2007 it fell 20.6% to $250,000. In 2006 one per cent of sales in Franklin were foreclosures. In 2007, that number was 41.6%.

Comparing December of 2007 to December of 2006, we find that by December, the trend of selling more and more foreclosures and deep price drops had continued apace. By the end of 2006 the average sale price was $282,327. A year later the average had fallen 34.9% to $183,914. Another way to say this is that the average home in Franklin lost slightly more than 1/3 of its value in a year. On a sold price per square foot basis, Franklin closed out 2006 at $200.21 per square foot, and had fallen to $126.61 a year later, a decline of 35.8%.

The percentages of short sales and foreclosures available in Franklin / Freeport are staggering. Almost three fourths (73.9%) of inventory in Franklin / Freeport is either a short sale (35.9%) or foreclosure (38.1%). At the same time, if you needed a case study of REOs outselling short sales, Franklin / Freeport is it. Last month no short sales closed, but twenty-five of the twenty-nine closed sales in the area were bank owned properties. That works out to 86.2%, or close to 7/8 of all sales.

The contrast between East Sacramento on the one hand and Franklin / Freeport on the other shows how local real estate markets are. East Sac enjoys less than three months of inventory and a brisk seller’s market where the prices have remained flat while nationwide prices are falling, while Franklin / Freeport currently has almost two years (23.6 months) of inventory, and homes there have lost two thirds of it’s value in a year.

If you’re a buyer or seller, the right question to ask is not “How’s the Market” overall, but “How’s the Market” for your particular area. Is there an area you’re interested in particularly? If so please contact us and we’d be happy to get you specific market data or comparable sales.

Sacramento County – Foreclosures as a Percentage of Total Sales

In movies, 2007 was the year of the threequel. Sensibly enough, Beyonce Knowles was the year’s most desirable woman (I’ve been saying that since 2006, at least). Al Gore won the Nobel Peace Prize, while the arctic ice cap melted at an alarming rate.

In Sacramento real estate, I’ll remember 2007 as the year when those of us who entered the business early in the decade learned the mechanics of selling short sales and foreclosures. 2007 was the year of the foreclosure in Sacramento County.

This chart shows the number of foreclosures sold month by month through November of 2007 in blue. The short sales are shown in pink.

Short Sale “Time Lag”?

About a month ago, a reader responded to my post about the dismally low closing rate for short sales by remarking that my analysis failed to account for the fact that short sales take longer than foreclosures to sell.

The chart above does not show short sales lagging behind foreclosures by the 1-3 months it takes to sell them. It shows a steady increase in the number of REOs sold. REOs broke the 10% barrier in April, and short sales have yet to rise above 6%. The longest short sale I’ve done took four months — sometimes we can close them in 30-60 days. If short sales were lagging four months behind, not just failing to close, there should be at least 18% of them closing every month by now.

Another problem with this argument is this. Yes, short sales take longer, but the short sale step also happens before the bank owns the property. So these sales take longer, but they also start earlier, so the longer sale should be a wash, and clearly the numbers above show that it isn’t.

Sacramento County Real Estate Market Update

The numbers are in for November. As we get into what’s usually a slow time of year, unit volume is continuing to rise slowly from September and October, with 809 units selling as against October’s 803 and September’s rather bleak 709 units. Buyers are beginning to take advantage of the bargains offered by short sales and REOs (bank foreclosures) in inventory, which collectively account for just over 50% of active listings (REOs make up 24%, while short sales comprise 26.5% of inventory).

The average home sold for $323,772 in November, down 15.2% from last November’s average of $381,666. Average sold price per square foot is off 16.6% from a year ago, at 188.35% versus last year’s $225.97. The median sale price in November was $293,000, down 15.1% from last November’s median of $345,000. Unit volume is off 25.7% compared to last year, but as we mentioned earlier, is strong compared to recent months.

There are 11.21 months of unsold inventory at present in Sacramento County, down from last month’s figure of 11.61 months.

You Can Write Up a Short Sale (But Can you BUY One)?

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).

Three Things Your Agent Should Tell you About a Short Sale

Sometimes when I read the material on my colleagues’ web sites, I almost get the impression that the idea of doing a short sale — a sale where the lender approves a payoff amount less than the value of the loan — is being promoted to sellers almost as a normal sale.

It’s not. To be sure, if you simply can’t pay off your mortgage and are facing foreclosure anyway, a short sale may offer some advantages, the most important of which is that it may prevent non-purchase money lenders from getting a deficiency judgement against you (refinance or home equity lines of credit are typically non-purchase money and hence the lender has a deficiency judgement as one option in a foreclosure situation). But you should also be aware of these facts about a short sale.

You Will Be Asked to Show Hardship, and You Have to Tell the Truth
In order to approve a short sale, a lender has to believe that they’re not going to get their money any other way unless they do, and this typically means that you have to show that you can’t pay for some important reason — sickness, death of a spouse, loss of a job, or the like. Also, if you’re paying off a $100,000 loan and you have a six figure income and good credit, don’t expect the bank to welcome your request that they take a loss. So you’re going to have to show a hardship, and be aware: if you lie, that’s loan fraud.

Short sales will not “Save Your Credit” (At Least Not All of It)
If a Realtor® suggests that you can save your credit with a short sale, run, don’t walk. There is some debate over how much impact a short sale will have on your credit, and it also depends on how the bank reports it, some of which may be negotiable. However, in general you should only go through the short sale process as a last resort. Although a short sale may not impact your credit quite as much as a foreclosure, you should still expect to it to have a strong negative impact on your credit. Whether it’s “as bad” as a foreclosure or bankruptcy or “almost as bad” depends on who you ask.

Once the Short Sale is Over, You May Owe Taxes
There are two possible tax liabilities to a short sale. First, if the sale results in a gain in value of the property, you may need to pay capital gains tax, regardless of the value of the notes involved. Secondly, if the lender accepts less than full payment, the difference may be reported to the IRS as taxable income to you.

More Sacramento Area Foreclosure Resources

We’ve improved our Sacramento Foreclosures portion of the site this morning with two enhancements. First, if you scroll past the foreclosure listings offer, you’ll be rewarded with a set of foreclosure “Frequently Asked Questions”. Actually, to be perfectly frank, I think the best questions here are the ones that aren’t frequently asked — and that may keep some people from ignoring the real opportunity that buying a foreclosure represents. We’ve tried to answer those as well.

The second improvement is that we’ve now added Placer County and El Dorado County to the areas where you can browse short sales and bank owned foreclosures. Those links are all available from the main foreclosure page, but for your convenience, here they are again:

Bank Owned Properties:

Short Sales:

Sacramento County Short Sales Listings Available

Recently I’ve been reworking the foreclosure area of the web site and — as promised earlier — I’ve added a page of links where you can browse Sacramento Short Sale Listings. If you’re unfamiliar with Short Sales, what these are are sales where the sellers are “short” in the sense of not having enough cash to sell, pay closing costs, and pay off the lender(s) they owe. So what happens is that you have to get approval from the bank, a process which is fairly time consuming.

That said, there are some bargains to be had in short sales, but (as we recently showed for Antelope and we’ll examine further in a future article), on average the discounts are better on bank owned properties.