This post is LONG, but if you are thinking of buying a short sale (or if you’re an agent looking for an outlet for your short sale frustrations),  PLEASE read.  Understanding this information is a must.

I completely understand the allure of the short sales when you are a buyer.  The prices are attractive and there are SO many of them.  They have become a  necessary evil of the Orange County real estate market.  I get it.

If you really want to pursue a short sale, be forewarned.  Know what you are getting into, understand the risks, the pitfalls, and what is  required to make them happen from a buyer perspective.  They may, or may not, be worth it.

What is a Short Sale?

The seller’s obligations in a sale (loans, encumbrances, and closing costs), exceed the value of the property.  The seller must prove a hardship (job loss, wage reduction, divorce, health crisis, lack of assets) to qualify for a short sale.

A Few Realities

• There is no Standard Operating Procedures for the banking industry to handle short sales.  Every bank has different guidelines and manages them differently; even negotiators within the same bank manage them differently.

• This is important:  Nearly across the board, a banking institution will not consider a seller’s hardship application until they submit an offer with a short sale.  What does this mean to a buyer?  Your offer is used to see if they qualify in the first place.  You may sit in escrow for weeks while the bank considers not your offer, but the seller’s circumstances.

• There is no Standard Operating Procedures for how agents handle their short sale listings.  Frankly, I think there is a lot of irresponsibility in this area.

• Many agents leave their listings ACTIVE in the MLS even though they have an offer submitted to the bank.  Once an agent has a good offer with a solid buyer, it should go in Backup position.  The bank will only look at ONE offer – highest and best – anyway.  Why waste an agent’s time, a buyer’s time and emotion, showing a property that is not really available?

• Even Banks will ask the listing to remain Active after an offer is submitted.  Note the conversation with this agent on Twitter.

• The SoCalMLS has a Special Condition field where agents are required to specify that the short sale has an offer submitted to the bank.  Unfortunately, most agents don’t use it.

• An ‘Approved Short Sale‘ does not necessarily mean that the process will go any faster.  See Countrywide’s response on my short sale last year.

• A short sale process will take as little as 60 days (very rare) or as much as 4 to 6 months (common).

• The list price is not a reflection of what the bank will, or will not, take. The listing price is positioned to generate offers.  Remember, the bank hasn’t even looked at these seller’s situation yet, let alone evaluate the the market value of the home.

• There may be past due HOA fees, property taxes, or other expenses, that the bank will ask for a buyer to cover.

• If the seller declares bankruptcy during the process, your deposit becomes a frozen asset that you likely wait a fair amount of time to recover – if you do.

• Many short sales ultimately foreclose.  Why?  If you find out please tell me.  There is often NO LOGIC in the way banks (and investors) approve, or disapprove these.

• More banks are trying to do loan modifications for sellers rather than approve short sales and in some instances, they are incentivized by the government to do so.

Real Life Examples

The following are scenarios that have been experienced by me, my agents, colleagues, and my buyers.

• My Listing last May:  I had 8 offers in 3 days.  The highest was $580,000 and it took 4 months to get an approval from Countrywide.  By the time it was approved, the market value had fallen precipitously and the buyer was no longer interested.  When I asked Countrywide if the process would go more quickly with a new buyer given the hardship had been approved, their response was that the each buyer was a new file and they couldn’t provide better than a 4 to 6 month time frame.  The home sold for $490,000 4 1/2 months later.

• An agent within my company, had a short sale in escrow with a solid buyer for 90 days.  The bank asked the insolvent seller to come to the table with $3,500 on the $165,000 sale.  When the seller was unable to, the bank refused the short sale.  The home is currently vacant and worth about $145,000 6 months later.  Currently, it’s not in foreclosure and the seller hasn’t made a payment in about a year.

• This week alone, I’ve shown 2 different short sales, marketed on the MLS as Active, that already had offers submitted to the bank without notation in the listing.  When I called expressing my buyer’s interest in one of the properties, the agent subsequently told me, ‘the deal is done’.  When asked, “Then why is it active?”, his response was, “Don’t tell me how to run my business, sweetheart.”  BTW – Don’t call me sweetheart unless you’re loving me or you’re my husband. 

• One of my recent short sale listings was in escrow 60 days with a qualified, ready-to-go buyer.  In that time, the bank reviewed the seller’s hardship, denied it, and offered a very poor loan modification.  Buyers lost 60 days and their offer was never considered.

• I currently have an investor buyer in escrow on an ‘approved short sale’. We’ve been in escrow 90 days on a property that had an Notice of Default filed in March 2007!  Not only has there been no news, the listing agent has told me essentially – don’t call us, we’ll call you if there is an update.  Not very reassuring to my buyer.

This is the tip of a massive iceberg.  So if you want to buy a short sale, you certainly have my blessings.  Just be armed with patience, don’t become emotionally attached to the property, and be prepared to potentially go through the process more than once.

If you have questions, if you think I’ve gotten any of this wrong, or if I’ve just scared the hell out of you – leave a comment or give me a call.  Happy to chat with you.  If you want to create a strategy to buy in Orange County – whether it’s a short sale, bank owned, or an equity seller, just let me know and I’m happy to help.

Happy House Hunting!

When you are looking to buy a home in Orange County, or anywhere else for that matter, it is critical to drill down into the numbers for the sector of the market that you are looking at.  Orange County numbers are wonderful benchmarks to know, but our market is made up also of submarkets within the OC.  It’s important to understand Absorption Rates, Average Days on Market, price per square foot, sale price to list price, etc.

For every buyer I’m working with, I try to do an analysis that really tells the story of the market they are hoping to buy in.  This allows them to have a realistic picture of the market and compete effectively for the home they hope to buy.

If you are a seller, these numbers will be important to you too.  Even if you are not a buyer or seller right now, hang in there.  This may seem dry, but I’ll try to make it fun.  There is a story told by the numbers every time! 

Today, I did some research for an investor I am working with in Rancho Santa Margarita.  She is looking for a condo around $250,000 that has at least 2 bedrooms and 1 car garage.  I looked at the numbers for Rancho Santa Margarita between $200,000 and $300,000, with a minimum of 2 bedrooms and 1 garage – Active, In Escrow, and Closed Sales going 90 days back.  (I recently did this analysis for a Mission Viejo buyer and only included sales over the previous 30 days, but in this instance that would have been swayed too heavily by the holidays).  Here’s what I found for this submarket:

Active Inventory – 47 Listings

• 34 Short Sales or 72%
• 9 Bank Owned or 19%
• 4 Traditional Sellers or 9%

In Escrow – 22 Listings

• 9 Short Sales or 41%
• 9 Bank Owned or 41%
• 4 Traditional Sellers or 19%

Closed Sales in the Last 90 Days – 27 Listings

• 10 Short Sales or 37%
• 10 Bank Owned or 37%
• 8 Traditional Sellers or 30%

Analysis of Closed Sales

• Short Sales:  Average Days on Market – 96, Sale Price to List 102.17%, $256.47 price per sq. ft.
• Bank Owned: Average Days on Market – 35, Sale Price to List 98.89%,  $248.17 price per sq. ft.
• Traditional Sellers: Average Days on Market – 33 (there was one outlier here that if removed would have made it 14), Sale Price to List Price 96.43%, $263.35 price per sq. ft.

Hey wake up! This is fun – really!

So what does all this tell us?

I’m a little surprised to see that some short sales are getting done in this price range.  We still have a large swing in the percentage of active inventory versus closed sales within the short sale market, but maybe the banks are starting to pull it together.  I’ll be watching.

It’s also still clear that the traditional seller is able to secure a slightly higher price.  The swing was much greater in the Mission Viejo analysis I did earlier, but it is still there.  Why?  I think buyers still love to have full disclosure from a real seller.  They also tend to be properties in slightly better condition.  And the best part – you submit an offer, and a real live person actually responds in sometimes as soon as 24 hours!  Wow!

Still the best ‘deal’ going is the bank owned home.  Just beware, is it still a ‘deal’ if you have to put in a lot of money after the close?  Maybe yes, maybe no.  Each property will require individual analysis to make sure that one is really getting a good value for the home.

Hope this helps my investor – and you.  If you ever are in need of a little Microscope on the Market – just let me know.  Just make sure you’ve had your coffee first.

There has been much discussion about the big bailout.  But in case anyone with any influence is listening – I have an idea that could make a big contribution to our market recovery.  Just call anytime and I’ll share my insight with you – from the trenches.  I’ll be waiting for your call.

For the rest of you that might be curious about what I have in mind, I’ll share with you some of what happened to me this week.  Brace yourself because I feel a rant coming on….

As I have said countless times on this blog, short sales are a HUGE factor that is driving our market prices and inventory in Orange County.  For example, 64% of the active homes on the market today in Rancho Santa Margarita, under $500,000, are short sales!  In Mission Viejo, 50% of homes active on the market today under $500,000 are short sales. 

These short sales have offers that have been submitted to banks and are just awaiting approval.  They may have multiple offers.  This is buyer demand that is waiting and the last thing we need in this market is pent up buyer demand waiting.

I’d like to share with you a story about one of my short sale listings.  Within 72 hoursof listing the home back in May, I had 4 offers for asking price, and over.  We submitted them to the bank, along with the package from my seller that clearly qualified for a hardship.  The following dialogue is from this week between my short sale coordinator and the the banking institution’s (a very common and well known lender) negotiator.

My Short Sale Coordinator:

“We now had 4 buyer’s who have cancelled, including the last offer we submitted due to the fact that this process has taken almost 6 months.  We just can’t keep buyers around that long and we can’t keep the value the same for that period of time.  Values are dropping.  We do have another offer, but it is lower than any offer we have received.

“At this point we, as long with the seller, are at a loss as to what to do.  Do you have any suggestions, or any time frame that we can tell buyers?”

The Bank Negotiator:

“I will have to cancel this file because the buyers are no longer interested.  I suggest faxing in the new offer.  Because it is a new offer it will be considered a new file.  Anytime you have a new buyer it starts all over.  A short sale can take 4 - 6 months.  When you send in a  new contract the time frame starts all over. ”

The negotiator goes on to say that they are trying to make time frames shorter and the last response time was 30 days.  But in my experience, that response is inconsistent at best and clearly, they aren’t willing to commit to anything better than 4 to 6 months.

So what’s my big idea?  Let’s save a big bailout expense.  Forget giving money to banks with no accountability for how they use it.  Instead, let’s create an efficient, streamlined method of handling the massive number of properties that are in foreclosure and that are short sales. 

In the case of my listing, it may take one year to get a buyer in that property and a closed sale.  In the meantime, values are detrimentally impacted,  inventory remains misleadingly high,  property condition deteriorates, and suffering sellers can’t restart their lives.  If you shorten this process to 90 days, can you imagine the positive impact on our market?  Just think, 6 months ago I had 4 buyers that wanted to pay full or over list price.  Today’s buyers are thinking about 20% less than that.  THAT is a huge reason prices continue to decline in Orange County and in many parts of the country.

Maybe this is too simplistic.  Maybe this addresses only part of the problem.  But, if we are looking at some of the real, on the ground solutions for the much touted ‘Main Street,’ this seems like a great place to start.  Like I said, to those influential individuals and government institutions dying to hear my Bailout alternative, I’ll be standing by waiting for your call.