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Monday, November 28, 2011

Housing Roulette: Short Sale Odds Against the Buyer


I have some clients I am shopping with who have recently shown an interest in short sale properties due to their apparent attractive price points.  The thought of shopping for short sales with owner-occupants instinctively made me cringe.  It has a reputation as being a notoriously bad experience.  However, I wanted to double check the market to make sure the expectations I established with my clients were correct.

So, let's say you are a buyer and want to play the short sale roulette.  Here are some things you need to know:



1.  Short sales constitute 18% of all active listings but only make up 10% of the sales.
2.  832 short sales were listed for sale in the past 12 months.  Only 270 (or a measly 32%) sold.

So what does this mean to you?

For starters, it means that if you find the perfect home that meets your every need and it's a short sale and you place an offer on it, you have a roughly 1-in-3 chance of closing on the sale (assuming you are the only person putting an offer on the property).  Why only 1-in-3?  Well there are many variables at play in short sales that do not affect traditional listings. Here are a few:

1.  Bank Stubbornness - By definition, a short sale is the "shorting" of the debt owed on the property that allows it to be sold at a more agreeable market price.  Since the bank has to approve what kind of haircut they will take, many times they will keep that point too high to make a transaction work.  There are many behind the scenes reasons for this counter-intuitive behavior but the fact is that it still happens.  If the bank won't play ball, the home goes to foreclosure and comes back as an REO listing.

2.  Bank Bureaucracy - Many times, particularly if the seller is participating in HAFA, the process can take a very long time to complete.  I had this happen on a listing and the it took so long to get the sale approved that the market had changed significantly to the downside.  Thus, it rendered our sale price unattractive relative to contemporary market pricing.  In this case, a buyer will usually excuse themselves from the transaction and the home will go to foreclosure.  It will come back later as an REO listing.

3.  Seller Absconding - Because of the large length of time involved, many times sellers will lose patience and move on with their life out of frustration. One time, I had a short sale I negotiated for six months only to have the seller disappear and change his phone numbers.  This happens more often than you think.  Because short sales become extremely time sensitive once approval is gained, absent sellers can ruin a short sale pretty quick.  When sellers abscond, the home will go to foreclosure and come back later as an REO listing. 

These are just a few of the pitfalls associated with closing short sales.  From a buyers perspective you have a 1-in-3 chance of getting the home if you are the only one making the offer.  What happens if you are one of multiple offers?  Well your odds get worse with each additional offer you are competing against.  If you were competing against 5 offers, your chances would be about 1-in-15.

Of course, on a case-by-case perspective the market isn't as perfectly predictable as these numbers.  Knowing the listing agent, their negotiation style, and trustworthiness goes a long way to helping you understand your odds.  However, in the broad picture, there is still a lot of uncertainty in the business of buying short sales.

Most of the owner-occupant buyers (as opposed to investor-buyers) I have worked with prefer to avoid short sales altogether and stick with the more reliable and less frustrating realm of REO and bank owned properties.  They can be just as much of a bargain as short sales but without the hassle.

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