Short Sale Shenanigans

It almost never fails whenever I am looking in San Diego for Clients that I will see these crazy low priced short sale opportunities.  It reminds me of the days when you would see those cheesy advertisements claiming Goverment owned cars for only $75.00.  So what is up with these properties, and should you consider them in your home search?  The answer is maybe yes, and then again, maybe no.  In real estate, it is always about being informed and making the best decision for your goals and circumstances.

First let me explain what a short sale is for those that don’t know.  These are homes where the Seller has purchased at the top of the market, or had 2 or 3 loans taken out on the property (home as a ATM), and now they owe more than the home is worth in today’s real estate market.  Anyone that purchased during 2003 to 2005 is likely to be in this situation.  Matters become even worse with adjustable mortgages that have reset and payments are unmanageable.  The Seller is now distressed and trying to get the Bank to approve a sale for less than the loans.  In short sales, the Seller cannot receive any proceeds, and the Lender or Lenders agrees to accept less than the loan, or in many cases multiple loans.

So here is where it gets like the old west, and I really have not seen anything quite like this in my career.  Some less than ethical or experienced agents are soliciting these poor Sellers, and convincing them to list their home for a very low price.  The Seller and Agent know that the possiblity of the bank approving such a short fall is unlikely, but they are hoping on getting multiple offers from potential buyers, and maybe getting one offer high enough to fly.  Never mind that this is a violation of the REALTOR Code of Ethics and a Sandicor MLS violation, it is just disgusting what it is doing to those Buyers chasing a pipe dream, not to mention the chilling effect it has on the Sellers in the market at legitimate asking prices.  You don’t have to go very far to hear some really horrifying stories of buyers and agents tied up in such messes, which sometimes go on for months and months.

It is the responsibility of the REALTOR® or real estate agent to advise the Seller how to best market their property in a given real estate market.  The agent needs to see how many loans are against the property, and how serious the Seller is delinquent on their payments.  Let’s say the seller purchased their property back in 2003 for $500,000 with a 10% down payment.  Shortly after close of escrow, they took a second loan out when their home had appreciated for another $80,000.  The Seller has not paid their property tax bill for this year, and are behind on their payments.  The latest sold comparables in the neighborhood indicate the home is worth $380,000, and yet the agent advises the Seller to place the property on the market at $300,000.  Knowing that this low price will attract Buyers, the Agent is hoping to attract multiple Buyers and get an offer high enough to submit to the Bank(s) for approval.   This is kinda like the old bait and switch scheme of old.

Okay, so you say the Seller should be able to list their home at whatever price they want.  In most cases this is true, and if a Seller wants to sell quickly, the best way to always do that is to list their home at or below market value.  What is different with a short sale, is that even when the Seller accepts the low offer from a Buyer, it will be subject to the lender’s approval.  Since lenders have to have 3rd party opinions of value, and they need to recoup as much of their loss as possible, they are not going to accept idiotic prices – again this is just a ploy for these agents to get the Buyers in the door!

No one really knows the success or failure rate of short sales,  although I have heard as many as 70% of them are never approved or close escrow.  When working with my Clients, I make sure they are aware of this situation and how unlikely it may be that they will have success in purchasing a short sale.  After all, many first lenders will choose to foreclose on the property, which wipes out secondary loans and puts them in a better position of recouping their loss.  Being in a short sale escrow can take a long time and be very frustrating, it is not for everyone.  And while there are sometimes a few really good deals, other deals can be found in motivated Sellers and Bank Owned REO properties.

Another aspect of the Short Sale is the contract addendums coming back from the Lenders.  While the Residential Purchase Agreement, which is published by the California Association of Realtors, is very balanced and gives the Buyer a great deal of protection and rights, most Bank addendums tend to monkey with the complicated underpinnings of the RPA, significantly changing those rights.  Since Banks operated thorughout the County, many times their boiler plate addendums are in direct conflict with California Real Estate Law and are certainly not in the best interest of a Buyer.  Most addendums give the Seller the right to cancel anytime and accept another offer from another Buyer.

So sometimes short sales can be a good thing, and other times they can be a horrible mess.  If you have plenty of time to jump through all the fiery  hoops, and don’t mind wasting lots of time, you may get a great deal.  When working with Clients, I educate them to the market and I make sure they know all the pitfalls regarding both short sales and REO Bank Owned Sales. Both offer opportunities, but you have to know and understand the dangers.  I always encourage my Clients to look around at everything on the market. Sometimes their best deal may be a motivated Seller which is not in a hardship, just willing to sell at the market!

If you are a Seller in this situation, please take your time and interview REALTORS® that have short sale experience and don’t promise unrealistic approvals from Lenders.