Do Short Sales Affect Your Value?

Having been involved now with several short sale transactions, I often have neighbors approaching me upset that short sales are negatively impacting their value. Fact is, both short sales and foreclosed (bank owned/ REO) properties do tend to sell for quite a percentage less than other homes in a neighborhood, however, they are classified by most appraisers and even real estate agents as an entirely different category when providing a CMA or estimated value for your home. I will ALWAYS represent my client's best interest and for short sales, it is to get the place sold and avoid foreclosure. Neighbors then tend to understand it is helping the neighborhood to move the short sales and avoid foreclosure which further deteriorates neighborhood appeal and value. Most homeowners I talk with are often times referencing Zillow when looking at their home value. Though Zillow is a fantastic tool and can more often than not be a decent resource for determining value, it will never be able to replace a professional CMA from a real estate agent, I’ll explain more later. Zillow is a tool that simply takes square footage, sold price, and whatever information a homeowner has provided about their home to determine the value of every other home around it. If you are surrounded by several hundred other homes that are all cookie cutter then it could be a decent estimate, however that is not the case with most neighborhoods. To get back to the point, even banks that are working a short sale transaction DO NOT use other short sale comps, or bank owned comps to get a BPO (Brokers Price Opinion) when negotiating an offer! Buyers are getting great deals on short sales, but those prices do not determine the current value of your home and what you would be able to sell for within the next couple months. Will the short sale or bank owned price have an impact on your negotiation, yes, however, buyers know that short sales and bank owned listings sell for less because they are AS IS and there is a an unknown on the timing and the possibility of even closing! These types of properties are shrinking in inventory as the months pass, and considering that building has come to a halt for the most part, sellers with quality homes are able to take more of a stand on their price and get it! This pattern will allow sellers who really understand the competition through a professional CMA to stand more firmly on their asking price driving the neighborhood value back up.

Professional CMA’s: Zillow, or an agent from a far off city can pull numbers from the NWMLS and provide a “CMA” to you within minutes. However a professional CMA requires hands on leg work from your agent and can NEVER be replaced by any number calculating software. An agent that has seen your home can go tour other listings that are active and even some that are pending to compare the amenities, upgrades, lot location, layout, defects, and appeals that all help determine your homes value. Do you think that a home with similar square footage, layout, and upgrades that is sitting under power lines is worth the same amount to a buyer as your home that has a private lot w/ no power lines? NO! Zillow, or a software generated CMA will never account for those power lines, but a professional CMA by a quality agent will.

In representing a buyer we made an offer on a quality townhome about 12% below the list price which was unrealistically high, considering there were 5 other comparable units in that community all w/ lower prices. The seller countered back coming down only 6K and we walked understanding they were not willing to negotiate so we moved on. The next property we made an offer on had the exact square footage and layout but was a bank owned property that was listed 28K below the first one we offered on. We offered 20K below that list price and then came up 5K on our end with mutual at 15K below list price. The home is in great condition for a bank owned property, however my buyer needs to buy a fridge, washer, and dryer so we took that into account when making our offer. Two days after mutual acceptance on the bank owned property I saw the first seller dropped their listing price 3K BELOW her bottom line in negotiation with us. Could we have got the same deal on the first property as with the bank owned? No way. But will the first seller have to settle and take what we paid for the bank owned? No, the seller understood that once the bank owned property is moved and since she lowered price she is now comparable to everything else in the neighborhood with the nicest unit of them all. I’m guessing she will settle for about 5% less then where she is currently listed and it will be the next unit to sell in that community. The first seller had bought at the height of the market and was unrealistically high to begin with, however now that the bank owned property is off the inventory she will get the current market value, but won’t have to sell for anywhere near what my buyer paid for the bank owned. This goes to show my point that sellers don’t need to compare their home in pricing to the Short Sale or bank owned down the street. Wait to list until it is off the market or make sure your agent knows as much about that short sale or bank owned property as they do yours, so they can defend you in negotiation knowing most buyers don’t want to deal with the hassle of bank owned and short sale properties giving you leverage.

Thank you so much for reading my blog, please fill out a form if you have any specific questions regarding this topic or other real estate related topics you would like answered.

          To your success,

               Michael Dzurenko III “TheTownhomeAgent”

                     www.TheTownhomeAgent.com

Short sales, what are they?

Short sales have become extremely common in today’s market, and having an agent that has walked through and successfully closed these types of transactions is key if you are considering a short sale as an alternative to a foreclosure. The process of a short sale involves a lot of personal paperwork aside from the typical purchase and sale agreement and all the addendums necessary. However it is all worth it to avoid foreclosure. If you have defaulted on your mortgage payments, or are about to default, a short sale is a great alternative to foreclosure! So what are the steps of a short sale?

Step one: Call your bank to see if they are willing to accept a short sale. They will typically refer you to the “loss mitigation” department and will send you some paperwork to complete.

Step two: List your home if you haven’t already! Typically the banks like to see that you have already listed your home and are making a good faith effort to get it sold. Pricing is extremely important and must be done aggressively for your local market.  It is extremely important to hire a real estate professional that is experienced and understands short sales. A lot depends on the agent to communicate with your bank(s) to pull the deal through for you.

Step three: Once you have received an offer, you must negotiate the points that may adversely affect you, then pass the offer on with the required paperwork to the point person with your banks loss mitigation department. In short sales the bank becomes the negotiator on price and typically closing date. Closings can take longer in some cases; however I had a short sale close within three weeks of receiving the offer.

Step four: You the seller, and your agent need to bug the crap out of the bank to keep the process moving forward! Understanding the back end of this process is huge! The banks have piles of files and you need to keep yourself in front of them as much as possible!

Step five: The point person from the loss mitigation department, will either tell you to counter, or issue you a letter stating they are approving the short sale and you are officially in mutual acceptance.

Step six: complete all addendums necessary and continue with typical items related to a real estate transaction until you get to close.

Below I have provided definitions of a short sale, negotiation, and how a short sale is viewed on your credit report from Wikipedia. If you have considered a short sale, or know someone who is considering a short sale please have them contact me to answer any questions they may have.

 Thank you again for your time.

      ~Michael Dzurenko III www.TheTownhomeAgent.com

Short sale definition:

In real estate, a short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's loss mitigation or workout department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Many Short Sales leave a deficiency balance for which the Mortgagor / Borrower is still liable. In 99% of all cases it is not a settlement-in-full. A deficiency balance will remain while the mortgage broker, real estate agent / broker, loan officers, title and closing agents retain their profit. No regulatory agency governs this hybrid transaction.

Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower's financial situation.

A short sale typically is executed to prevent a home foreclosure. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Negotiations:

Lenders have a department (typically called "loss mitigation") that processes potential short sale transactions. Today, lenders may accept short sale offers or requests for short sales even if a notice of default has not been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that mortgage lenders have suffered from the current foreclosure crisis, they are now more willing to accept short sales than ever before. This is great news for borrowers who are "under water" or in other words those who owe more on their mortgage than their property is worth and are having trouble selling to avoid foreclosure because of this. They are type of distressed borrower who needs a short sale the most.

Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. Multiple levels of approvals and conditions are very common with short sales. Junior liens - such as second mortgages, HELOC lenders, and HOA (special assessment liens) - may need to approve the short sale. Frequent objectors to short sales include tax lien holders (income, estate or corporate franchise tax - as opposed to real property taxes, which have priority even when unrecorded) and mechanic's lien holders. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender's loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction which is why unfortunately short sale deals have a high failure rate and often do not close on time to save homeowners from foreclosure when they are not handled by a knowledgeable and experienced professional. The best sources of knowledge and expertise in short sales are short sale negotiators, loss mitigation specialists, and real estate lawyers who specialize in short sales.

Credit reporting:

A short sale does adversely affect a person's credit report, though the negative impact is typically less than a foreclosure. Short sales are a type of settlement. Like all entries except for bankruptcy, short sales remain on a credit report for seven years. Depending upon other credit information it is typically possible to obtain another mortgage 1-3 years after a short sale.

While it is frequent if not common for a lender to forgive the balance of the loan in question, it is unlikely that a lien holder that is not a mortgagee will forgive any of their balance. Further, it is common for a lender to omit updating mortgage balances to reflect a zero balance after a short sale.