Focus On Short Sales

One of the things that I frequently find myself trying to explain to clients is "what, exactly, is a short sale?". So let's start with the basics - a short sale happens when homeowners find themselves in a position where they have to sell their home, but they owe more on it than they'll be able to sell it for. For instance, let's say I bought a Mission Hills home in 2005 for $400,000, financed 100% like so many purchases in that time frame. Now, something has happened (job loss, the loan has adjusted, I'm getting relocated, divorced, etc.) and I can't make the payments. Big problem, because that house is now worth around $180,000. So here are my options in a nutshell:

• I can stop making payments on it. The bank will eventually start foreclosure proceedings, and unless I'm able to get it together and get caught up, I'll eventually lose the house.
• I can play the lotto and hope like heck that I win big. The bank will eventually start foreclosure proceedings... You know the drill.
• I can try to see if the bank will work out a loan modification for me if it makes sense in my situation (that's a whole other blog post for some day).
• I can list it and try to sell it, even though the proceeds will fall well short of the amount owed on it.

49% of the active listings on the market in the Lompoc Valley as of today are sellers who are trying that last option. This is way up - that was close to 20% a little over a year ago. This is primarily a result of falling home values and our bigger economic picture - which is being damaged by falling home prices... Sometimes this stuff makes my head hurt when I think about it.

Here's the catch - of the short sales on the market right now, maybe 30% of them will sell. 7.7% of our 2008 sales were short sales, but short sales accounted for 24.4% of the homes that came on the market in that time period. Let's put this another way: looking at resolved listings - those listings that have either sold, been withdrawn or expired - our market as a whole had a 61% success rate over the past 15 months. That's pretty good; a year ago that number was closer to 38%. It's amazing what an influx of well priced inventory can do for a market. Let's compare that to short sales. We saw a 24.6% success rate for short sales over the past 15 months. Again, this number has come up quite a bit; it was at around 9% a year ago.

Two questions come to mind when I see these numbers. First, why do short sales lag so much when it comes to success rate? There are a handful of reasons for this. First of all, they take longer than a normal sale. You have to go through a whole approval process with the lien holder or lien holders. This can take a couple of months at times, and we've seen a few that have taken several months. So buyers get to live in this limbo for a period of time, and in many cases, they give up and move on to something else that they can get closed. We've seen some short sales that went into escrow five and six times. In a lot of cases, buyers decide, after talking to their agent, that they don't even want to look at these types of listings. And frankly, some agents try really hard not to show these listings. I think we've all been burned once or twice by putting in a lot of time on a short sale that didn't close. We really don't like transactions that don't close.

The second question that comes to mind when I see the numbers is, "Why are we having a better success rate now than we did a year ago?". In a way, it seems counter-intuitive. With so much well-priced REO inventory out there, why is it that the short sale success percentage improved at a much better rate than the market as a whole? I think it's all about the lien holders. For the longest time, banks were badly understaffed in their loss mitigation departments, and they have slowly been getting staffed up and getting their processes in place to make these things run more smoothly. 18 months ago, a short sale was just about the kiss of death. Now it's just the kiss of a really bad flu episode. But things are getting better, clearly, and I think we'll see more successful short sales this year as banks figure out how to make it work.

I'm going to give you three pieces of advise if you're thinking about making an offer on a short sale: First, be prepared for a long ride. It's going to require a lot of patience and waiting on your part. And don't stop looking at other options in the interim. You don't want a great deal on something that fits you well to get away on a question mark.

Second, they aren't all created equal. The short sale with some listing agent from out of town who picked it up by cold calling an NOD list, is priced 30% below market value, has had no contact with the lender, and the owner has already given up and moved out of state - let's not waste our time on that one. The ones that are listed by competent local agents that we know will get the job done are much better. Better still if we can find one that just fell out of escrow because the previous buyer lost patience - the hard work has most likely already been done, or at least started.

Finally, don't make an offer on it if you don't love it. Really, I give that advise to most non-investor buyers, but I pound it home for short sales. Even with a shrinking inventory, if you aren't finding what you want, hang in there, it'll come around pretty soon. Life's too short - don't go through the wringer only to settle, especially when it comes to the big stuff.