Why Short Sales Are No Bargain
Now, I can understand if a buyer has fallen in love with a particular home that happens to be headed into foreclosure. Some homes are special. So, I can rationalize why a buyer may pursue a certain home as a short sale. Because they would ordinarily buy it if it wasn't a short sale. But otherwise, buyers are getting the raw end of the stick. Short sales are not a bargain.
Short sales happen because a property is worth less than what is owed against it. Sellers, or their agents, negotiate with the sellers' banks to release the mortgages in exchange for accepting less than the full mortgage balance as payment in full. Why would a lender accept less than its full mortgage balance? Because the property, which is security for the loan, is worth less than it appraised for when the mortgage was originated.
This means that short sales are selling at market value. Market value, people! And that's only one of 11 reasons why short sales are not a good deal for home buyers. Don't buy into that short sale hype . . . read more about why Buying Short Sales are no bargain.
And just for the record -- you heard it here first. I expect this piece of advice will get picked up and distributed throughout the web shortly.
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Comments
Your article is very “generalized.” This was shared with me by one of my Real Estate agents with questions on your theories. I write a newsletter monthly and would agree and disagree with you. While it is true that short sales are not “always” a bargain AND that these current owners may be over their heads, this doesn’t mean it isn’t a value.
Short sales happen more in newer communities…and there is a reason these people owe MORE than the value. These reasons could be many that cause a short sale (i.e. divorce, adjusting rates, relocation, too much debt, etc).
A short sale is determined based on the market. Now, you may KNOW all of this, but you have written an article that is VERY misleading. I just closed a short sale where the ORIGINAL purchase price by the lifeless owners was about $198k. They did a 100% purchase. The short sale was for $176k. The reason was 2 foreclosed in the neighborhood, but the actual appraised value was $188k. Is that not a value? Maybe…value is in the eyes of the buyer. They may see owning at $176k on a home that was $198k 2 years prior as a deal. And if they sit on it for 4-6 years, that value, based on past market recovery/performance may be $210-$220k.
Short sales are big because if THAT house had gone into foreclosure, the BANK would have lost about $35,000. Attorey fees, removal, clean up, winterizing, and the sale at auction may mean a sale at $155-$165 instead of $176k. That bank probably saved $20k on the short sale.
The is geographical, too. A short sale in Michigan may be a waste. In California…a loss. In New Jersey, a land fall…same with Florida. It really depends, but to generalize ALL are a bad decision is very bad advice…and opinion.
I’d take a short sale ALL DAY LONG rather than buying 7% below asking price like a normal buy. Why pay too much…especially if it’s a home your buyers would have bought even if it wasn’t a short sale…a TRUE contriiction to your story. If they’d buy it anyway (short sale or not), wouldn’t the short sale be a “deal”?
Hey Pete: I see you’re a loan guy, so it’s quite possible you’re not out there in the trenches every day and do not realize that almost any home that sold since 2005 and is now a short sale is worth less than it originally sold for. If you read my article, you will find 10 other reasons not to buy a short sale. This is only one reason.
If a buyer would buy a short sale home even if it wasn’t a short sale, it means the buyer likes that home and is willing to pay market value. Almost every buyer pays market value anyway. The loose definition of MV is the price at which a seller is willing to sell and a buyer is willing to buy.
It all depends on the property. Each one you have to analyze individually..you can never generalize what is a better deal.