Is a "short sale" a bargain?

Actual info from recently closed short sales:

1) The owner bought it in September of 2005.  They did so many cashout refinances since time of purchase, that I can’t see what the downpayment was at time of purchase.  They tried to sell it for 30% more than they paid for it exactly two years after they bought it (likely due to a 2 year pre-payment penalty) just a month or so into the weak market of late 2007. They moved out and rented it in December of 07.  Then, while it was tenant occupied, they relisted it for sale in February for $50,000 less than their original attempt of 30% more than they paid for it.  They dropped the price an additional $50,000 two weeks later.  They dropped the price an additional $50,000 three weeks after that.  They dropped the price an additional $50,000 five weeks later.  They dropped the price an additional $50,000 three weeks later and dropped another $50,000 five weeks after that.

So $300,000 in price reductions from 30% more than they paid to an asking price that was 13% less than they paid.  BUT then it bid UP to 7% less than they paid for it 2.5 years before.  It either bid up, OR since by this time it was a short sale, the bank may have held out for $50,000 more than the original offer.  At any rate it closed at 7% less than the owners paid for it at 1.12 X assessed value, BUT that was the highest price ever paid in the neighborhood.  The original asking price was 1.5 times assessed value.

The escrow period was 128 days from the time the seller accepted the offer until it closed.

The kicker? A couple of days after this one closed, the neighbor listed their home at 1.08 times assessed value and $50,000 less than the short sale closed at, and it still hasn’t sold.  So the short sale was not necessarily a good buy.  It might have been if it had closed at or less than the final asking price.  But when it closed for $50,000 more than the final asking price it moved from bargain to not a bargain during negotiations and escrow.

Warning: Sometimes seeing $300,000 in price reductions and “short sale” or “foreclosure” at the end, causes buyers to bid UP a property to where it is no longer a bargain.  While I chose this example at random and worked through the history while doing the post and not in advance, it turned out the way many do.  Buyers bid it up or don’t hold their ground when the bank responds to the offer, and 128 days later…not a bargain.

Let’s do another one:

2) Bought in the summer of 2006 with 100% financing for 1.3 times the 2008 assessed value and for double the price the previous owner paid for it in 2004.  Clue.  This person overpaid for it in 2006 and it had the magic words “granite counters”.  Yesterday someone said to me they were going to buy a granite countertop and stick it out on the grass of a vacant lot and sell it for half a million dollars 🙂

Looks like the person who bought it barely (if ever) lived in it, as it was listed for rent within 3 months of closing in 2006.  Apparently someone in 2006 thought paying double what the previous owner paid in 2004 was “an investment”. After renting it out for a year, the owner tried to sell it in the summer of 2007 (before the market turned) for 11% to 12% more than he paid for it.  No takers and it was re-rented.  They dropped the price $15,000 after 125 days on market.  Three months later…still no takers.

They rented it out again and five months later listed it for 20% less than they paid for it.  (Interesting that they listed it for 12% more than they paid for it and then 20% less than they paid for it, without trying anything in between. An agent (not the agent who had it listed and not the same office) bought it immediately as soon as it was listed for 20% less than the current owners paid for it. The short sale escrow lasted 75 days and it closed at the full asking price of 20% less than the owner paid for it in 2006.  The sold price from the short sale was 1.03 times assessed value.

The kicker? The agent who bought it at the bargain price now has it on market for sale or for rent.  Rent price is $1.58 per square foot. Sale price is 1.17 times assessed value.  Would have been a nicer story if the person who got it for 1.03 times assessed value was going to live in it.  Insider gets the bargain and flips it back out on market for a decent price, but not such a bargain.  At least they’re not asking 1.5 times assessed value, but if a nice young family bought it for the bargain price of 1.03 times assessed value, I would have been happier.

I think I’ll go see it this weekend with one of my clients who is in that price range.  Maybe it will sell for less than 1.10 times assessed value.  Not a screaming deal, but worth taking a peek at it.

Moral of the story? Don’t go to an agent and say “I want to buy a foreclosure property” or “I want to buy a short sale”.  We always shake our heads when people do that.  Instead look at properties you like that are in your price range, and if one of them is a bargain, we’ll know it.  Sometimes it’s the foreclosure or short sale, sometimes it isn’t.

I know of another home that was listed for $1.3 million, sold at foreclosure for $800,000 and went back on market at $1.1 million.  No one’s buying it.  So the question remains on this one and the second example above, was it a bargain?  We won’t know until the people who got the bargain and immediately relisted the homes for sale at a higher price, get an offer that sticks.  What we do know is the bargain on those two gets less every day, since both properties are vacant and the owner is paying the carrying costs.

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ARDELL is a Managing Broker with Better Properties METRO King County. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has 33+ years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. email: cell: 206-910-1000

72 thoughts on “Is a "short sale" a bargain?

  1. You can use The Tim’s pricing calculator ( to see if you’re getting a bargain. If you’re paying more than 2004 prices, I don’t think you’re getting a bargain in a short sale in today’s economic climate with today’s short sale bureaucracy.

    Bargains do happen. I’m a first-time buyer who started looking about a month ago, and figured I’d make some lowball offers. I didn’t realize I was looking at “short sales” on RedFin, but ended up buying one through the listing agent (we close in a few weeks.) I’m going to live there for several years; so happy endings do happen.

  2. Sampai,

    What was your ratio to 2008 (not 2009) assessed value? While the public is viewing 2009, we are still working off current assessments for current taxes in the mls.

    If you don’t have access to that info, email me the address.

    We are happy that your purchase was of value and also quick! as I recall from your previous comments on my other post.

    I do worry that people are using 2009 assessed values though. The multiple for those would be much different. I’ll check out Tim’s info, and thanks for posting it here. The link didn’t take so I’ll try it again.

  3. What I find interesting (and not to get off topic here) is that these are typical of the short sales and foreclosures I have been seeing – specuvestors. Taking cash out and trying to flip homes. I guess I am getting tired of the media harping about foreclosures are up and all these “households” and “families” being thrown out on the street or having to do short sales.

  4. P.S. Tim’s calculator does not work. Using assessed value is more reliable. I tested a few homes in it and the answers were incorrect. Sometimes too much and sometimes too little and not incorrect to the same degree on each house. There are too many variances in 12 month periods to simply put in a year. Early 2007 a lot different than late 2007 and early 2005 a lot different than late 2005, as example. The calculation for 2004 was way off.

    Mostly the entire premise of using what previous owner paid isnt working at all, unless you double check with assessed value, for the reasons noted in example #2 where the curent owner paid double the 2004 price in 2006.

  5. Russ,

    Also many involved refinances after purchase…and not just one refinance.

    Jillayne often asks “what are they doing with ‘the money’ if they are not making payments?” Many were using refinances to make the payments in the first place. No refinances…no money.

    I wish there were figures for how many people were actually living off of their refinances and had no job at all.

  6. Ardell:

    Most are taking cash out of one property to finance another investment property or other frivolous things. These foreclosures/short sales are because they are the last sucker caught holding the bag after lenders and the market finally figured out what was going on and curtailed lending.

    I guarantee a few years from now some hot shot professor at Harvard is going to release a study proclaiming the “foreclosure crisis” was non-existent and nothing more than speculators losing their shirts.

  7. ARdell

    I love your thorough analysis of the property pricing. I think many borrowers assume Realtors just drive them around, point out the bathrooms, and collect a commission check.

  8. I bought mine at well under 2008 assessed value. It has a gorgeous view and is in perfect condition. There was an almost identical place with a slightly less-gorgeous view that was listed well above assessed value, and just above what they paid in 2006. As soon as my sale went up as pending on the MLS, they pulled it off.

    Those sellers thought they had listed at a fair price, but they had not.

    As more and more home owners discover just what their homes are worth in this market, they will either pull their homes off the market or list them at Tim’s calculator’s price.

    Tim’s calculator doesn’t work well enough yet because the real bubble-bursting in Seattle will happen next year. That’s when the people who *have* to sell will sell at pre-bubble values.

  9. I’ve always been advised not to look for “bargains” in real estate. There are people who spend more than full time looking for bargains as their main source of income and unless you devote as many resources yourself you are not going to be able to compete with them. The really good deals disappear before many people have even heard about them (because the first person with money — or friends or family with money — snaps it up). A great deal might just falls into your lap though random chance, but you probably aren’t going to find it by looking for it.

    Also it helps to have an experienced professional on your side. If by chance you do happen upon a great deal, there is a very good posibility that it is a lemon in disguise (which is why it has lasted long enough for you to happen upon it). Someone with RE experience might be able to recognize it as a lemon.

  10. It’s easier to look for bargains in this market. In a hot market you’d have less than a day to bite. Now it’s not so bad.

    BTW, on the calculator vs. assessed value argument, I’d argue that neither is going to let you know it’s a bargain. Both would be about as effective as using Zillow. I say that not having tried the calculator referenced, but because I believe you actually need to see and touch the property to make that determination.

  11. Actually. I was advised by a family member who does do real estate investment full time in a different state from where I live (or have lived in the past 15 years). He has offered to teach me for free what he does if I ever want to pursue that.

    Oh, and he has been unwinding his investments over the past few years right now so that he can retire in his early forties.

  12. Sampai,

    Again, I’m happy that you got a good deal and found Tim’s calculator useful. Anything that helps a consumer with the difficult process of determining value is of use.

    My problem with it is simply that you can only put in the year of purchase and in many areas the price in December of 2005 was drastically inflated from the price in January of 2005. I’d like to see it have a month and year and not just a year.

    But if you got it for “well under 2008 assessed value”…then you got a bargain, and probably one of the best or better ones to date. Congratulations again.

  13. Sorry for the snark, Alan, I’m sure your relative is doing great.

    I do think that if you hire a full time professional to represent you they had better be able to help you find a good deal, particularly in this market. If that “professional” is really just a salesperson, as I believe many agents are, why would you hire them?

  14. “I believe you actually need to see and touch the property to make that determination.”

    I think it goes without saying that one should see and touch a property before buying it or using other methods to fine tune their thinking process. I also take into consideration improvements made since last purchase, of course.

  15. cautious buyer,

    I have had some clients who don’t want a “good deal” as much as they want a house they like a lot. There’s nothing wrong with that as long as they are accomplishing their own personal stated objective. I have had clients who waited a year or more for just the right house, and were willing to pay a little more to have it if need be. The one I clearly remember as being overpriced was in 1992. As long as the buyer knew that at the time he purchased, I was OK with that. He emailed me not to long ago to tell me that they still live there, so it all worked out well for him and his family.

    As Sampai said in a comment on a previous post, she was more than willing to lose it if they didn’t take her offer. Not everyone feels that way depending on how unique the property is.

    I don’t know why I’m calling Sampai a “she”and Cautious Buyer a “he” I’m wondering if I’m deriving gender from the little monster avatars 🙂

  16. A few months ago I saw agents on Trulia telling buyers who wanted to offer less to look at the comps and base their offer on the comps. It reminded me that during the up market when people wanted to make offers based on the comps, they were told they couldn’t do that because the market had gone up. But now that it’s going down the adivise is look at the comps instead of less than the comps.

    Doesn’t seem right, does it?

    But that is likely more relevant in areas that have a lot of similar housing, than areas where houses are quite different from one another. We have a lot of both kinds in the Seattle Area.

  17. Do you think any of that could be a good salesperson convincing the person that “this is the one house, you have to have it”?

    I am sure a lot of people are willing to pay more for a “perfect” place without the sales pitch, and that’s fine for them. I for one don’t want a “unique” property, I want a functional one, and I believe there are a lot of them.

    Would you agree that a good real estate professional should be able to find a good deal in this market for a client who wants it? I am not talking about hunting foreclosure auctions for 30% off, but a normal good deal.

    I think you can often tell gender by someone’s writing style. For me, my general lack of tact and good taste probably betray me as a male.

  18. “Would you agree that a good real estate professional should be able to find a good deal in this market for a client who wants it? I am not talking about hunting foreclosure auctions for 30% off, but a normal good deal.”

    Yes, I do. What area are you looking in. Might be fun to take a peak. Often “the one” is on market at a much higher price than where it will eventually sell. Often I hand a client some homes and the prices they should sell for vs. what the owners are currently asking, and we form a strategy for getting “the one” at the right price.

    Waiting for the asking price to get too low often doesn’t work, like the one above that ended up bidding up when it hit the low point. Getting it right before the owner is ready to reduce it sometimes works better.

    The short sale I looked at with a client the other night was priced at assessed value BTW. It was just a bad house at any price.

  19. Cautious buyer wrote: “Would you agree that a good real estate professional should be able to find a good deal in this market for a client who wants it? I am not talking about hunting foreclosure auctions for 30% off, but a normal good deal.”

    If that question was a baseball pitch, it would be part of batting practice. 😀

  20. For the record, I just wanted it to be possible to install a doggie door, and it turns out I was woefully ignorant of the varieties available.

    I hadn’t clicked the link, but what a story. That is kind of what I am afraid of. I don’t want to be stuck for 10 years.

    We did happen to stumble upon what I think was a good deal for the time early in the year at an open house. I thought it was overpriced by around 20% but looked into it deeper and found it had been threatened with foreclosure twice with outstanding balances around 1/2 list price, and the owner had obtained it in a property settlement from her husband (probably ex?). Someone bought it for 25% under original list price a few months later within a week of the 3rd notice of trustee sale being issued. I suspect they felt the pressure and sold to a lowball offer that had been around a while. Checking the county appraisals now I see it went for 1.07 times the appraisal, and the county didn’t know they had finished the basement and added a 1/2 bath.

    I took the whole thing as a learning experience as it was one of a few places I followed. And yes, I feel a little bad for finding all that out since it was likely a pretty sad story and it is surprising what you can find on the internet. The former owner did leave with around $100,000 after the sale though.

    We are looking, not very actively at the moment, in areas 380, 140, 130, 360, and even 340, with a few excursions beyond that range.

  21. I’m just razzing you about the doggie door. Reminds me of a house I showed recently where the dogs had an indoor/outdoor fenced area. Part of the basement was fenced and part of the yard, and the doggies had a door to go in and out while still being fenced in, whether inside or outside. It was a bit odd to see the dogs outside and then in the basement. Agent’s aren’t big fans of doggie doors where the dog can come in while you’re showing the house 🙂

    I personally don’t like dog and cat doors because other people’s pets can go in and out too, as well as other animals. My cat used to be in my neighbor’s house all the time, while her cats went up on the roof to get away from him. Her cat used to bring in dead things it caught all the time. Mine would have to stand at the door until he realized we weren’t going to let him in with that dead thing in his mouth.

    Personally, I wouldn’t feel safe with a doggie door for a big dog. Seems a small person would be able to get in that way too.

    Just mentioning a few things in case you never had one before.

  22. I have a retraction. The county site has a higher recorded sale price than I remember when it went pending, and the ratio was really 1.18, more than I would have paid. It sold in May.

    380 and 140 both have large swaths that would be “ambitious”. Use 350K for absolute price cap.

    There are dog doors that only open when a sensor on the dog collar is nearby.

  23. Ardell:


    In a short sale I closed this last summer, the 2008 assessed value was $231,000, the purchase price was $210,000, the appraised value was $240,000.

    The method that closest hit the appraised mark was the 1.05 times assessed value, or $242,500. The 5% bubble method made it’s value $214,083 (sold for $138,000 in 1999).

    Either way, it was a bargain for the buyer, and an unpleasant bath for the lenders.

  24. Isn’t it telling that the property sold for about the bubble-calculator value, and below the assessed value?

    As long as short sales are perceived as difficult and uncertain, that will be the sort of price they will sell at.

    Lenders realize this; so they’re getting better at short sales. But it will be months before short sales compete with normal sales in terms of timeliness and certainty, and thus avoid a big “short sale discount.”

    Before Ardell asks: Yes, my purchase price was well below the most pessimistic bubble calculator value as well. That would be the only sort of price at which a very fiscally conservative person like me would feel safe spending a large amount of money on real estate.

  25. Those of you saying the banks will accept a lower price because they realize the disadvantage they’re at for one reason or another are making one large assumption: That banks act rationally.

    I don’t think this type of stat is available, but it would be interesting to see how many short sale properties have offers made that later end up in foreclosure, with the bank ultimately receiving less (after accounting for interest and other expenses).

  26. Cautious Buyer: “The county site has a higher recorded sale price than I remember when it went pending”

    Same as the first example in my post, it’s possible the closed price is higher than the asking price at time of sale. Since the seller doesn’t know what the bank will take until after he has an offer, the possibility that the asking price will end up too low, from the Bank’s perspective, is high. The seller just has no way to gauge what the Bank is looking for until he has an offer, in most cases.

    This presents a problem when the general public doesn’t understand short sales, and looks at the asking price as a guarantee of highest possible price without mulitple offers.

  27. Roger #28,

    “…and an unpleasant bath for the lenders.”

    What amount and year was the refinance causing it to be short? How short was the bank without added interest and penalties, as in the face amount of the loans?

    I am doing one now (not yet short, but by my calculations “fair price” will equal short) and rather than purchase price, I’m using assessed value and the 2006 100% cash out refi as value indicators. I’m assuming the two loans taken out in 2006, that look like an 80/20, give me the appraised value of that time.

    It wasn’t over appraised at that time as far as I can tell, but the market is not going to pay that 2006 value, even though the owner is asking more than that now, and it is not listed short.

    We’re in a market where the listing agent saying “but the seller won’t take that” is of no-nevermind. It’s all about whether or not there is going to another buyer at a higher price than yours, when the property is vacant and the owner is not going to come back and live in it or rent it out.

  28. Sampai,

    There is another factor of selling “at discount” that will never go away for short sales, even if they close in the same timeframe as other property.

    Estate Sales, Relo Properties, Bank Owned Properties and any property that you buy “as is” with no one to go back to in the event you discover a problem after you purchase the house, will always sell at discount.

    I guess you can say it’s an “unwritten rule” that any property where the seller is in distress and must sell, and the buyer is assuming the house “as-is”, sells at a discount to owner occupied homes.

    If the property is selling short, and the owner was “under the gun” financially for some time prior to the sale, it is possible that they didn’t have money to maintain the home for several months or longer prior to the short sale being completed. That fact alone will still garner a discounted price in the open market. For the most part, tenant occupied properties follow the same pattern of discount vs. owner occupied properties.

  29. “That banks act rationally.”

    There was a time when banks could rely more on appraisers. Often an appraisal with 5% or less down would be more accurate than one with 50% down. The appraisers forgot who they represented over the last few years, and what their role is. The verbal pressure coming from those who wanted the sale to go through, vs. the appraisal offering protection for the lender.

    In fact I used to advise buyers to put a lower downpayment in the offer, and then up the downpayment after the home was appraised by the lender, to squeeze the appraiser into a position of more valid appraisal. But in the last five years it does not appear that the appraisers were operating under normal standards and guidelines. They were treating zero down and 30% down the same, which is not historically the case.

    The greater the lender’s exposure, the more stringent the appraiser used to be on valuation. By the time the rest of the Country was moving down in price in 2005, you would think lenders and appraisers would have started to become more cautious here in the PNW…but not so.

    Perhaps the first market to go down could have been a surprise, but when we were going up in 2005 and 2006 and the rest of the Country was going down, one would think that would have been a huge red flag for lenders. So in this area and loans done after 2005, it’s hard to feel sorry for lenders that weren’t seeing the handwritng on the wall.

    In fact, as recently as 90 days ago, I was seeing “drive by” appraisals. How much could they possibly save on a “drive by”? This continued practice not only hurts the lender, but the buyers who rely on an accurate and tight valuation method.

  30. Ardell:

    Re #32. I can’t give you all of the details, but the public record shows the following:

    Purchased 2004 for $233,500, maybe with 1.5% down
    Refid 2005, for $295,500
    Refid 2007 for $322,000
    Sold 2008 for $210,000

    Loss to lenders, at least $112,000
    Equity extraction, about $89,000

    So in this instance, the owners may have benefited from the lender’s largesse. Both refi lenders have either folded or have been absorbed into larger banks.

    What you may be driving at is that serial refinancing is the driving force behind most short sales, locally. It would be interesting to get that data.

    Whatever housing and economic policies we end up with, I hope it’s intention is to keep housing in responsible ownership, and put to productive use. Beats bulldozing the excess, or letting it sit empty, housing nothing but pests.

  31. Roger #35,

    For the benefit of our readers, I’m going to do a little interpreting to possibly fill in some blanks in Roger’s example:

    “Purchased 2004 for $233,500, maybe with 1.5% down”

    Rarely would a buyer or lender come up with 1.5% downpayment. These scenarios usually involved the buyer needing to come up with 5% down, but being able to stack their costs into the financing vs. paying them outright. So financing 3% of costs and putting 5% down often comes up looking like a rediculous low % for downpayment. Which is, of course, the net affect of putting the required amount down, but financing the costs.

    I have yet to see a lender require the buyer to have x down AND pay their own closing costs, but I have seen and we WILL (or should) be seeing more lenders disallowing “prepaids” as closing costs that can be paid by a 3rd party.

  32. “What you may be driving at is that serial refinancing is the driving force behind most short sales, locally.”

    I’ve seen serial, but I’ve also seen all at once large. If the property was purchased prior to May of 2005 (I’ll double check that when I do Sunday Night Stats), the transaction shouldn’t be upside down or short, unless there has been one or more than one subsequent refi, or the loan was artificially inflated for other reasons.

    For people who bought after May of 2005, short as to purchase price is the norm and moreso the later you go as to purchase date.

    That’s why when Eastside Mom came around saying she was going to sell something she bought in 2006, that subsequently had the added stigma of a large special assessment, and she was goint to sell it on her own at “break even”…well, you just don’t know what to say when someone is thinking that way.

  33. Kary #36,

    You can’t look purely at actions “after” default without looking closely at the sequence of events prior to default…of which there are many.

    I personally saw the warning that came out to appraisers in 2004 to downgrade for down market coming. And yet…I think we all agree they did not do that in the PNW.

  34. Ardell:

    re #35, it may have been simpler to explain that the purchase price was $ 233,500 and the loan amount was $229,892.

    Exactly how they arrived at that loan amount, we can only specualte. Regardless, it is a very small amount invested in the property, for a purchase, by any standards, outside of the years from 2001 to 2007.

  35. I agree, Roger, but it is a very good time to warn people about the difference between “true” closing costs vs. all monies needed at closing.

    Often the word comes down that the lender won’t allow prepaids very near the end of the transaction, and the buyer is not covered in our finance contingency against not having the funds to pay interest, taxes and homeowner insurance.

    We really need to work on the Finance Contingency around here. It sucks. And during a seller’s market maybe that is SOL for buyers. But in a buyer’s market it’s unconscionable not to upgrade its worth to buyers in these scenarios. The ones we see coming down the pike…not the ones currently in play.

    Not having the cash to close is not covered by a finance contingency. The lender not allowing the full seller credit often means the seller gets to keep the difference. The lender disapproving prepaids at the 11th hour leaves the buyer in a very bad situation with no warning.

    If you are not seeing it now, you will be seeing it soon, or the lenders are not doing everything they can to correct their previous lack of attention to detail. Time for them to turn on the mike while everyone is listening.

  36. Ardell, I don’t think the place I was watching was a short sale since the notices of trustee sales stated mortgage balances around 166,000 and the place went pending around 265,000 and now shows 299,000 in the property report. The seller had bought the place in 2000 for 196,000. Of course I don’t have access to agent notes in the listing and I am not an expert in interpreting the court filings. Maybe there is something I don’t know, but I think there may be some other explanation for the discrepancy.

    Regarding appraisers and bank rationality, did you read about the appraisers suing countrywide for essentially blackballing appraisers who refused to inflate appraisals?

    Also, did you read about the congressional hearings where none other than Alan Greenspan said he was “in shocked disbelief” that his assumption that banks would avoid stupid loans out of self interest was wrong, and a flaw in his understanding of the markets.

    It seems clear that banks were willing to sacrifice their future to show some short term gains. It makes sense since the people in charge of the banks were paid huge amounts for short term gains and obviously didn’t care whether or not their company went bankrupt a year later. That is nothing other than a huge systemic failure, and I am very curious to see if anything is done to change it.

  37. Cautious buyer, there are a lot of 80/20 packages still out there, but yes the 166k and 299k price doesn’t seem to indicate a short sale situation. If they bought for 199k the 166k is most likely whatever was left of their first (or a refinance of that loan). It’s possible that had a 20 on top of it, that was later increased by a refinance, but at some increased number they’d be more likely to refinance the first at a higher amount because seconds have higher interest rates.

  38. I’ve wondered why they didn’t call it a distressed homeowner law instead of a distressed property law. The situation that causes the property to be a potential bargain for a buyer is the fact that the seller can’t make the payments, not whether it is upside down as to value vs. liens.

  39. Kary said: “there are a lot of 80/20 packages still out there”

    I’m working on stats and for the 6 properties sold in 98052 under $350,000 (not condos) 5 sold with 20% down and one sold FHA. I’m working in smaller segments so that I can check the type of financing used.

    For all trackable 17 properties closed with no price criteria in 98052 between 9/25 and 9/30:

    6 were 20%down
    4 were more than 50% down
    5 were between 25% down and 50% down
    1 was 10% down
    1 was fha

    The fha financed property and one of the 20% down properties from the first group of 6 are also in the second group of 17. So 2 of the 6 that sold for $350,000 or less in the last six months, sold between 9/25 and 9/30.

    If there are “a lot of 80/20 packages still out there” as you say, I’m not seeing people using them. The two loans I am seeing are when they carve out the $417,000 conforming loan limit. The 10% down did that, as did one with 33% down.

    The one that I really liked was where the buyer/borrower chose a loan amount of a straight $500,000 and then looked at houses with the concept that they would pay the cash difference, regardless of sale price and % down. They put 44% down. I like the empowerment and conviction of choosing the debt ceiling vs. % of downpayment.

    If you are seeing closings with 100% financing using 80/20 packages, as in “a lot” of people are using them, please let us know. I’m not seeing them up here, but I will continue checking as I do my weekly analysis of market activity.

  40. Well, for one thing, it’s my opinion that the law doesn’t apply only to owner occupied homes. That’s one of the problems I have with the NWMLS forms–they’re limited to addressing owner occupied. There are parts of the law that seemingly apply to non-owner occupied homes, which makes sense. For example you have someone that is at risk of losing the home they just moved out of, because they bought a new home. Why shouldn’t they be protected if someone who lives in one unit of a four-plex gets protected?

    But again, just being upside down doesn’t result in coverage (that I can think of). You need a risk of default or actual default, etc. The law is more aimed at protecting people with equity, not people who are upside down.

  41. Ardell, re #46, I’m talking about existing loans, not recent sales. They type of properties that are likely to be in default. 80/20s were popular until within about the last year, and those have not all been refinanced.

    As I’ve said before, I never liked 80/20s because of the liability concern on the 20 portion of the loan. I’m glad to see they’re less popular. Too bad it took a financial crisis for that to happen, but I guess there’s a silver lining in everything.

  42. Re 49, state licensing law trumps NAR ethics rules.

    Re 50, exactly! My substitute form for 22 NFW is designed to protect my client more than myself. Their liability is more direct.

    Unfortunately the state wide forms are more CBA (Cover Broker’s Arse.) They don’t protect agents or clients as well as they could and should.

    And by the way, as long as we’re explaining initials, Form 22 NFW stands for No F…… Way! 😉

  43. Kary says, “state licensing law trumps NAR ethics rules.”

    That sounds pretty bad, Kary. If the law only considered the buyer’s position, as agency law did in describing automatic representation for buyers and not sellers, the agent must consider the impact on their client…no?

    Extreme example: Private in the army is ordered to shoot a baby in the head. I don’t think Laws or “orders” can trump ethics ever, and the people on the street have to find a way to legally act ethically regardless.

  44. Is there ever a “Guardian ad Litem” of sorts, representing the citizens, in the room when these forms are manufactured? You’d think there would be one attorney representing the broad interests of buyers and another representing the broad interests of sellers and one representing the broad interests of Brokers. But I don’t think that’s how it works.

  45. The state law is fairly clear that you need to disclose a material fact, which is what we discussed earlier.

    But by the ethics rules trumping state law, I meant that if there’s a conflict between the two, you should follow state law. Thus, the ethics rules couldn’t prevent disclosure of something that state law requires you disclosure. I suspect the ethics rules probably say that themselves.

  46. I think it’s more a matter of when to disclose and to whom. I don’t think current requirements impose disclosure in the public remarks vs. agent remarks. If the buyer’s agent has a right to know, then why not buyers generally in the public remarks?

    Nothing requires the seller to disclose a leaky roof prior to contract negotiations. The buyer simply has the right to cancel within a few days of that information being disclosed, after the contract is signed. Why not the same for short sale?

    I wonder if we would ever get to a place where even Buyer Agent fee is not disclosed to agents, to insure that buyers are not affected by commission issues. That would be interesting. Then agents could decide to negotiate their commission in advance with their buyer client, or take their chances on what the seller may or may not be offering.

    Way off topic there, but an interesting topic as to disclosure changes that would benefit the general public.

  47. Re #53, they don’t ask for any input or give out any drafts (usually).

    Look at Form 22 FSBO. It’s a poorly drafted form. The seller is supposed to check one of two boxes. Either that the property is or is not a distressed property.

    This fails to address the possibility that the property might become a distressed property after negotiating the contract, which isn’t necessarily such a big deal, but is rather sloppy. The bigger problem is the provisions that state that the agent and buyer are not providing DHC services is dependent on the seller selecting the second box. So if the seller selects the first box, there are no contract provisions that protect the buyer or agent.

    Better drafted it would give a (___ is ___ is not) choice for whether it’s a distressed home, then define distressed home as they do, and then have provisions that protect the buyer and agent regardless of whether “is” or “is not” is checked by the seller.

  48. Ardell wrote: “I think it’s more a matter of when to disclose and to whom. I don’t think current requirements impose disclosure in the public remarks vs. agent remarks. If the buyer’s agent has a right to know, then why not buyers generally in the public remarks?”

    I’ve been wondering that myself. I don’t have a good answer for that.

    I wonder if it does somehow pertain to Form 17? If so, perhaps Form 17 should be amended to include distressed property law and foreclosure issues.

    But again, maybe it would be a good thing for sellers if “short sale” was put in the public remarks. Some people look for short sales. It might help the sellers.

  49. “there are no contract provisions that protect the buyer or agent.”

    Best I can tell there are none that protect the seller either as to getting highest possible price and/or warning him that he may be responsible for the shortfall, and that disclosing that it is a Short Sale may increase that shortfall.

  50. Re 58, that would be Form 22 SS (because not all distressed property sales are short sales) and unfortunately what it does is limited to paragraph 6, which advises both sides to consult “third party professionals.”

    At that point (getting an offer) I think the disclosure is a bit late. Hopefully agents are getting their clients to professionals before even doing the listing.

    I just looked at the DH listing agreement, and all it seems to have is a state mandated disclosure suggesting that the seller consult an attorney before signing the agreement.

  51. Ardell,
    I just sent you that address.

    I was impressed that Greenspan admitted there had been a flaw in his reasoning. I haven’t seen that type of intellectual honesty out of the government lately, or maybe even ever.

    I thought the meat of the story was that the free market system broke down when banks failed to look after their own interests. Thinking about why, it occurs to me that decision makers at the banks didn’t lose anything from the banks failing years later. They were paid huge amounts on short term profits generated from the questionable mortgages, and there was no provision that took that money away if the mortgages were not paid back later. In fact, they had “golden parachutes’ in place for if they were ever forced to leave!

  52. I don’t think there’s a sure fire way for the seller to know in advance if the bank is reserving the right to collect the shortfall or not. So the contract should not only have a buyer option to cancel if things aren’t going well, but the seller as well.

    From a Realty Times Article: “So their listing agent recommends putting it on the market…(and)…reasons thusly, “Look, there’s no difference to the sellers what it sells for, because they are not getting anything out of it anyway. [I am not saying he is correct about this.]”

    I think there are many cases where agents do think that way. Once the seller isn’t getting anything, “there’s no difference to the sellers”, when in fact their being held responsible for the shortfall, or not, is a HUGE consequence to the seller. You would think that the seller would have an opt out clause in the event the lender’s position is other than they anticipated.

    Another resolution to this issue is to require agents to disclose to sellers that they should not list their house unless they are willing to take the shortfall with them after sale. Maybe big bold print “YOU, the SELLER will be responsible after closing to pay the lender the shortfall, unless the lender agrees otherwise at time of short sale approval.”

    I don’t think anyone can disagree that a disclosure of this to the seller and an opt out provision for the seller, is needed.

  53. Cautious Buyer #60

    1) I’ve aleays been impressed with Greenspan. Bernanke has yet to give me reason to listen to him, and I’ve felt that way since Greenspan left, likely because Bernanke was so critical of Greenspan.

    2) I’m sending the info on the property privately as the detail is not likely meant for public consumption, in case the addres is later disclosed in comments.

    3) The whole short term profit vs. long term concerns reminds of me of almost every HOA Meeting I’ve ever attended and the reason we see so many huge special assessments. When I would advise the HOA to increase dues so as to put X per year in reserves for eventual roof and siding replacement, very often MANY would say “but I don’t plan to live here that long”.

    Personally I like more regulation as to less in many things for this reason. I don’t think you can trust a free market economy to look past their noses most times.

  54. Ardell, re 61, such a clause would make it even less likely a buyer would want to buy.

    It really is a problem. I’ll give you that. And I’ve been trying to think of decent solutions, but haven’t been able to. I was a bit disappointed with Form 22 SS because I viewed that as a step backwards.

    About the best solution that I can think of would be if all the MLS joined together and required a written agreement between the bank and the seller prior to a property being listed. If the banks risked being cut out of the MLS system, that might get them to act, but it also might backfire on the MLS systems. Absent that, I’d think you’d need federal legislation because many of the lenders are national banks, and the chance of getting decent legislation out of Congress that affects banks is about as close to zero as you can get. (Somehow, banks are very well capitalized when it comes to campaign contributions.)

    So I really don’t see a solution.

  55. Kary,

    As Jillayne teaches in her classes (I think) and has said here, it is very important for the buyer to know in advance whether or not the seller is willing to take the shortfall as a personal note. Often that is the only way it will close. So both the buyer and the seller should be talking about that on day one in the best interest of all parties.

    Problem is, if the seller puts that in the contract, the bank likely won’t consider forgiveness. So getting the seller to say that in writing vs. verbally is not necessarily a good answer either.

    My problem is always anything forcing agents to do things a certain way, regardless of the wishes and impact on their client. Who needs an agent if the agent isn’t free to look out for their best interest? There is no one right answer for all people, so laws should give some leeway as to how we can represent our clients.

    I was in a class the other day that said if there is any possibility that it might be short, better to disclose. Well, you had to ask yourself better for who, since disclosure is like guaranteeing it will be short.

    Say the property is listed so that if the buyer offers 98% or more of asking price it is not short, but at 97% or less of asking price it is short. What is the correct answer to “is this a short sale”? Depends on your offer? That could be true of most homes if the offer is substantially less than asking price.

    As we move further into the last quarter, more and more buyers will be looking for bargains…as is usual for this time of year. I’m wondering what will happen when all of an agent’s clients want a bargain, and there aren’t enough bargains to go around. Who do they tell about the bargain? It will be interesting

  56. Ardell, the problem is the bank most likely won’t give you a definitive answer on anything prior to getting an offer (based on what I’ve heard). So they can’t know.

    Getting back to the 80/20 thing, the seller probably has a bit more leverage if the situation is not an 80/20, or if the 20 is getting a high percentage of what they’re owed.

    As to your point about disclosing if it’s close, I’m not quite sure I understand the point that was made in your class. If it’s not a short sale, you don’t need to disclose that. If it’s “close” I’d hope the agent would cut there commission if the seller comes up a bit short and doesn’t have the funds. And finally, if you get an offer that would make it a short sale, when the list price isn’t a short sale, then that actually gives the seller some negotiating position. They might be willing to pay slightly more to avoid the time it would take to do a short sale (or to have the selling agent contribute to making it not a short sale).

  57. Kary, yes they certainly can know if they are willing to sign a personal note for the shorfall. The seller told us this upfront when I had the buyer of a short sale in Tam O’Shanter earlier this year. At least the buyer was waiting with the odds in their favor, knowing that up front.

  58. I meant the seller knowing whether the bank would require it. Your point is good that the buyer should ask that question, because waiting three months for the deal to fall apart because the seller isn’t willing wouldn’t be a good thing.

    Personally I’d say the seller should assume that the bank will require the note (or not expressly release). And if they aren’t willing to take that risk, they probably shouldn’t try to sell. But whether a listing agent would put those issues before a seller is another matter, which is why the buyer should do as you suggest, and ask. (I’m not sure it needs to be part of the contract–I can see where that does create problems–good issue–I wonder if Craig would give an opinion on how to deal with that.)

  59. “But whether a listing agent would put those issues before a seller is another matter.”

    All listing agents should have that conversation with their seller clients. Remember Tim and the lawsuit from the man who was surprised by that fact AFTER closing? After closing is not the first time a seller should hear about that. Many if not most agents think the seller shouldn’t care what the price is on a short sale, leading the seller to believe it is of no concern to them. That’s just wrong.

  60. Thinking about it further, maybe you can’t effectively bind a short-seller because they’re probably judgment proof. Even if you bind them contractually, they could default when push came to shove, and collecting damages would be tough.

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