My Dad was a stockbroker and has always said, “Buy on bad news, sell on good news.”  Over the years he’s made great money with that strategy.  As soon as everyone wants to buy - he’s out.

I’m not sure the philosophy ought to be much different in the housing market.  Yet the fear, the challenge in the financial markets, and the negative remarks from friends and family is keeping buyers out of the market.  But how long do you wait on the sidelines?Buyers waiting on the sidelines

May 29th, Jonathon Lanser had an interesting article in his blog about the 15.4% decline we’ve seen and that a recovery may not be until 2010.  Clearly not good news. 

The worst of the decline may very well be behind us - but the recovery is not here yet.  Maybe this is the window of opportunity.  Michael Carney, the Cal Poly Pomona professor who heads the Real Estate Research Council of Southern California said, ”Once we get people thinking prices will go back up, we will see a fast turn. There’s a lot of money ready to go.”

It may not make sense to wait for the ‘good news’ that prices are rising again and if Carney is right, how quick can you get in on that ‘fast return’?

A few years ago many of us, including a lot of Realtors, didn’t know what a Short Sale was.  To be clear, a Short Sale is when the value of the property is lower than the encumberances (loans against the property) and the necessary costs of sale.  In short (no pun intended), the loans against the house are more than the house is worth.

Today, both sellers, buyers, and definitely Realtors are very clear about Short Sales.  It impacts everyone, at every level of the process.  And in truth, the poor, reactive approach the banks are taking to this epidemic problem is really only hurting them, and consumers, here in Orange County and across the country.

To truly understand all the implications here, it’s important to understand the process.  Please note, this varies from bank-to-bank and there are currently no industry standards to the process.

  • Seller determines they are in a Short Sale position and must sell.
  • Sellers apply for a Hardship Package from the bank.  A consumer can complete the package verifying they have suffered a hardship (loss of job, divorce, illness) and can no longer make the payment.  They also must show they do not have other assests to cover the shortage.
  • The package is submitted to the bank.  Here is where the problem lies.  Banks likely will not even consider the Hardship Request until a seller supplies them with an offer.  And this is where I think the banks are really hurting themselves and consumers.  Lets talk about that…..

If you are a seller and have been told that your hardship package won’t be looked at until you bring an offer with it to present it to the bank, what do you do?  It’s often at this point that agents are brought into the matter. 

As an agent, you have a seller in distress, possibly in foreclosure, and in need of a quick sale.  What will the bank take?  No one knows.  Will they approve the hardship?  Maybe, maybe not.  Precarious and odd position to be in as an agent.  Where do you price the home to get a quick sale?

 Let me give a hypothetical, but not unrealistic circumstance.  For this example let’s assume the following:

Home’s Value Based on Recent Sales:  $500,000

Amount Owed:  $575,000

Closing Costs:  $35,000 (may include unpaid taxes and HOA dues)

# of competing homes on the market: 25

Now - an agent knows that getting Agents to show their Short Sale Listing will be difficult.  Why? 

  1. Some of these agents have been working with these buyers for months or more.  They know the short sale process sets up their clients for heartbreak and delays a successful transaction.  In addition, Agents commissions are often severely cut.  While the brokerage fee may say 3%, it may actually be only 2% or less
  2.  The bank may take weeks to respond.
  3. There are likely multiple offers due to the low price (we’ll get to this)
  4. A hardship may never be approved in the first place.
  5. Their impatient buyer will still be looking in the meantime and possibly want to move on to something ‘better’ making this sale an exercise in futility.

So how does an agent attract showings to their Short Sale Listing?  A low price!  It looks like the best deal in town.  In our example a $425,000 list price wouldn’t be unrealistic.  The seller doesn’t care where it’s priced anymore.  The bank has given no guideline.  The agent has to generate offers to submit to the bank for consideration of that Hardship Request.

Time is of the essence in these situations.  Pricing it agressively, they will get many offers of anxious buyers looking for a deal and NOW they have the offers to submit to the bank so that they will consider the seller’s hardship.

In the meantime, traditional sellers and other bankowned homes are forced to compete with the short sale.  In all likelihood, the bank will never approve the sale at that price but at least you get the hardship approved and you can reenter the market at a bank approved price of, in our example, $475,000.  In the meantime, traditional sellers have been competing with $425,000.

The implications:

  1. Listings remain in ‘Active’ status while waiting for the bank approval.  They aren’t really ‘Active’ but meanwhile it misrepresents the inventory to be higher than it is.
  2. Traditional sellers are competeing with lower and lower prices that may not every even sell at that price.
  3. Banks create their own comps for future Short Sales, Foreclosures and Bank Owned inventory.
  4. Buyer demand is pent up while they wait for the word from the bank.

Why don’t banks take a proactive approach?  Review hardship requests first.  Reach out to delinquent sellers and disuss Short Sale options.  Establish an approved Short Sale Price before the home ever enters the marketplace! 

This type of strategy would serve their own interest, the sellers they are servicing, the buyers they are hoping to sell to, and the agents working in the industry.  Reactive is not working!  It’s driving prices down, misrepresenting inventory, and impacting consumer expectionations and results.  It’s a no win for anyone.

 

 

OC Real Estate Voice is written by Linsey Planeta of Belterra Fine Homes. Browse around at your leisure with no obligations to give us your contact information. If you would like to talk me I can be reached at 949-939-2514. You can also us our contact us page linked at the top left.

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