April 30, 2008

Danger: Hidden Short Sales Ahead

Yesterday’s post dealt with how lenders are being slow and difficult when it comes to negotiating short sales — i.e., accepting less money for a property than what is owed, and forgiving the remainder of the debt. Short sales can be a bad deal for buyers not only because of the long wait time, but also because lenders aren’t as flexible on price as they could be.

If you’re looking online for homes these days, particularly on Redfin, where each listing includes price and sales histories, you’ll see many properties with asking prices lower than what the property last sold for.  Yet often, the listing description does not say “short sale.” What gives?

Well, it turns out that this topic is being hotly debated in the real estate community at the moment. Some agents are not disclosing that the property is a potential or likely short sale, preferring to get an offer first and then take it to the lender.  This lack of disclosure is angering potential buyers and their agents.

Colleen Badagliacco, an agent in San Jose, explains the problem in this Inman News story:

“Technically you don’t have a short sale until it comes to closing and there is not enough money to pay off the lender,” Badagliacco said. “This can be a slippery slope.” For example, a house may be listed for sale at $500,000, and the outstanding loan amount may be $490,000. If the offer is above the loan amount then the property would not qualify as a short sale.

The issue has become so heated that the National Association of Realtors next month will consider issuing guidelines to participating MLSs on when and how potential short sales must be disclosed, Inman News reports. The story quotes Daniel Ickowicz, a Florida agent who is lobbying for more disclosure:

“There are a large number of listings currently placed on our MLS system that are falling into the so-called ’short-sale’ category. What concerns me is that the prices and terms being marketed are not realistic. Realtors, together with their sellers, come up with a figure that they ‘think’ the bank will take.”

A Wall Street Journal story reported on the same problem:

Homeowners hoping to avoid a foreclosure are adding to downward pressure on the market, says Daniel R. Odio, owner of DROdio Real Estate Inc. in Alexandria, Va. Such people often seek to unload their homes through a “short sale,” in which the price is less than the amount owed on the mortgage and the lender agrees to forgive the difference. Homeowners hoping to do a short sale sometimes advertise very low asking prices to lure buyers, even if there is little chance the lender would accept bids at that level, Mr. Odio says.

In other words: Sellers (and lenders) are still holding on to that last shred of hope that they’ll be able to sell without eating thousands in losses.  Their agents are putting the homes out there, hoping that once they find a potential buyer, they can work something out.  In most cases, they’ll fail.

This is yet more proof that we haven’t found the bottom of the market yet.  Sellers and lenders are still in denial.  Most of these short sales will turn into foreclosures a year or more from now.  When that process is completed, we’ll be closer to the bottom.

In the meantime:  Buyers, beware.

Recent Redfin posts:
Charles Dickens, Welcome to Van Nuys 
Downtown Must Sell As-Is:  Revitalization Stalled

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