Friday, February 25, 2011

Why shouldn't I write offers on Short Sales?

Short Sales (aka Short Pays, Subject to Lender approval etc.) are everywhere in this Real Estate market. These are sellers who bought or refinanced when their property was worth more than it is today and now they owe more on their mortgage than the property is worth. These sellers are frequently referred to as "underwater" or "upside down" on their houses. When trying to buy a property short sales are usually a waste of time to write offers on. This is because of several reasons; the sellers typically have no motivation to sell because they have not been paying their mortgage for many months and the longer they get to live in the house rent free the better it is for them. They have no inclination to show the property and will usually leave it a mess because of resentment or because they had rented it out and tried to make some money "skimming" by collecting rent after they stopped making mortgage payments. The sellers owe more on their mortgage than it's is worth, sometimes by hundreds of thousands of dollars, so their lender has to approve any offer that comes to them because ultimately the lender will take the loss. Many times the agent listing the property will price the it artificially lower than market to try and attract attention and offers. They usually get a flurry of offers and send them off to the seller's lender for approval of the sale. Sellers lender(s) can take anywhere from 2-18 months to respond to an offer and when they do, they almost always counter offer at a price that is in line with the market value of the property. This price is usually much higher than what the agent listed it at and so the buyers, thinking they were paying X are suddenly asked to pay Y. Banks are not stupid, they know very well what the property is worth and they're not going to entertain lowballing. If after the several month delay there are buyers still interested in paying the higher price, the property will sell but usually most buyers have moved onto other opportunities. Essentially, offering on short sales is like agreeing to wait a long time to have the price increased by an unknown amount.

That being said, we have had success snagging short sales using a shotgun approach. Since writing an offer does not obligate a buyer to anything until the seller accepts it, we have had buyers write several offers at a time on properties they had only driven by and not been inside. A few of these offers do eventually come back and if they haven't found anything by then they can see inside, do their investigations, accept the counter and go into escrow. This method takes lots of patience and some chutzpah (its counter intuitive to most people who haven't bought real estate in such a down market to make offers with only a drive-by). This method can work well with the current abundance of distressed and upside down properties on the market.

No comments: