Moses Kagan on Real Estate

What’s a “short-sale”, and should you offer on them?

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Recently, I’ve been working with a lot of buyers who bring me short-sale deals to potentially write offers on. Thought I’d take some time to explain what a short-sale is, how the process works, and what the pitfalls are in offering on them.

A short-sale is a listing where the price asked for the property is less than the outstanding balance on the mortgage. For example: Say someone bought a duplex for $800k in Silver Lake in 2005, borrowing 90% of the value or $720k. Say they need to move out of state and want to sell the property. Say they still owe $700k on the mortgage. Say also that property is generating $50k in annual rents and that it’s therefore worth roughly $600k. What do they do?

One thing they might do is hire a broker to list the property at $550k. And you might see the listing and get excited about it, because it seems cheap. You probably call up the broker you’re working with and ask him about writing an offer at $540k (everyone wants a deal!).

Your broker probably groans inwardly. Why? Because the $550k price was never real to begin with. When someone is trying to sell for less than the outstanding loan balance, they’re not in charge any more. Neither is their broker. The bank is in charge, because it’s the bank who will be taking the loss.

So, what happens? Everyone and their brother offer on the property. The highest offer probably gets to around $625k (there’s usually someone who’s willing to pay over the odds in this market). The broker takes all the offers to the bank, shows it that the market thinks the property is worth up to $625k and begs it to take the $112,500 loss (the difference between the $700k owed and the net proceeds of a sale at $625k after the brokers, taxes, and other costs get paid).

The bank takes its sweet time deciding whether to take the loss. Weeks or even months can go by. Maybe the bank decides to take the offer. Maybe it decides to try to negotiate a sale at $675k to minimize its loss. And that, ultimately, is why it’s no fun to represent the buyer on an offer on a short-sale: The chances that a deal will actually get done at anything like the list price are pretty remote, because the seller and the listing agent aren’t in charge.

So, how do you deal with short-sales? You make an offer, forget about it and move on to other properties. Maybe, just maybe, you’ll get a call sometime down the road that the bank has accepted. And then, if you’ve still got the dough, you can decide whether to take the deal.


Written by mjkagan

06/03/2012 at 4:48 am

Posted in Brokerage, Buying

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