The Lure of the Short Sale

The Lure of the Short Sale

The Lure of the Short Sale

short saleIn many markets around the country, and certainly here in the western suburbs of Chicago, properties for sale as Short Sales have become very prevalent, even among Bloomingdale, Bartlett and Carol Stream homes for sale.  Prior to 2008, we rarely, if ever, saw short sale listings.  Sadly, they are now fairly abundant.  As a matter of fact, according to our MLS (MRED...Midwest Real Estate Data), of the 1140 attached and detached single family homes currently listed for sale, roughly 15% of the listings in Bloomingdale, Bartlett, and Carol Stream are indicated to be Short Sale listings!  And this DOES NOT INCLUDE those properties that may just be one more "price reduction" away from having to be disclosed as short sales!

"Why sadly?" you ask?  Well, there are many reasons having generally to do with things like the impact on the neighborhood, the impact on the seller's credit, and the like.  But sadly also because of what short sales do to the perception buyers have of the marketplace in general, and of what buyers who choose to involve themselves in the short sale process are put through by the bank or banks involved.  This is truly a seduction...the "come hither" lure that short sale pricing offers prospective buyers.  But, as they say, all that glitters is not gold.  As my Dad used to say, "there ain't no such thing as a free lunch!"  Here are just a few of the many reasons why short sales are to be considered only after exercising great caution:

  • Short sales are not "normal" transactions.  And they are not PRICED as normal transactions.  Their prices are reduced, often very significantly, as an INDUCEMENT to encourage buyers to take the RISK that the transaction may well not ever reach the closing table.
  • Short sales at this point offer buyers roughly a 50/50 chance of ever making it to the closing table here in the Chicago area market.  In the past 12 months, according to our MLS, there have been 7,420 CLOSED short sales.  Currently there are 15,131 short sales on the market, roughly 1/3 (4,884) of which are under contract awaiting approval of the seller's bank (or banks).  During that same period, 14,543 short sale listings were terminated as unsold.  In other words, twice as many short sale listings were cancelled or expired as those that actually closed.  Point of information...some of those cancelled short sale listings may have gotten relisted and perhaps sold, or they may be among those still on the market.  However, MANY of them are now simply in the process of going into foreclosure!
  • When buyers consider two similar properties and one of them is a short sale, they tend to believe the "normal" sale property should be valued the same as the short sale.  This creates a very distorted perception of the value of property.  It's important to remember that real estate pricing in general has two primary components:  the property itself and the motivation of the seller.  Distress, whether it's of the property or of the seller's financial situation, places downward pressure on pricing.
  • Due to the fact that banks have, for many years now, been encouraging people, even those who originally had significant down-payments on their homes, to use their homes as "cash stations", borrowing from their perceived equity to buy cars, take trips, do home improvements, send their kids to college, the reality is that many homeowners, perhaps even most homeowners, have more than one mortgage or lien on their home.  In the case of short sales, that means there is likely more than one lender who must approve the short sale.  If you ever consider placing an offer on a short sale property, the very first question you should ask is "how many lenders are involved in this short sale?"  If the answer is more than one, be aware that the deck is stacked significantly against any sale reaching the closing table!
  • Because of the typical time frame of the short sale transaction where it is not uncommon for the transaction to take from 90 to 180 days to get from contract to closing table, if the buyer needs to secure a loan to purchase the property, they are unable to lock in their mortgage rate until the seller's lender/lenders approve the sale, making it much more difficult to know how much their eventual monthly payment will be.
  • Because of the uncertainly of timing, buyers who are pressed to make a move by a certain date, and who are not prepared to make a double-move, are not good candidates for short sales.
  • It's not uncommon for buyers to miss out on really great buys that are "non-distressed" properties while waiting for that short sale to get approved by a seller's lender/lenders.

Certainly there are other pitfalls to be wary of when considering making an offer on a short sale.  Take a look at our short sale info for buyers and short sale info for sellers here on this site.  Buyers who choose to venture into that arena should do so only with eyes wide open.  The better informed they are, the more facts they have in their arsenal, the better armed they will be to NOT be among those who come up short in the end!

In a Buyers Market How Much of a Discount Should I Get?

In a Buyers Market How Much of a Discount Should I Get?

In a Buyers Market How Much of a Discount Should I Get?

It's human nature, I guess.  In many parts of the country stories abound about the great deals buyers are getting, so when it's your turn to find a home, you expect to get a deal, too, right?  There's no doubt that qualified buyers are gold right now, which, of course, gives them leverage when they're shopping for a home...and they know it!

Let me ask you a question, though:  How do you define "deal"?  When you go to the department store and find an outfit you like...it's on a rack with a big sign over it saying "20% Off", does it make you feel good?  What if you found out that the price of that outfit had been raised by 25% the previous week.  Now how good does that "20% off" feel?

When buyers are looking for houses, of course they begin by looking at a variety of homes in their price range to get an idea of how much their dollar will get them.  But the same thing happens over and over:  when the buyer finds a home they've fallen in love with, they want a "deal".  Frankly, this market is offering up some really nice homes at great prices (even many that are not short sales or foreclosures) so it's likely buyers are finding good deals by default.  The notion persists, though, that "deal" translates into "discount off asking price".  Frankly, that notion is very flawed.

Take a look at this scenario, for example. single_story_house2

Seller "A" has a home to sell, and let's assume it has a current market value of $100,000.  It's a cute little 3 bedroom single story home in nice shape and the seller has decided to put his home on the market at $95,000 in hopes of getting it sold soon.  Seller "A" has decided on a strategy to price his property "below market value" in an effort to secure a quick sale by a ready buyer.

There is no question in real estate that motivation is critical!  The more motivated a seller is, the greater the advantage is for the buyer.  

Seller "B" has a virtually identical home to sell...also a cute little 3 bedroom home in nice shape with a current market value of single_story_house$100,000.  This seller, who figures he has "time on his side" and wants to have "room to negotiate" decides to put his home on the market for $115,000.

Buyers are out looking at properties, and Buyer "A" loves the pricing that Seller "A" is offering, and after some negotiations winds up agreeing to asking price...he's agreed to pay $95,000 for that house.  Shortly thereafter, Buyer "B" comes along and places an offer on Seller "B"s house.  After considerable negotiations, Buyer "B" agrees to pay $102,000...more than 11% discount off asking price!

Let me ask you a simple question:  Which buyer got the best "deal"...the buyer who paid ASKING PRICE for his home, or the buyer who got more than an 11% DISCOUNT off the asking price?

The bottom line here is that the amount of the discount off an asking price (if there even is any discount) is irrelevant!   It may sound better when you talk to your friends and can say "I got the seller down 11%" or "I got him down $10,000", or whatever.  But is that what really matters?  What constitutes a "deal" is how much below an item's value you paid, not how much below it's asking price!

What makes a deal a deal is not the amount a buyer is able to get the seller to discount from their asking price.  What makes it a deal is how the "market value" of a home compares to what a buyer actually pays.  Paying the full price of $95,000 for a home valued at $100,000 sounds like a deal to me!  Tell me what you think?  Have you negotiated a purchase or sale recently?  I'd love to hear your thoughts!!!

When Expectations and Market Reality Collide

When Expectations and Market Reality Collide

When Expectations and Market Reality Collide

To a certain extent, it's always been true ... a buyer's perception of value is generally quite different than a sellers.  But in this market, buyers are more bewildered than ever when they begin their home search.  They're wondering why THEY can't find those fabulous $400,000 homes for $200,000 or less!  And while the reality is that there such extreme values may appear now and then, the majority of what's on the market today, while substantially discounted over what they might have sold for just a few years ago, are generally not nearly that extreme. 

There's a reason why parents have reminded their offspring "if it sounds too good to be true, it probably is!" for generations.  The reality is, despite the decline in home values that plagues so many communities today, buyers are often very disappointed when they first begin actually looking at homes and compare what they're seeing in their price range to what they thought they would find.  Just this weekend, I was showing homes to some very enthusiastic first-time buyers who had scoured through the hundreds of available MLS listings that met their criteria.  They'd found several that looked appealing in photos and were very excited to get out to see them in person.  This would be their first time actually getting inside homes currently for sale, and the plan was for this to be (unless we found something really SPECTACULAR) basically an "educational" appointment to get an idea of just what the dollars they had planned to spend would bring them in the areas they had chosen.  What they found, and what many other buyers are finding, is that there is often a disconnect between the perception of the current market and the reality.mansion

Having realistic expectations is a critical component for a productive home search experience. Imagine that, based on stories you'd heard and the news reporting, that you BELIEVED the dollars you had available to spend could buy you a home like the grand home you see here on the left.  And imagine that when you actually got out and began looking at homes in your price range, what you found were more like the one on the right?  It's a nice home...nicely manicured lot.  And let's even assume that what you saw inside the home was wonderful...well cared for, updated, spacious.  But how would you feel?  Would you be excited about the one on the right if your expectation was that you could buy the one on the left for the dollars you'd planned on spending???? moderate_house

Chances are you'd be very disappointed!  Regardless of whether or not the house on the right was a great home, in a great neighborhood, in great condition, and representing a great value, the reality for you would be that you would feel as though you were getting robbed!

rundown_houseBut now let's assume your perspective was different.  This time imagine your expectations were reversed and that what you BELIEVE you'll be able to find in your price range looks more like this!  With that in mind, now go back to the middle image and think about how you might feel about THAT home?  Would you more likely feel disappointed...or pleasantly surprised?

The reality is that the middle house never changed.  It had the very same things to offer whether you expected to find more house for your dollar or less!  But, based on those expectations, your perception of its value most certainly DID change, right?

So how DO buyers better prepare themselves for the realities of the marketplace?  Here are some things you'll want to consider if you're thinking about buying a home and don't want to set yourself up with unrealistic expectations:

  • Recognize that the media (online as well as off) does hype and exaggerate.  It's how they get the viewer's attention.  Accurately representing reality is often not their priority.
  • When someone says they just got a house for $200,000 that the seller had purchased just a few years earlier for twice that, recognize that there are many factors that could be at play to create the difference in price...it's not always just a shift in the market.  For example, are the home and property in the identical condition they were in when they were purchased earlier for that substantially higher amount?  Condition matters!
  • When you hear that someone was able to negotiate an outrageous discount from the asking price, try to find out how "realistically" the house was priced in the first place.  For example, if you have two identical houses that are valued at, for example, $110,000, one priced at $100,000 and the other at $130,000, might you be able to get a bigger discount off the one priced at $130,000?  Undoubtedly.  But which would really represent the better deal?  How much someone is able to negotiate off an asking price is irrelevant without knowing the other pertinent factors.

What are your expectations of the market?

But That Was What WE Offered Them

But That Was What WE Offered Them

But That Was What WE Offered Them

Have you ever had this experience, or know someone else who has?  Here's the situation:

Buyer has been searching for homes and finally decides on one that meets his needs.  He makes an offer, negotiates in good faith, but the seller decides not to accept it.  Then weeks go by...maybe even months.  Eventually the house sells, and when that original buyer investigates, he discovers that the seller sold his home for what the buyer had offered months earlier.  What happened?

Actually, this is not such an uncommon situation and for a whole host of reasons...none of which being nefarious.  Take a look at SOME of the reasons why a seller might eventually accept a previously rejected offer:

  • First and foremost, price is not the only component of an offer, though to hear buyers and sellers alike talking about their purchase or sale one might reasonably think it is.  There are many things to consider when creating a contract, things like time frame of closing, how well qualified the buyer is (which, from the seller's perspective, translates into how likely it is that the transaction will make it to the closing table), what type of financing they buyer chooses (which, in some circumstances, can translate into higher costs and/or higher risk for the seller), what additional "concessions" the buyer is requesting (which impacts the seller's bottom line), among other things.  A change in any of a number of the "terms" of a contract can make the difference between one that is acceptable to the seller and one that is not.  Case in point:  if you were a seller who absolutely must close you home as soon as possible and you had two identical offers, both with closing dates within your desired time frame, but one required financing while the other was a cash certain offer, which would you pick?

  • There is nothing "static" about the real estate market...it is constantly changing.  Availability of housing changes; availability of buyers changes; availability of affordable financing changes; number of competing properties changes.  A seller who feels he has little "competition", thereby deeming his property more "valuable", is far less negotiable than he is when new inventory comes on the market and more competitive pricing.  Timing is everything!
  • There is also nothing "static" about life!  A seller who believes has 12 months to sell his home, who professes he's "in no hurry", is far less negotiable when that is his situation.  However, because situation changes, if he suddenly discovers he's about to lose his job, or his wife has become pregnant again and he now "needs" a bigger house, might find a previously "unacceptable" offer perfectly reasonable now.  Circumstances change, and when they do, so does motivation.  Motivation matters!
  • And personality matters as well!  More than one home has sold, or not, because of the personalities and temperaments of the people involved.  The seller who "loves" their home, has put their sweat and tears into their home, has filled that home with memories both wonderful and not, might easily reject an offer they deem "insulting".  A buyer never really knows what that home (which is basically "brick and mortar" to them) really means to the seller for whom that home means a whole lot more, and how difficult it might be for that seller to let go...even if they really must.  Two buyers with identical offers might have extremely different results with their offers, simply because one shows the seller greater respect for that connection during the process of negotiation.  I've even seen sellers take less from one buyer vs another because they "really liked the one buyer and wanted them to have their home".

Of course price matters, to both the seller and the buyer.  But it's important to remember that price is not the only thing that's important when negotiating a contract.  This is one place where the cliche really is true...it's often the little things that make the big difference!

Your FICO Scores…Experian, Equifax and Transunion Sell them to Lenders….but Sell a FAKE to You!

Your FICO Scores…Experian, Equifax and Transunion Sell them to Lenders….but Sell a FAKE to You!

Your FICO Scores…Experian, Equifax and Transunion Sell them to Lenders….but Sell a FAKE to You!

If someone said the temperature is 38 degrees outside, how would you want to dress?  Would you be grabbing an overcoat?  How about ear muffs?  Would you begin to shiver just thinking about it being so close to freezing outside? 

Now, what IF that 38 degrees they were talking about was the Celsius number???  According to the National Weather Service, a 38 degree Celsius is equal to 100.4 degrees Fehrenheit! 

When discussing temperature, it MATTERS which scale is being used.

When discussing CREDIT SCORE, it MATTERS which scoring scale is being used!!!!

For years it was so easy.  You could visit any of the major Credit Bureau websites (Transunion, Equifax, Experian) or any of their "partner" sites and pull your own credit.  For a small fee you could also get your FICO score.  After all, knowing your own FICO gave you a barometer as to how lenders would look at you.  It let you know whether you would likely be able to get the best interest rates on your purchases or loans, or whether you'd likely have to pay a higher interest rate because your credit score was lower than desirable.  The FICO ranges between 300-850 and it is FICO that the majority of lenders still use in making lending decisions (though there are even different "versions" of legitimate FICO which can yield somewhat differing results).  

The very fact that it is FICO that the majority of lenders use is the reason why consumers have made it a habit of monitoring their own credit scores ... so they can have an idea as to where they stand in the "credit worthiness" spectrum.

But the three major credit reporting agencies (Experian, Equifax, and Transunion) have made it a whole lot harder for Consumers to REALLY know where they stand with regard to their TRUE CREDIT SCORE....THE FICO!!!  What's even worse, MOST CONSUMERS DON'T EVEN KNOW THEY'RE NOT GETTING THEIR FICO SCORE WHEN THEY REQUEST THEIR "CREDIT SCORE" directly from any of those primary credit reporting agency websites (let alone from any of their "partner" sites!).

Here are some of the facts:

  • FICO measures your credit on a scale of 300-850
  • The "Credit Scores" being offered by the major credit reporting agencies is based on a scale of 501-990 and is called a VANTAGE score...TOTALLY UNRELATED TO FICO!!!!
  • FICO is the score that lenders, employers, insurers, landlords, etc., require when making decisions on whether or not (or at what interest rate) you're "credit worthy"
  • FICO is the scoring system that, until recently, the major credit reporting agencies (Experian, Transunion, and Equifax) made available to the consumer directly from their own websites.  THIS IS NO LONGER THE CASE.
  • When you are offered "opportunities" to check your "credit score" online, these companies are NOT giving you THE credit scores that they are providing to anyone inquiring as to your credit....

In other words...they are telling YOU one thing....and telling potential creditors SOMETHING TOTALLY DIFFERENT!

For more information on what's happened to your FICO, including links to some great resources on the subject of FICO and your credit, visit my "Know Your REAL FICO" page for more information!

Have you checked your credit yet?  Do you know what your FICO score is (NOT just your "credit score"...be sure it actually says FICO (and you can see your FICO scores for Transunion and Equifax at MyFico.com)...if it doesn't, you're seeing a FAKE!