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 (Hilton Head Island realtors 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!