I have been getting the question, “What is a Short Sale?”

Thank you Casey Serin for this photo.

As our market changes we now have new additions to our real estate vocabulary. Just a year ago the term, “short sale” was not even a word on our terminology radar. So, it is not surprising that many of my clients are now asking, “What are short sales?” Maybe, more importantly can short sales be a buying opportunity?

A short sale is when a property is sold for less then the debt owed on it. It is usually done as an owner’s last resort for liquidating a property before a debt holder begins the foreclosure process. Short sales require the seller to come up with money at close of escrow to cover the difference between the debt owed on the property and the sales price.

So can a short sale be a deal for a buyer? The answer is most short sales are more complex and harder to negotiate than a typical real estate transaction between a buyer and a seller. Often when a sale is short, the seller does not have sufficient funds to come up with the difference. This brings the bank in to the picture. Banks do not like to lose money, and in our current robust market most banks are stiff negotiators. Banks are usually tougher to deal with in a negotiation than an individual seller. This is because they have capital and corporate structure to rely on when negotiating. They have more power than an individual to wait for good offers and withstand low-ball offers. Often if a bank has completed the foreclosure process they will want more money for the home than the owner. This is due to the high cost of the foreclosure process.

For example let’s look at 123 Taurus a nice home located in the Oakland hills near Montclair. The owner of the property placed the home on the market in December for $850,000 with a real estate agent. December happened to be a slow month for housing in the Bay Area. The property did not sell so the owner dropped the price of the listing to $825,000. It was labeled as a short sale in the MLS. The owner still could not get the property sold.

The property fell into the foreclosure process. The bank cleaned up the home and re-listed it at $890,000 (a substantial increase from the seller’s last list price of $825,000). The Montclair real estate micro-climate began to become more favorable in the New Year. One of my clients wrote an offer on 123 Taurus at the end of February, and we competed against 2 other buyers. My best guess is that after the closing we will see the property has sold for more then $890,000.

So, what if some one had made an offer on the property in December when it was priced at $825,000. Could they have gotten a better deal from the seller? The answer to this question will never be known. Yet, it is my guess that because the seller went into foreclosure they probably did not have enough money to make the short sale happen. As we can see with a little 20/20 hind sight the bank did much better then the seller at getting the property sold for a higher price.

Currently, this is typical in the Bay Area. Our real estate sky is not falling as many have tried to predict and from what I have seen in the immediate Bay Area banks are doing well with liquidating foreclosed property. All the short sales I have witnessed are hard negotiated deals that require much finesse. I have been seeing that, often in terms of value, short sales are not the best Bay Area buying opportunities. There have been many advertisements that allude to the riches that can be made in distressed deals. In the Bay Area, I am not witnessing these unbelievable short sale and foreclosure deals. Buyers should not assume that short sales and foreclosures are easy pickings.

Are you looking for value? There are far too many possible situations and variables to speculate about the value of short sales or foreclosures as a whole. I prefer to look at and assess every deal individually. More importantly, finding value in real estate is predicated on your agents ability to listen to your needs and concerns and then to apply your specific search characteristics to everything that is available in the market. Your agent should utilize their knowledge about the market’s climate and trends to your benefit and they should use all of their negotiating skills to your advantage.
Do you have an interesting short sale or foreclosure story?