Our thoughts about Short Sale listings in Orange County, CA

There are so many, many short sale listings "available for sale", listed in the multiple listing service ( the MLS ) by licensed real estate agents and brokers. The listing will say, in the Realtors private remarks section, "Short sale listing subject to Bank approval."

Since August, 2007, I've been working with buyers who are searching for the best deals out there, and most of the best priced homes are short sales. But are these listings really for sale?

Often, no. No, these listings are not really for sale . Unless the short sale is "Bank approved", the Bank hasn't approved it - and without the approval of the Bank, that house isn't going to sell.

Read on to see the difference between a Short Sale and a Bank Owned property (Bank owned properties are the best deals right now!).

WHAT IS A SHORT SALE?

Here's a quick example: A home owner bought his house in 2006 for $750,000. He obtained a 90% loan to value (LTV) on the house, so he owes the Bank $675,000. To further complicate the situation, he may have taken out a HELOC (home equity line of credit) or a 2nd loan on the property.

In today's market, that house will realistically sell for, say, $630,000. Closing costs might cost the seller $40,000. So the seller is getting $590,000 for the house after he pays his closing costs. The seller owes $675,000, and to sell the house, he will have to come up with $85,000 out of his pocket , to pay the difference between what his loan amount is, and what he's netting on the house.

So... it's a bad situation for the homeowner. If he hasn't got $85,000, he's in a nasty pickle.

Here's where the typical short sale comes in. The home owner gets together with a Realtor, who says, "Let's put this house on the market for $650,000, subject to Bank approval of the short sale." If the house eventually sold for $630,000, that means the Bank would have to agree to lose the $85,000.

Unless the MLS listing says, "Bank approved short sale", that means the Bank has NOT agreed to lose money on this property. The Bank has a contract with the home owner that borrowed the $675,000 from them, and the Bank is not going to easily accept an $85,000 loss.

In this market, it seems as though the listing agents are fishing for a buyer, by putting the house up for sale and seeing if any offers come in. If offers come in, then the listing agent submits the offer(s) to the lender, who puts it in a pile with 500 other offers on other houses. The lenders don't necessarily respond to any of the offers, and if they do, it can take months to get any response at all. Often, the house that's "available" for short sale is sent over to the foreclosure department at the Bank - and there IS NO SALE. The Realtors and the homeowner have wasted a lot of time and energy, when the property is going to end up on the auction block or as a REO sale.

WHAT IS FORECLOSURE?

While many Realtors refer to a foreclosure as a house that's been repossessed by the Bank, the word "foreclosure" refers to the process the Bank goes through to take ownership of the property. This process takes about 120 days AFTER the Bank files at the county. So, the foreclosure process is a lengthy process, and the homeowner has the option to pay up on their loan and keep the house right through the end of the 120 day period.

Property is not sold by the Bank during the 4 month foreclosure period, unless the Bank agrees to a short sale, and then the Bank will allow the seller to sell the property and the Bank will accept less than the loan amount that is due. This doesn't happen often.

Meanwhile, the homeowner is bitter... they've lost an arm and a leg on their investment of a primary residence (who could have known?). They often won't allow the home to be shown for sale, and many times they simply throw in the towel, flush their credit down the toilet, allow the Bank to foreclose on their property, and try to stay in it without paying their mortgage for as many months as possible.

WHAT IS Bank OWNED?

THESE PROPERTIES REALLY ARE FOR SALE, AT A GREAT PRICE - but not below "market value".

After the foreclosure process, the property becomes Bank owned, or Real Estate Owned (REO). Once the property is a REO, the Bank will send the listing over to their REO department, and they will either turn it over to an auction house to be sold at auction, or they will list it in the MLS at market value.

The Bank determines market value by two methods... they have their real estate professional (often an in-house broker) value the property, and they have a professional appraiser value the property.

REO property (agents often refer to REO property as a Foreclosure) is priced "at market" to sell. The proof is in the numbers:

25% of REO listings sell below list price
50% sell right at list price
25% sell above list price (often with multiple offers)

The Banks will NOT sell the house below market value, because they would be hurting themselves if they did. If they list a REO house to sell at $600,000, they are not going to sell it to a cash buyer for $550,000, because that Bank probably has 5 other houses in the neighborhood, and the value of those other homes would plummet, were the Bank to accept a low offer. Bankers are smart - they're not going to sell a house low, when it will harm their other holdings.

I hope this helps. Learn as much as you can about this real estate market before you jump in. Yes, it's a buyers market, but the current conditions have made it extremely difficult to navigate the seas.

Realtors are doing a crummy job - they're taking listings that they can't sell, and they're not returning phone calls or responding to offers. They keep listings on the market as "active" homes for sale, but in reality they're just dangling a worm out on their hook to attract the fish (you).

Sellers are angry (they're losing their shirts and as a result, destroying their credit). Tenants don't want to be evicted, so they won't allow the property to be shown. Bankers are overwhelmed - understaffed and unprepared for this current turn of events - and for the most part, allowing these short sales to go through the foreclosure process.

But it's not all bad! There are some FABULOUS DEALS out there in real estate, and I would be delighted to help you find the right property - and give you 1% CASH BACK AT CLOSING. Click here for details: BUYER CASH BACK REBATE .

HOW DID WE GET INTO THIS MESS?

TRUE STORY: I just rented an apartment to a tenant. This tenant, let's call him Jose, works as a handyman. In 2006, with an annual income of $28,000 to provide for his wife and two small children, a lender gave Jose two loans (one loan was for 80% loan to value, the other for 20% ltv) totaling $459,000 to buy a condo in Lake Forest. Now, it doesn't take a genius to quickly figure out that Jose can't possibly make payments on $459,000 in loans, plus property taxes, plus HOA dues, plus - oh yes - they need to eat.

The lender packaged up these two loans totaling $459,000 and sold them to Countrywide. When Jose couldn't make his mortgage payment, Countrywide foreclosed on his property. Countrywide (and Indymac, and probably WAMU is going down too) has now gone out of business.

HYPOTHETICAL STORY (it could be your neighbor): Jeff is a high school math teacher. He earns $48,000 a year. That's not bad. That works out to about $23 per hour. His wife is a homemaker. Five years ago, they bought a nice condo in Rancho Santa Margarita for $500,000, and they had about $100,000 cash to put down on the property, so their mortgage, which was locked for 5 years at 5%, was $2000 a month (interest only payments). That mortgage payment cost Jeff half his income, but that's okay, he needed a place to live!

Five years later, their adjustable rate mortgage (ARM) changed to 8.3% overnight, as their index was 3.5% over the 11th District Cost of Funds. Jeff's mortgage payment jumped to $3500 a month. Now, if Jeff were to pay ALL of his income to the Bank, he'd have very little left (maybe $500 a month) to pay property taxes, HOA dues, gas for his car, school loans, clothes... you get the picture. It can't be done.

Jeff and his wife must now pile their belongings onto a U-Haul rental truck, and move back to Kansas to live with Jeff's parents. They have no choice, and maybe in 7 or 8 years, once the foreclosure is off his credit, they can start over.

THAT'S HOW WE GOT INTO THIS MESS. There are millions of Jose's and Jeff's out there. Banks gave loans to anybody who had a pulse. We all assumed that the value of our homes would go up and up and up. But what goes down, must come up - property values WILL rebound.

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Mark L!nzmeier & Terri Lange, Real Estate Brokers, E-mail: Click here to e-mail
Bright Skies Real Estate & Property Management

TERRI'S CELL: (949) 697-2246
MARK'S CELL: (949) 525-3288
E-MAIL: Click here to e-mail
California DRE Broker License
Mark L!nzmeier 01266101
Terri L!nzmeier 01266102

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