Short Sale Bank Bites

[no_such_reality]

This weekend was interesting looking at a couple different homes and reviewing the newspaper ads

The thing that stuck out was the ads saying bank approval on offer required. Basically, a short sale needing bank approval to go.

Talking with the realtors in a couple places about other places in the neighborhood I was aware of, I learned that they too were short sales and any offer at the current asking price would need bank approval.

One neighborhood had three properties with short sales waiting (no offers).

Anybody here have experience with the bank on short sales?

Will the bank end up chasing the market down?

Will the bank rather foreclosure and REO liquidate than take 20% or more below current market?

[PerryChase]

Think about the fraud discussed in other threads. I don’t think that the lenders will approve too many short sales below debt owed. That’ll invite fraud since the sellers can easily manipulate who the houses are sold to.

If short sales were too prevalent, then everyone will ask for one.

[no_such_reality]

PC, that was kind of my thought. If it’s a short sale requiring bank approval, then there is probably very little negotiation room on the price.

The bank will stick for market price. Even though they’ll get a lower price when they foreclose, they know they’ll get real price.

[farbet]

Who pays the monthly carrying costs in the mean time with short sales?

[picpoule]

Here in my Colorado neighborhood there was someone trying to sell his house this way, for $298,000. Never sold. Bank foreclosed. Bank listed it for $279,000. Still didn’t sell. Now listed at $259,000. Bank is still waiting for a buyer.

[RottedOak]

Until the bank forecloses, the owner is on the hook for the carrying costs, in theory. In reality, the bank isn’t likely to approve a short sale unless the owner is in default on at least one mortgage, which means they will be eating any missed payments. An owner in financial distress might also decide to forgo paying HOA dues/assessments, property taxes, and perhaps even utilities if the home is vacant. Unpaid HOA fees and taxes would create liens on the property, which would be cleared from the proceeds of any sale. That means in effect that the bank pays for them as part of its loss on sale. Sometimes government-owned utility districts can place liens as well. Private utility companies would send collections people after the old owner.

Once foreclosure happens, then the bank is on the hook for everything until it sells the property. That is one reason banks don’t like to carry large numbers of REO properties.

[Bugs]

It’s A LOT cheaper for a bank to take a short sale than it is for them to foreclose. Once they foreclose they have a limited amount of time to dispose that property and whatever they get is all they get.

So in answer to your question – yes, the banks will indeed follow the market down if the trend continues at the current rate. What’s their alternative? They can’t make a home sell for more than it’s worth in the market.

[SD Realtor]

NSR I have a few different clients who have been tracking short sales and even some REO properties. One common theme is that in all of the cases be it short sales or REO properties there seems to be severe reluctance on the part of the bank to negotiate. It is disappointing.

SD Realtor

[no_such_reality]

SD Realtor refresh my memory here again, if the bank repo’s, does it show up as a regular sale when they get rid of it or will it get discounted out of comparables because if was a foreclosure?

I think Perry hit the nail, they may know if they go foreclosure, they’ll get 50-60 of what they are asking now. However, if they sell it now for 80% of thier asking, half the homes in the neighborhood are DOA for loans.

[jztz]

SD Realtor said: “One common theme is that in all of the cases be it short sales or REO properties there seems to be severe reluctance on the part of the bank to negotiate. It is disappointing.”

Could it be that it’s still early? I wonder how these are counted for on their books, and what those bankers’ incentives are at this point. They can be rewarded for two things: a) value sold (hence their strong negotiation stance); and/or b) % of such assets disposed (if the amount of foreclosure increases and time drags on)… my sense is that it’s still too early.

I guess in spring we’ll really know what shape the SD real estate market is in.

[RottedOak]

Bankers read the latest news from NAR, etc. They hear that the market has hit bottom. Sure the unfortunate buyer can’t make his payments, but if the bank holds out they can sell the property for the full loan value during the market recovery this spring. A few months of carrying costs won’t kill them.

As long enough people at the lenders believe that, they will hold the line on short sales.

[Anonymous]

rla

On short sale the lender requires a statement of hardship from the owner/seller and the seller must be in default on the loan. The lenders will vary some on negotiations depending upon the amount of non performing assets they have on the books. The banks have reserve requirements and these bad assets constrain lending ability and hurt the quarterly reports to Wall Street. Fannie and Freddie typically will foreclose rather than shortpay but hardship will be considered. I am not aware of the motivation of Hedge Funds or Chinese investors etc. and the service companies handling the loan. Many of the 2nd loan holders will be more likely to negotiate because the added cost of foreclosure and requirement to bring first loan current. Most 2nd loans made after 2004 that are in default in Calif. will be wiped out in my opinion.

[SD Realtor]

jztz – yeah that is my hope as well… That it is still to early in the cycle. Hopefully as the cycle continues the short sales go into foreclosure, the REO inventory goes up, and the prices come down.

I think RLA had a very inciteful post on this thread.

Finally, with regards to the MLS run by Sandicor, the only sales that are recorded on the Sandicor MLS are those that are sold through the MLS. Thus, FSBOs, trustee sales, anything that was NOT actively marketed in Sandicor will not show up as a sold. However, there are more and more short sales, and REO properties now being displayed on the MLS so those sales will be recorded on the MLS should they complete.

SD Realtor

[asragov]

In hearing all of these conversations, I wonder how many people realize that they are very likely to be issued a 1099 for the amount of the debt forgiven? The fact that we are talking about deficiency judgments and short sales is a sad sign indeed.

[no_such_reality]

Yes, hence, I think sellers will be resistant unless the bank switches to judicial foreclosure in an attempt to saddle the defaulter with debt payments.

I wonder if the banks will wake up and realize that $200,000 of cash out refi is sitting on the driveway as a late model BMW, new monster pickup with $3000 rims, boat and $5000 Sony LCD TV over the fireplace and try and force liquidation to service the debt.

[Author]

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