Does anyone else recall The Brady Bunch episode where unlikely football star Greg Brady obtained a copy of his rival’s playbook? Why would he do such a thing? Because when you know how the opposition is planning to operate, it makes it much easier for you to turn their efforts to your advantage.
Consider this your glimpse into the listing agent’s play book for the short sale you’re considering buying.
To have any success, you have to acknowledge two basic facts. If you can’t wrap your arms around these two items, then you’re going to waste a lot of time and energy chasing properties:
1) Since lenders won’t tell the owner or listing agent what price they’re willing to accept in 99 out of 100 cases, the sole goal – the SOLE goal – of the listing agent when pricing a property is to get someone to write an offer as quickly as possible.
2) The best way to get someone to write an offer in a hurry is to stick a list price on the house below current market value. There are a number of theories on this but the most common advice is to price 5 to 10 percent below market to start and then drop the price by 5 percent every two weeks until you have an offer.
And because of that pricing theory, we now come to the most important thing you need to know when trying to buy a short sale – unless the list price has been approved by the bank (i.e., someone else made an offer and dropped out by the time the bank approved a sales price) the list price is imaginary.
What does this mean? It means when you’re trying to compare the relative worth of properties, the list price you see on a short sale is of no use to you because it has no correlation to market value. It means this home is useless as a comparable until there’s a closed sale. And most of it all, it means trying to secure such a home by further discounting the already imaginary discount provided by the listing agent will backfire more often than not, especially is someone else comes in and offers closer to the imaginary list price.
The lenders do not look at the sales contract and blindly accept an offer without looking at the home’s market value, no more than any other seller might do so. Appraisals and/or Broker Price Opinions are ordered so the bank can determine the home’s market value. Relatively few are the times where the bank will then accept an offer at 80 cents on the dollar when they know what they could get for the home on the open market.
Further lessening a bank’s motivation is the presence of mortgage insurance. If the original buyer had put less than 20 percent down they were paying mortgage insurance in addition to their payment, interest, taxes and insurance. Becuase of this insurance, a lender can recoup its losses through an insurance claim if it has to foreclose on a home – not true on a short sale where the lender voluntarily has written off the difference between what is owed and the market value.
If the only thing the lender sees before them is a well below-market offer and there’s a possibility of recouping losses through foreclosure, why would they accept the well below-market offer? Especially in a market such as the Phoenix real estate market, where there currently is less than a month of bank owned inventory available?
The best any buyer can hope for on a short sale is that the imaginary list price turns out to be less than imaginary. Knock a few dollars off the price if you must, but recognize that if the list price already is below market, the odds of success are long.
Are there exceptions to the rule? Absolutely. But that’s why they are the exceptions and not the rule.
[tags]Phoenix real estate, short sales[/tags]