Purchasing Sacramento Short Sales–A Waste of Time?

I am frequently asked these days about buying “short-sales”. It sure seems like a good buying opportunity. But after what happened this week, I’m not so sure anymore.

Nearly everyone knows what a short-sale is by now. But just in case, a short-sale is a home listed for sale that, when sold, will not yield enough to pay all the costs of the sale and pay off the existing mortgage(s) completely. So the lender is asked to accept less than the amount owed. If they agree, a short sale results. Sacramento area homes have fallen enough in value that short-sales are becoming commonplace.

Now, there are several reasons why a short-sale seems like is a great opportunity to buy a home cheap.

First, any seller who would consider doing this must truly be motivated. The seller may have already moved out, may be in financial hardship, or in may be a “flipper” in trouble. But we all know that a motivated seller is a softer target.

Second, once a seller knows that all her equity has evaporated, she often cares much less about price. You can’t lose more than all your equity, right? It’s the lender’s problem now. Uh….not completely.

Last, the lender is over a barrel, aren’t they? They either accept the offer or they may have to foreclose. A foreclosure will take longer, cost more, and yield less, particularly if values continue to drop as they promise to do here in Sacramento. And lenders don’t want to be owners anyway.

All this sounds great. The problem is, lenders don’t necessarily agree.

Some lenders see our market potential differently. East Coast lenders seem to read different headlines and think our market may improve. Look at a summary this week’s economic reports to understand their optimism. A strong economy, higher new homes sales, healthy consumer spending, and a market—Sacramento—that by any measure appears a good long-term bet.

Lenders often think Realtors are lazy. With the seller’s equity gone, the Realtor has less incentive to seek the highest price possible. Instead, lenders believe, the Realtor will encourage low price offers to induce a quick sale and generate a commission.

Lenders are mad. Recently a friend who runs a mortgage bank said to me, “Look if it looks like we’ll come out the same whether we do the short-sale or the foreclosure, I’d rather foreclose.” Really! “If it’s all the same, I’m going to file the NOD (notice of default) to get the foreclosure on the borrower’s record to hurt them as much as possible.”

So let me finally tell you what happened this week that made me questions the wisdom of pursuing short sales. I have two clients with loans fully approved and loan docs sitting in title, signed, for 45 days. We’ve been waiting for final short-sale approval from two lenders who had previously indicated a willingness to cooperate.

Both of those lenders came back this week and turned us down flat.

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