Short sale

“Sunk Costs” and Underwater Homes

by Ross Kaplan on March 13, 2012

Homes That Can’t Be Bought or Sold

“Sunk Cost“:  A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business may face, such as inventory costs or R&D expenses, because it has already happened. Sunk costs are independent of any event that may occur in the future.

Indulge me for a second, and answer the following questions:

Question #1:  Which is worth more, a 40′ foot boat with all the bells and whistles — and $500,000 debt against it — or the same exact boat which is owned free and clear?

Question #2:  Which is worth more, a late-model sports car in good condition, 37,000 miles on it and no debt against it, or, the exact same car with a $50,000 auto loan outstanding?

(Detect a theme?)

Finally, field this one:

Which is worth more, a 4 BR/3BA Contemporary with ocean views and a $1.5 million mortgage on it, or, an identical one that’s owned free and clear?

Ready for the answer?

In each case, the amount of debt secured by an asset is irrelevant; the asset’s fair market value has nothing to do with the underlying debt.

To use a bit of economists’ jargon, the debt (mortgage) is a sunk cost.

Ahhh . . . but if the debt on a house is big enough — in fact, it exceeds the home’s fair market value by enough – the owner can’t sell because they can’t afford to bring a check to closing for the difference.

Solution (in theory):  Short Sales

The way out of this mess is what’s called a “short sale,” whereby the bank(s) holding the mortgage(s) reduce the principal owed.

However, as any Realtor or underwater homeowner can tell you, the process is protracted, cumbersome — and successful only about half the time.

The rest of the time, the home ultimately proceeds to foreclosure.

Then, 6-9 months later (at least in Minnesota, longer elsewhere), it comes on the market as bank-owned property — typically at a deeply discounted price, and (much) worse for wear.

When commercial real estate owners take on too much debt, the lenders readily renegotiate terms rather than take an even bigger bath by foreclosing.

The fact that no such dynamic is at work in residential real estate explains quite a lot about today’s housing market.

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Short Sale Denial, Short Sale Semantics

by Ross Kaplan on February 20, 2012

Potential Short Sale?  Not if it Sells for ≥ 10% Over Market

If you have been in a cave (or simply aren’t up on the housing market), a “short sale” is when a homeowner owes more on their mortgage than the home is worth (called “being underwater”), and to sell, must get the bank to accept a “haircut” (or an amputation) on the outstanding balance.

Up until now, that’s not something that banks have been eager to do.

And even if they are, the presence of multiple mortgages can make the logistics a nightmare.

For these reasons and more, short sales have a deserved reputation for being cumbersome, drawn-out affairs.

50-50 Odds

That’s when they succeed.

Something like 50% of the time, the bank(s) do not agree to reduce the mortgage(s), the owner defaults, and the banks foreclose.

At that point, the affected home typically comes off the market for 6-8 months while the title gets cleaned up, and the bank gets its selling ducks in a row.

As you might imagine, the condition of an abandoned, neglected (redundant?) home usually does not improve while all that happens. 

Worse For Wear

Because of the risks and headaches associated with short sales, Buyers understandably shy away.

And because it’s only fair to let prospective Buyers know what they can expect, about two years ago the local MLS added a new field asking if the home was a “potential short sale.” 

So, here’s the $64k question:  what percentage of the time do Sellers accurately check that box? (as far I know, compliance is on the honor system, and there are no consequences for not ’fessing up).

My guess?

Perhaps one-third of the time (or less).

Seller Intentions

That’s not just because no Seller wants to undermine their home’s market value.

It’s also because, at least in theory, the home really isn’t a potential short sale.

That can be the case where — to use some concrete numbers — a home has a fair market value of around $200k, and a mortgage on it for the same amount.

If the owner lists the home at $220k and happens to get that — Voila! — no short sale.

After subtracting selling costs of about 7%, the Seller in this situation can satisfy their mortgage and actually walk away with a nice chunk of change (almost $5k).

No Room to Negotiate

But what if the house doesn’t fetch $220k or anywhere close to it?

If instead the home sells for $200k, the owner has to bring $14k to closing — something that most owners, to preserve their credit, will somehow manage to do.

Still no short sale.

Which brings up scenario #3:  the best the owner can get turns out to be $185k, which means that to sell, they would have to bring about $28k to closing.

At that point, if they don’t have that in the bank but can still make the monthly payments, most Sellers will simply opt to take their home off the market and stay put.

Bottom line:  even though the homeowner was underwater (or extremely close to it) when they put their home on the market, they could legitimately say that at no point was the home a “potential short sale” — because they would simply choose not to sell below a certain price.

Whatever you call the foregoing — my term is ”short sale semantics” — my guess is that a lot of Sellers, unfortunately, are engaging in it now, and a lot of frustrated Buyers are encountering it.

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Knowing When to Follow — and Break — the Rules

by Ross Kaplan on January 16, 2012

Pricing a Home When the Comp’s are Tough

“You have to know the rules before you know when you can break them.”

Normally, the standard way of doing a CMA (“Comparative Market Analysis”) is to limit your focus to three Comp’s, or “Comparable Sold Properties.”

By definition, those are the nearby homes most similar in style, condition and size, that have sold the most recently (within six months or even less, ideally).  See also, “Why the Neighbor’s House Usually Isn’t a Comp“; and “Bracketing,” Explained.”

But what if there aren’t three good Comp’s?

Or, the Comp’s that exist yield a murky picture (at best) of market value?  (essentially, the same thing).

That can happen when:  1) a home is a traditional sale and recent, nearby sales are all lender-mediated (short sales or foreclosures); 2) vice versa, i.e., the subject home is lender-mediated, and recent, nearby sales are all traditional; or 3) the subject home’s size, features, and/or price point (e.g., upper upper bracket) are especially unique.

Plan B

In such cases, step #2 — surveying the nearby, competing ”Active’s” — can be very instructive.

I’m doing a CMA for a Plymouth home right now where the Comp’s are all over the board.

However, the Active homes which align most closely with my client’s are all clustered around $350k — and have been sitting.

My pricing advice to my client?

List at $324,900 (or lower).

Risks

Of course, the problem with overrelying on Active’s is that you don’t know what price they’re ultimately going to sell for.

Or, if they’re going to sell:  something like 50% of all MLS listings in the Twin Cities these days don’t.

The listings are either cancelled or expire, and the homeowner either stays put or temporarily rents.

Bottom line:

The Comp’s are still controlling – but the price range they suggest needs to be carefully tested against the “Active’s.”

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Hey! What Happened to All the Inventory?!?

by Ross Kaplan on November 13, 2011

Lack of Supply = Higher Prices?

Fellow Edina Realty agent (and blogger) Aaron Dickinson has a nice post shining a spotlight on a lightly heralded, not-so-overnight housing market development:  the lack of Twin Cities homes for sale.

In fact, as Aaron notes, the number of homes on the market locally in October — just over 21,000 — is the lowest in 7(!) years, and down more than one-third from the 2007 peak (in supply, not prices).

The likeliest explanation?

It’s not that people don’t want to sell — they can’t.

“Underwater,” Defined

The reason, of course, is that millions of homeowners nationally — and tens of thousands locally — owe more on their mortgage than their home is currently worth (a predicament now widely known as “being underwater”).

To sell, such homeowners would have to show up at closing with a check.

Often times, a very big check. 

Gee, if only someone out there had a creative solution (or two) to this problem . . . . (See, “Groupon for Underwater Homeowners” and “Solving the Housing Crisis – Take 2″).

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“Clients” vs. “Patients”

October 19, 2011

Or Maybe That’s “Patience” My wife, who’s a physical therapist, has patients. On the other hand, I, as a Realtor, have clients. At least it seems that way most days. Of course, as my colleagues who specialize in short sales know . . . “patients” isn’t very far off.

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Short Sale Paradoxes

October 3, 2011

A Short Brief Short Sale Q&A Question #1:  When doesn’t a homeowner care what their home sells for? Answer:  When they’re not receiving the proceeds. Question #2:  When does a homeowner not care what the Realtor’s commission is? Answer:  When they’re not paying it. Question #3:  When do both of the above apply? Answer:  In [...]

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Listing Presentations, Circa Late 2011

October 2, 2011

On the Plus Side, There’s a Lot Less Prep Once upon a time, listing presentations — essentially, a job interview for Realtors — took about an hour, and covered such things as the Realtor’s track record, credentials, marketing strategy, references, recent housing market activity, etc. Now? After exchanging social pleasantries and taking a quick house [...]

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Short Sale Time Sink

September 30, 2011

Learning the Market — Twice; or Rinse “Flush and Repeat” What’s the worst thing about a short sale that doesn’t work out (depending on who you ask, the result 50% to 70% of the time)? From the would-be Buyer’s perspective, it’s the frustration and disappointment associated with having flushed months waiting on a home that, ultimately, wasn’t [...]

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