Short Sales Bargains, Steals, and Deals

The reality of short sale pricing and what to expect

If nothing else, today’s real estate market is replete with misconceptions. One of the largest misconception is about short sales. If you haven’t yet, be sure to read my short sale primer. The primer describes the technical aspects of and defines exactly what a short sale is. The most important thing to understand is that a short sale does not change the market value of the property.

Neither does a foreclosed property but, once a property is bank owned the time-value of money equation is applied by a for-profit corporation including carrying costs that mount up the longer the property is held. Therefore, the bank uses specific formulae to reduce the price periodically over time until is it sold. But, this discussion is about short sales.

I can’t tell you how many times my phone rings and I hear:

“…I’m looking for a good deal…”, “…I want a ‘steal’…”, sure who doesn’t? Then I hear “…I hear I can buy a $900,000 property for $250,000…”

The last point just doesn’t make any sense does it? If a $900,000 property can be bought for $250,000 then the property is worth…$250,000. You wouldn’t pay more than it’s worth would you? And if you did buy the property for $250,000 what do you think you could sell it for the day after you bought it? Yes, $250,000!

Now, I haven’t seen any $900,000 valued properties sold for $250,000 but there are properties that once were priced or once sold for $900,000 that now are worth $500,000 – $600,000. Does this represent a ‘steal’? No, it is representative of the fact that real estate market values have declined over the recent past. It’s also one characteristic of a buyer’s market, high inventory being the other key characteristic.

So , what is a good deal? Properties that are priced at the current market are a good deal in south west Florida. The historic appreciation rate for the Naples areas has been about 8% per year in the 1990s through early 2000s. Extrapolate that growth through the over-priced period from 2005 – 2007 and you will now find properties priced below what the historical growth rate was. I think that these right-priced properties represent good value particularly for a buy-and-hold strategy.

Are there still price decreases to come? Yes, for those properties that are not right-priced – i.e. have not been reduced yet to to the current market. This is a very important consideration when buying and it’s exactly why you use a Realtor to help and guide you to understand what is market priced and what is not.

Back to the short sale, does it mean a bargain/deal? Maybe, but not necessarily. First, the Bank is well aware of the market value. They order appraisals or broker price opinions. Then they apply a formula that is based on a percentage of the market value that will return the most money to the bank when considering the alternative, the cost of foreclosure and carrying costs.

Remember that the short sale is a result of financial hardship for the owner. The reason or reasons that came to create this condition real doesn’t matter but what does matter is this financial hardship does not change the market value of the property. What you as a consumer are willing to pay for it does.