The Ugly Reality of Short-Sales in Your Neighborhood
WHY YOUR NEIGHBORS MATTER
Short Sales Reduce Your Property Values
A WARNING: This blog post is not for the faint of heart. There is nothing warm and fuzzy in what I’m about to write. This is one of those “face the brutal facts of your current reality” stories. This is a blunt discussion of what happens when your neighbors have financial problems, when the economy turns sour and how their misfortune visits your doorstep….literally!
SHORT SALES
By now, most home owners have heard the term “short sale.” It’s become an all-too-common situation for homeowners this last year. For those of you who aren’t familiar with short sales, here’s a simple definition:
Sounds simple enough: a home owner gets into financial trouble and can’t pay the mortgage. They try to protect their credit rating and avoid foreclosure by asking the bank to accept less than what they owe on their mortgage. Wow! Sounds simple enough, right? For the purposes of this post, I’m not going to discuss the complexities of the short sale process. I’ll save that depressing subject for another day. What I’d like to focus on here is the serious, negative consequences short sales can have on a neighborhood.
A Neighborhood in Kenmore
Recently, a homeowner in Kenmore asked me to do a market analysis on his home. He was alarmed that homes in his neighborhood were listed as “short sales.” He had heard that this wasn’t good news and he needed some reassurance that his property value was OK. I crunched some preliminary numbers before I went over to talk with the client. Here’s what the numbers looked like:
Click on the picture for a larger view
I happen to be very familiar with this neighborhood. All of the houses were built within several years by the same builder and the condition of all the homes are good. It’s a desirable area. Nice place. Unfortunately, three homes in this neighborhood are currently being offered as short-sales (as pointed-out by the red arrows) and, as I explained to the worried homeowner, the short sales have stagnated his property value (and those of his neighbors).
The client’s home happens to be an identical model as the property currently pending at $365,000. The homeowner thought his house was worth $475,000 based on his original purchase price and the asking prices of other houses he’s looked at. He wasn’t too happy when I showed him the comparables: Here’s the problem:
The direct comparable home at $365,000 was originally listed one year ago at $530,000 when the market was at its height. As the year went by, the sellers continued to drop the asking price until they could no longer pay the mortgage. Furthermore, the two active short-sales have lowered their prices.
The bottom line? I can’t spin this any other way my dear readers, the number of short sales in this neighborhood has pretty much eroded any equity gains the neighborhood experienced from 2004 until now. Conventional wisdom tells us that if one, single property was sold under distress, the comparables run by an appraiser might not come in low; however, this is not the case here. Sellers in this neighborhood will have a hard time proving higher prices when the prices are declining.
In fact, if I had a buyer interested in this neighborhood, and he/she was patient enough to get involved in the purchase of a short-sale, it’s good news. The pending short-sale at $365,000 was only listed for one week at that price. If the transaction actually closes, the buyer did very well indeed.
The ugly reality of short-sales in your neighborhood is that your property values are at risk. I’ve heard a lot of sanctimonious individuals recently, criticizing others for a “lack of personal responsibility” if they can’t pay their mortgage. The fact is, there are some people who did get in over their heads; however, I personally know a number of hard-working people who have lost good-paying jobs and they are in financial difficulties they never imagined. Just remember that we are all in this together and we need to be careful not to judge each other too harshly. Together we stand…….
Comparable pic courtesy of the NWMLS
June 18th, 2009 at 12:31 am
Well written James. You are well versed and in tune with Kenmore Real Estate. Thanks for sharing your short sale experience and expertise.
Cheers,
Cameron Novak
Real Estate Agent & Short Sale Specialist
Corona, California
http://activerain.com/cameronnovak
June 18th, 2009 at 6:13 am
James, good article… The fact of the matter is that you are right on most all accounts. The bad news is that there is not much we can do about it. Property values are stagnant in most markets and declining in many. The short sale is not the enemy of the neighborhood it is actually a boon. It is highly preferable to speed up the road to recovery by having the home sold quickly via the short sale, than to take it through the foreclosure to REO process. (At which time it would be sold at a similar price but with up to a year + delay)
What I find interesting is how people view the ‘inherent value’ of their homes differently than say the value of their 401k. For example if you neighbor sold stock in their 401k at a loss for reasons of financial distress, and that selling affected stock price… no one cares….but with real estate, its like a God given right that house prices stay fixed or constantly appreciate….just a thought.
June 18th, 2009 at 7:35 am
Cameron and Matthew – Thanks for the comments! Matthew, you’re absolutely right about the perception homeowners have about their property. The phenomena of double-digit appreciation over the last decade has blinded people into believing that a) property always appreciates and, b) a home is an “investment.”
You comment about short sales being a boon is interesting: Indeed, short-sales beat the alternative (e.g. a protracted foreclosure and eventual loss of property values). The problem with short-sales is the complexity of the transactions and the seeming lack of urgency shown by the lien holders. Because so many of the homes were securitized against the pension funds of retirement funds in Iceland or NY, it’s taking forever and a huge number of the short sales in our market fail to close. I’d be curious to know, from your perspective, how the process could be improved.
Great conversation. Thanks!
June 18th, 2009 at 7:42 am
[...] SHORT SALES….click here [...]
June 19th, 2009 at 9:53 am
[...] but they can adversely affect the property values of whole neighborhoods (see my blog post The Ugly Reality of Short-Sales in Your Neighborhood). We are truly fortunate that the bar is spending $150,000 on a foreclosure legal team and $10,000 [...]
June 19th, 2009 at 1:20 pm
[...] The Ugly Reality of Short-Sales in Your Neighborhood James Lupori recently posted an article about the consequences of short sales in rel estate. This may be an issue for some of you and I wanted to keep you abreast with the workings of the real estate market. [...]
June 21st, 2009 at 10:30 am
[...] SHORT SALES….click here [...]
June 24th, 2009 at 9:33 am
James, you’re absoulutely correct. In our case, we completed a short sale last year in an area with very few other homes on the market. By the time we closed, the market was starting to go flat. The buyer got a great price but the market is now in line with what he paid for the house which was $160K less than we paid just four years earlier!
July 1st, 2009 at 5:56 pm
This is happening all over the country. In fact, some locations in the St Paul-Minneapolis Area there are so many short sales and no retail sales that doing comparable analysis is impossible for Realtors,Investors, Homebuyers and Banks.
A reality check for people is that this won’t matter for most people since they are not interested in selling today.
Granted lines of credit are affected as well as the ability to refinance.
Most people will weather the market correction fine. Just like most loans outstanding today are paid on time and are up to date.
August 24th, 2009 at 11:18 am
[...] an associate of mine at Kenmore Undressed; Jim talks about some of the consequences of short sales. “The Ugly reality of Short Sales in Your Neighborhood.” This entry was posted on Monday, August 24th, 2009 at 12:18 pm and is filed under Las Vegas [...]