It’s becoming our weekly ritual to browse Open Houses on Sundays. We usually try to have a theme, from “cheap condos we’d eventually outgrow” to “houses that would be a stretch, but we could live in forever”. Last week, we actually did “beautiful multi-million dollar homes we’ll never afford” just for fun and possible remodeling ideas.
More and more short sales
One common theme that we’ve been noticing across the board is more short sale houses. Whenever you see a house listed for sale that just seems too cheap, it’s likely a short sale. A short sale is a type of pre-foreclosure situation where the buyer is already in default of the mortgage loan, but the bank has not foreclosed yet. Here, both the lender and borrower agree to sell the house for a price that won’t pay off the entire loan balance. The lender avoids a long foreclosure process and potentially lower price upon the eventual auction, and the borrower prevents an foreclosure from completely killing their credit history.
From the buyer’s perspective, it can be both good and bad. You might get a good deal, but it can get complicated. Instead of a seller accepting your offer within 24 hours, you’re looking a 2-4 weeks while the lender takes multiple offers, checks you out, demands pre-approval letters and sometimes large upfront deposits. There are more details than this, but that’s my basic understanding.
Flip or Flop
Today, we got to see the results of a house flip gone bad, just like on the TV show Property Ladder. They had the classic mistakes – they took too long with the remodel, they priced it too high and stayed stubborn, and they ran out of money before they could sell. Here’s the general timeline:
6/05: Bought house for $850,000. Remodeled… adding the obligatory hardwood floors, fixed up the bathroom, did some painting.
7/06: Listed for $1,100,000
8/06: Dropped to $1,050,000
9/06: Dropped to $1,000,000
3/07: Taken off market, decided to wait things out
8/07: Short sale at $800,000
The carrying costs for the loan were probably around $5,000 a month, although I think the “owners” did live in it or at least rented it out, as there was clothes hanging in the closets. Add in the remodeling costs, and things look pretty bleak. Even if they do get a short sale, forgiven debt is considered taxable income. I wish I could feel sorry for them, but the signs seem to indicate that just they got too greedy.
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I’ve got to say that the open house sundays sounds like a nice ritual. My wife and I have done the same sort of thing, but usually going for places that aren’t quite finished being built yet. Usually open door and building sites on the weekend type of thing.
How do you end up doing searches for the high end stuff? A few of the sites I look over never seem to have Open houses for that …. level of cost.
It seems like there was lots of risk taken by both the owner and the bank. The owner was hoping to get a 30% higher price on the house after 1 year (that seems aggresive even in a good market without some special circumstance driving prices) and if there isn’t enough money left to cover the loan when the house sells at $800,000 then the “bank” did not leave itself much cushion on a house that was originally $850,000.
Sounds like this person got too greedy. Does anyone know a website where you can see houses going on sale or people advertising their houses they want to sell?
Hey Jonathan;
We were bugging you just a while ago about “waiting it out”. All of these “short sales” seem to be a pretty good indicator that the “sub-prime” crisis is not actually done.
Given the market’s tendency to lead by a few months and the general trend of lower prices over the fall and winter months, I would expect that you’ll see more of these and more price drops on houses. Your waiting is probably paying mucho dividends right now 🙂
Hi! Just came across your site…very informative! Keep up the great blogs!! Just wondering if you know whether there is a place on the web that you can find houses that are on a short sale?? I’m looking into buying a home in the next year and would love to find a great deal on a house, if possible. Thanks!
As far as I know, most short sales are listed on the MLS just like any other house. You’ll often see them if you’re trying to find the cheapest house in a nice neighborhood like we are :). So just search the online MLS sites for your area, or any good real estate agents should be able to find them for you.
You can also try Craiglist as they often advertise there. Just type in “short sale” and you’ll get a bunch of returns. Here is an example in Portland. Notice under special conditions they list it as a short sale.
the only problem i can see is is that as the price increases . there is also increase in the expectations.i would like you to comment on that
Jonathan,
I just pulled out of a short sale purchase that I was spent almost 24 days in. We are in the southern California market and in the 24 days since I made my offer the value of the property depreciated by 40k. It was still a deal for today, but in 6 months I can probably pick it up for 40k less. Even though I planned on living in that house for 15 years. I couldnt bear seeing the value of my house lose value while the market recorrects. I sleep much better at night now.
Hey Jonathan – I’m glad you mentioned that forgiven debt is considered taxable income. There’s a real unfortunate surprise lurking next January for many would-be short-sellers who thought their situation couldn’t get much worse as long as their short-sells materialize. That’s actually a topic i’d like to see you discuss. Most people affected by forgiven debt probably don’t realize the reduction to their mortgage loan is taxable income — until they receive the 1099 the following year.
Hold on there, these shortsellers might not be as bad off as you think come April 15th.
from:
http://en.wikipedia.org/wiki/Debt_settlement#Tax_consequences
Most people affected by forgiven debt probably don?t realize the reduction to their mortgage loan is taxable income ? until they receive the 1099 the following year.
Not if Bush manages to push through his “mortgage help” plan through Congress:
http://www.npr.org/templates/story/story.php?storyId=14094388
Excerpt:
One measure that goes into effect right away uses the Federal Housing Administration to help people refinance into loans with better terms.
Most lenders won’t offer new loans to borrowers who have fallen behind in payments after their loans adjusted higher. But if the FHA insures a new loan, the borrower can refinance.
Another measure that needs congressional approval would waive a tax that homeowners pay if a lender forgives part of their loan.
***
Yet another instance of savers getting screwed.
Short sales must be a great opportunity for people ready with cash. Man! I would think that this particular price range (800+) would be a really cool place to be. Not quite worth a million, but the right one might appreciate eventually into the 1mm range. And to get a deal on a renovated one to boot, wow, some people are getting lucky!
Has anyone observed whether lowball offers are ever considered in short sales? It seems that since the lender also has to accept the offer in addition to the seller, they may be less likely to bite the bullet. Would you even receive a counter-offer in a short sale situation?
I can see this getting ugly if the lender is slow to act upon offers in a declining market as buyers will withdraw their offer when something else comes up or as they see the value drop as in Daniel’s case above. Better to wait until the house is in foreclosure? How long might it take to reach that phase (seller and lender giving up on short sale)?
regarding on taxable income. on 2007 Congress pass G. Bush sign. here and listen incase you don’t know. example. if you short sales your house lower on what you owed in the bank you are covered to this 2007 signed by President Bush.
1. it has to be your Primary home.
2. not purchase or refinance.
if you refinance your house and take 30 thousand or more then you might have to pay some taxes. but if half of that 30 thousand or more are being use for home improvement as long as you can prove it, then you might get away from it.
I just found your site, and gotta say I love it. Citi mentioning that they are operating at a profit gives hope that things are slowing down a bit, although without knowing what is on their books, it’s hard to say. We can only hope for a recovery by the end of the year and that short sales can be processed with a “cleaner” timeline for buyers and sellers. It’ll be interesting to see how property taxes play out when the properties are reappraised and the city has to send out refund checks for those finishing up the installment on a new purchase. Things are going to get tight and will hit a little closer to home in the next 6-8 months.