Short Sale Pitfalls: Buyers Walking

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Post date:  December 28, 2009

More short sales are continuing to hit the market in our south coast cities, and there’s more where that came from.

And, 240 short sales were successfully closed in our south coast cities in 2009.

This blog will feature a short sale series with Broker Associate Aaron Friedly of Huntington Beach based Short Sale USA.

Friedly told us the status of short sales in our south coast cities, where distressed inventory is on the rise and where short sales are headed.

For the fourth installment in this short sales series, Friedly breaks down the pitfalls:

Buyers Walking

‘Subject to lender approval’ is the real estate contract clause that makes short sales notoriously tough to deal with. In an equity sale, buyer and seller deal with each other in an arm’s length transaction and when certain terms are met, usually within 30 days, the escrow closes and title is transferred. In a short sale, the lender must approve the whole transaction which makes the sale more lengthy and complicated.

Many short sale transactions “fall out” because the buyer backs out of the deal after a period of time; usually this occurs due to unrealistic expectations. It is imperative that the real estate professional inform the buyer of realistic timeframes as soon as the transaction is initiated. For short sale transactions to be successful, buyers need to come into the deal fully aware of the vicissitudes of the short sale transaction. As in all aspects of real estate, education and awareness are of the utmost importance. The real estate professionals involved in the transaction need to be utterly candid to all parties and set proper expectations throughout the process.

There are many reasons why buyers will walk away from a short sale transaction. As mentioned above, many buyer’s expectations on short sale timeframes do not jibe with actual short sale transaction timeframes. Thus, they get impatient and nix the deal before it gets completed. Second, buyers walk due to non-short sale specialists handling the transaction. As a buyer, one needs to be keenly aware of who is transacting the short sale. If the real estate professionals involved in the short sale have no experience in short sale transactions, the deal is doomed from its inception. The best case scenario is to have a professional short sale negotiator involved in the process, facilitating it through completion. Along this same vein, buyers have a tendency to walk due to lack of follow up from the professionals involved in the short sale. In more than any other real estate transaction, short sales requires constant due diligence and continuous follow up.

Lastly, many buyers walk due to their perception, and often rightly so, that the sellers and their agent are not fully committed to them. For example, say a short sale offer from a buyer is approved by the seller and submitted to the lender at $500,000. Many sellers will keep this offer “in pocket” until a better offer comes along. If and when the better offer occurs, the seller will find a way to extract themselves from the original deal and move forward with the higher tendered offer.

The best business practice is for all parties to do their due diligence on each other. As a seller serious about closing a short sale, one should always choose the best possible buyer and fully commit to closing with that particular buyer. Too many listing agents and their sellers commit to a buyer prematurely, then either simply hope the deal will close as is or will follow the above scenario of waiting for a better offer and then re-submitting to the lender. “

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Why U.S. Home Sales Are Both Up and Down

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Date Posted:  December 23, 2009

We can’t blame you for being confused about housing. Tuesday, the market cheered a surge in existing-home sales. Then comes today’s news that new-home sales slid 11.3% in November, falling to the lowest level since April.

Up, down. Up, down. What gives?

Though the two reports both concern home sales in November, they aren’t really in synch and so aren’t comparable. The National Association of Realtors records existing-home sale data when the home closes, while the government records new-home deals when contracts are inked.

For home resales, there is typically a lag of a month to six weeks between the signing of contracts and the closing. So most of the November sales reported by the Realtors are based on decisions buyers made in September or October. At that point, lots of people were scrambling to buy homes in time to qualify for a tax credit that was due to expire Nov. 30. (It was later extended through April 2010.)

For the new-home sales, the decisions were made in November, when there was no such scramble to qualify for the tax credit.

Existing inventory includes foreclosures, which continue hitting the market and typically command a steep discount to new homes. Buyers, particularly first-timers, are rushing to take advantage of these falling prices. As Wednesday’s Journal points out, first-time buyers made up 51% of purchases in November, according to the Realtors. Sales of foreclosed and other “distressed” properties  – which includes homes built during the housing boom – accounted for one-third of the purchases.

Median prices are another issue: The price tag for existing homes came in at $172,600, while new homes registered $217,400.

Housing economists and analysts are eager to see how this plays out in the next few months. It is likely that the tax credit pulled forward demand for both new and existing housing, but no one knows by how much.

“The spring selling season would be critical to determining whether a possible double-dip is at hand, or whether housing’s recovery will regain steam,” writes Carl Reichardt, an analyst with Wells Fargo.

Some experts seem more optimistic than others, particularly when it comes to new homes.

“The new home sales figures didn’t bring any smiles to Wall Street’s face this holiday season,” writes Mike Larson, real estate and interest rate analyst at Weiss Research  “Still, I’m not all that surprised. Some giveback was to be expected given the feared expiration of the tax credit and the pull-forward of some demand Now that the credit has been extended and expanded, and the economy has improved a bit more, I suspect sales going forward will find support.”

But Mr. Reichardt, who covers the home builders, remains concerned.

“We are entering poor-weather winter months, when it is more difficult to construct homes in a substantial part of the country, with builders also low on spec units,” he writes. “While [today’s] dataset is volatile and could be revised, the poor weather thus far in December also leads us to conclude sales rates could continue to show weakness when reported in late January.”

He also points out that numbers for August, September, and October were revised down by 2%, 3%, and 7%, respectively. Will that happen again?  Stay tuned.

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10% of Underwater Homeowners Would Walk Away, Survey Finds

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Post Date:  December 24, 2009

A new national survey looking at the phenomenon of strategic defaults, in which homeowners choose foreclosure over continuing to pay on underwater mortgages, has found that nearly one out of 10 homeowners say they would walk away if they felt financially vulnerable and owed more on their homes than they were worth.

The telephone poll of 1,000 homeowners, conducted for Reecon Advisors, publisher of Real Estate Economy Watch, revealed that most would choose other options: 61.7% would talk to their lenders about modifying loan modifications, 44.3% would try to sell and 25% would rent out a room to help meet expenses.

To what extent homeowners are underwater also plays a role in the decision making process. Owners with negative equity of 10% or less rarely default, according to researchers from the graduate schools of business at the University of Chicago’s Booth School of Business and Northwestern University. But once negative equity reaches 50%, close to one in five owners would walk away.

The findings show that one out of four homeowners who default on their mortgages are making a strategic decision.

Whether owners should feel guilty about walking away has also been the subject of recent reports. In “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis,” University of Arizona law school professor Brent T. White urged homeowners to stop paying their underwater mortgages if it was in their best financial interests. Further, he said they should not think of the decision as doing something morally wrong.

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Pending Home Sales Increase in October; Construction Spending is Flat

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Post Date:  December 1, 2009

Some good news for real estate today: The number of buyers who have signed contracts to buy a home has risen for nine months in a row, according to a national index.

The Pending Home Sales Index — which is based on the number of signed monthly contracts as tallied by the National Assn. of Realtors in Washington — increased 3.7% in October from September’s reading of 114.1. Today’s results put the indicator 31.8% above October 2008, the biggest annual increase recorded since the group began tracking pending home sales in 2001.

Nevertheless, home sales could dip in coming months after a rush of consumers motivated by the initial Nov. 30 expiration of an $8,000 tax credit for first-time buyers slows during the typically sluggish winter months. Congress last month extended and expanded that credit through April, but it could take time for that extension to pump life into the market, said Lawrence Yun, chief economist for the Realtors group.

“The expanded tax credit has only been available for the past three weeks, but the time between when buyers start looking at homes until they close on a sale can take anywhere from three to five months,” he said. “Given the lag time, we could see a temporary decline in closed existing-home sales from December until early spring when we get another surge, but the weak job market remains a major concern and could slow the recovery process.”

Critics of the credit and its expansion (to higher income levels and to people who have already owned a home) have argued that it is a waste of money going to people who would have bought a home anyway and that it has only served to temporarily increase home prices.

In other news, the government said construction spending during October was flat when compared with the prior month.

Construction spending in October was estimated at a seasonally adjusted annual figure of $910.8 billion, nearly the same as the revised September estimate of $910.4 billion. The October figure is 14.4% below the October 2008 estimate of $1,064.1 billion.

Patrick Newport, U.S. economist for IHS Global Insight, said in a note to clients this morning that the slowdown in construction spending probably was due to the initial expiration of the tax credit.

“Going forward, single-family starts should continue to improve because inventories of new homes have fallen to their lowest level since 1972, and will require restocking and because the household formation rate will increase as the economy starts adding jobs in 2010,” Newport wrote.

The report also underscored the collapse in the market for rental homes, he said. That market is being hit by tight credit, a surplus of property due to overbuilding during the boom years and because more and more renters are becoming homeowners given the steep drop in home prices.

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