This week I looked at a house that was
being marketed as a short sale. I'm not sure why but I do this
occasionally. It's probably for the same reason I take a hammer and
smack my thumb from time to time just to remember why I shouldn't do
it. For those familiar with the stock market usage of the term, it's
not the same thing. Unlike stocks, people do not sell borrowed real
estate in the hope that they can buy it for a lower price at a later
date. I guess if anyone has tried it, they would be sitting in a
cell next to Bernie Madoff. You remember him, he's the guy who made
off with the retirement funds of a lot of unhappy people.
In real estate, a short sale occurs
when the banksters holding the note on the property agree to take
less than the amount owed, generally because payments have either
stopped or are not coming in at regular intervals. They agree to
accept a selling price that is short of the amount the buyer
contracted to pay.
I have been to auctions where we were
told the bank would accept pretty much whatever price brought the
hammer down and the cry of “Sold!” from the auctioneer. When the
property is a pretty house in need of little repair and a number of
people are looking for a nice place to live, chances of finding the
sought after bargain are about the same as finding a Super Bowl half
time show suitable for the children to watch. Even on less than
perfect houses, far less than perfect, I have been to auctions where
investors quickly dropped out and watched in amazement as a couple of
owner occupant bargain hunters bid the price up beyond even the most
optimistic after repaired value (ARV).
Banksters love that kind of stuff, but
it is expensive and time consuming to go through the foreclosure
process so they often turn to the short sale. They want to get the
non-performing loan off their books to keep the bank examiners
semi-content, but rarely are they in such a hurry as to give an
investor a fair shot at a reasonable profit. In fairness to the
banksters, rarely does the guy consigned to the basement of the home
office even see the property, so the price they accept is more
related to minimizing their losses rather than based on the actual
value of the property. They get input from realtors, but, in the
end, they think know the market better from hundreds or even
thousands of miles away.
Getting back to the short sale I looked
at last week: the bank approved price was $129K and the Zestimate was
$176K. Now I won't go into the reliability of such numbers but comps
in the same neighborhood showed the house could have been worth
somewhere in the mid 180s. So with a $50K plus spread it was
something to check out. One of the sad facts of life is that when
homeowners find themselves in this position, mainenance falls by the
wayside along with the mortgage payments.
So when we walked in the front door, I
saw the popcorn on the ceiling was separating because the air handler
above leaked water from the tray beneath it... but that was no longer
a problem because the AC was no longer working. There were wires
strung around the rooms, sometimes from the ceiling, as apparently
some of the outlets were no longer functioning because rats in the
attic had been having a merry time chewing on most anything exposed.
It was listed as three bedroom home because the fourth was an
unpermitted carport conversion. With one bath, four bedrooms was a
bit excessive to put on the market so turning it into a garage would
have been on the agenda for a flip.
The kitchen and bath were not bad for a
house built in the mid fifties and might suffice for an economy
rental, but they both would have to go to come anywhere near the mid
180s. Laminate floors were relatively new in the living and dining
area, but the rest was vinyl tiles on a concrete slab.
Outside it was apparent the roof was on
its last few tropical storms and siding on the back of the house was
pieced together in a unique fashion. Most likely the best thing to
do would be to replace it with vinyl siding that was common in the
neighborhood. There were several other “features” that brought
the repair estimate to something just shy of $50K.
This, according to the guru taught
formula of 70% of ARV minus repair costs yielded a maximum allowable
offer (MAO) of $82K... pretty close to my off the cuff comment of
about $80K.
Since the place had only been listed
for about two weeks and the banksters were still in their fantasy
price period, I just decided to tuck this information away and check
back in a month and a half to two months... maybe longer.
If someone wanted this place as a home
of their own and wanted to act as their own general contractor,
hiring all the tradesmen themselves, they would probably come out
with a decent house the way they want it...along with a few well
earned gray hairs.
When I lived up in New Jersey
(something I don't admit to very often) there was a saying “nobody's
gonna good deal ya”. This is especially true with banksters, but
it doesn't hurt to check them out from time to time. You may just
find one to make a buck or two.
