There many real estate agent professionals touting the short sale as the MAGIC pill for property owners as a cure all for any situation from loans based upon dishonest income information (stated income loans – “liar loans”) to real estate investors that are not realizing the profits they anticipated.

People are always looking for the MAGIC pill to solve their problems or shortcomings. We look for the magic pill to lose weight or increase our incomes. Over the past few years the magic pill was finding a property, maybe the wrong one, and finding a loan or mortgage to finance the purchase, maybe the wrong loan program. Now, the MAGIC pill is the short sale.

A short sale historically has been used to assist borrowers with a financial hardship caused by a change in their financial situation. Changes in financial situations involve – loss of job, loss of a spouse’s income, hospitalization, job relocation, etc. A short sale means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales. Banks and lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.

Real estate investors may not qualify for a short sale, because they were investing. Investing does not guarantee a profit; it has inherent risks associated with it. Hence, banks and lenders may be more reluctant to be receptive to a short sale for a real estate investor.

Two recent cases come to mind immediately and are used to show how the MAGIC pill was used and proved unsuccessful.

Case #1 – A Bonita Springs real estate agent recently expressed on her blog the frustration of the short sale process when representing a buyer and the lender’s lack of cooperation trying to complete a short sale. Major points discussed – settling on a price for the property, needing an additional document, and at the end the bank requesting the seller pay $3,000 in closing costs.

Case #2 – A Naples real estate agent, expressed frustration with the process and the lender’s lack of cooperation in accepting an offer. An offer was presented to the bank for $175,000 on a home with a list price of $180,900. The bank declined to approve the contract. He could not understand why it was not approved since the offer was so close to the list price.

There are others expressing their frustrations as well but these are the most recent within the past few days, coming to my attention.

The short sale process is difficult to maneuver through the maze of research and documentation, in addition to lenders or holders of the mortgage can be hard to deal with. But this does not have to be the case if a buyer or seller has a team composed of qualified professionals in real estate, real estate law, and income taxes. In some situations alternatives to the short sale can be discussed and save the home owner the emotional distress of losing their home. In other cases it might be possible to determine the chances of having a successful short sale for the seller or short sale purchase for the buyer.

Why the short sale MAGIC pill failed in the above cases:

- Listing agent and seller establishing too low of a list price without due consideration towards the bank or lender. Questions – Did the seller and buyer really negotiate or was it just the seller approving the offer and contract? Was a comprehensive Broker’s Price Opinion or Comparative Market Analysis completed prior to listing and included with the package to the bank or lender?

- Inadequate research or counseling to determine if additional resources were available from the sellers.
In Case #1, the seller may not have been making payments on the loan. Did the $3,000 represent the payments not made? Did the seller use the monies for other purposes – paying down credit card or other loan balances?
Case #2, some quick research showed individual was a real estate investor with the possibility of significant equity in other real estate holdings. Does the seller expect the bank or lender to settle for less than owed when there are assets or resources to cover the deficiency?

- In Case #1, a document was not initially furnished to the bank or lender. The document was a preliminary settlement sheet (closing statement or HUD-1); in a real estate transaction it is called a seller’s net sheet. The net sheet is done at time of listing. It is done once again when an offer is presented and through-out the negotiation process.

Short sales can be a win-win-win situation for sellers, buyers and financial institutions if handled by knowledgeable real estate agents, real estate attorneys and income tax advisors.

The challenge for both sellers and buyers is to find the right professional team. The search usually starts with finding a real estate agent, rather than a real estate attorney, due to what is perceived as a cost savings. If you are starting with a real estate agent look for the following characteristics or skill sets:

• Some type of business background – accounting, finance, credit and collection, basic income tax understanding.
• Ability to review and explain the closing documents signed at a closing.
• Can explain without a computer program closing costs for both a buyer and seller.
• Ability to analysis cash inflow and outflow.
• Research techniques to discover important aspects not readily available.
• A list of real estate attorneys and income tax professionals.

In another post it will be explained why these characteristics and skill sets are important to both sellers and buyers when considering entering the area of short sales.

Frequently, we hear or read about real estate statistics in the news media.  What do these statistics truly mean?

The first premise of understanding the meaning of real estate statistics is that real estate is local.  Local can be a town or city or possibly even a county.  Each town, city or county’s real estate can and does perform differently from each other, as well as, from community, neighborhood or subdivision, as well as, historical turnover rates for an area.  Historical turnover rates are indicative of stability and could explain less fluctuations in property values.

We have certainly heard the expression, “location, location, location” and think it means location is important.  Yes, the location is important, but location is beyond just where the property physically exists.  The first location, does mean the physical location.   The second location deals with the schools that a property owner’s children will attend.  It has been proven that locations where the better schools are attended have a better rate of appreciation and demand.  The third location deals with the traveling distance to employment – the closer to employment the greater the demand.

The news media generally speaks of national statistics or on a state level, but rarely discusses the statistics of a particular town or city.

What are the important statistics a potential seller or buyer should seek in determining the best time to place their property on the market or make their next purchase.

The second premise of real estate is understanding the difference between list or ask price, what a seller wants for their property and market value, the price a knowledgeable buyer and seller are willing to complete a real estate transaction.  Sellers can set their list or ask price at any price they think their property is worth.  However, the closer to the estimated market value the ask or list price is generally the faster a property sells.

The third premise is the ownership of a property.  There are distinct differences between ownership – single family (fee simple), condominium, cooperative, or timeshare.  Knowing the differences is critical for determining if the statistics are important for your decision.

There are a number of statistics that a seller or buyer should be aware of in order to make a good decision about what they want to do.  Any user of statistical information needs to know that seasonal fluctuations does impact these statistics and should be given such consideration.

Median price paid – this is the price where there are an equal number of transactions above and below this point.  A year over year analysis is helpful for determining if the median price is up or down from a year ago.  These can be either monthly, quarterly or annually.  When a trend analysis is used in combination with this analysis, one can detect where the market prices are going.  Under any real estate market  condition, an untimely decision can be avoided, by knowing the median price trend rather than a snapshot.

Months of inventory – this is a measure of how many months it will take for the current listed properties to sell based upon a 12 month rolling average of close sales volumes.  A neutral market – one in which neither the buyer nor seller is favored – is about six months of properties.  More than six months favors the buyers, commonly called a buyers market, while less favors the sellers, commonly called sellers market.  This is important to know if you will be in a favorable position or not for your potential transaction.

Pending sales – a pending sale is where a seller and buyer have agreed to transact the sale of a property.  Sometimes called as under contract.  At this time, the actual agreed upon sale price is not know to parties not associated with the transaction.  Pending sales are a good indicator of increasing or decreasing real estate transactions as well as interpolating an estimate of the market values of properties.  Increasing pending sales are an indicator of increased interest in the procurement of real estate, while the reverse occurs when the pending sales are decreasing.  The time between agreement and closing can vary according to local real estate practices – generally it is estimated between four to eight weeks, in most parts of the country.

Closed sales – a closed sale is where a property has actually transferred ownership.  This is generally measured as a volume – increasing signals a positive, while a decrease is a lack of interest in transacting real estate.

New listings – a new listing is any property that has a new listing agreement with a real estate agent, could include properties previously listed with another real estate agent.  The importance of this statistic in the form of developing a trend.  Trends where new listings are increasing can either indicate a real estate market heating up or one that is cooling.  This statistic needs to reviewed in conjunction with months of inventory available and pending sales to develop a clear indication of the market.

There are some other statistics that can be used to evaluate a real estate market – average days on market, list price to sold price ratio, and expired listings.  The average days on market measures the number of days from the date listed until the property receives a mutually agreement sales contract.  It is important to know, if the average days on market calculation includes the contingency period for clearing contingencies.  Contingencies could include such things as home inspections and loan approval.  Such contingencies can add as much as 28 days to the average number of days on market, thus becoming a misleading statistic.

The list price to sold price ratio measures the difference between what the seller has the property listed at when the sales contract is agreed to and the actual price paid.  Although this figure can be helpful to measure price flexibility, it can be distorted by properties sold where the seller pays for some of the buyers’ closing costs.  The seller’s payment on behalf of the buyer can be included within the sales price of the property.  However, it can also, measure the flexibility of sellers list prices for a particular neighborhood or subdivision.

Expired listings reflects those properties that failed to sell during the contracted listing period.  Listings expire for one of the following reasons, over-priced, lack of promotion or lack of marketing.  These properties could be re-listed with the original real estate agent and show as a new listing.  Expired listings as a statistic maybe informational, but is more important when determining a list price or for preparing an offer to purchase.

Before selling or buying real estate, be sure to seek out the statistics directly related to the property and do not rely upon statistics which are general in nature.