Just last year, Mark Biggins, local Realtor for Redfin guided Curbed University students through the short sale and REO property. We're using his helpful lessons for buyers interested in these properties again, adding updates for the current market. Contributing to the current information is Haruko Hata of ZipRealty and Ed Deleski of Vanguard Properties.
A short sale is a listing that is being marketed at a price below the outstanding balance of an existing loan or loans on the property. In this circumstance the lienholder (usually the whoever owns the mortgage) would be taking a loss when the sale goes through- and must give their approval prior to the sale proceeding. To complicate things, there's often more than one lienholder to deal with.
Haruko Hata says that REO sales in San Francisco accounted for 6.6 percent of all SF residential sales in 2012, down from 9.7 percent in 2011. Short sales in 2012 accounted for 6.5 percent of all SF residential sales, down from 8.8 percent in 2011 — bringing the total share of distressed sales in SF to 13.1 percent in 2012, while the distressed sales in the U.S. accounted for 43 percent of all U.S. residential sales in 2012. These data give us insight into the rarity that is a San Francisco short sale or REO, and help explain why buying them is even more difficult than it might be elsewhere in the country.
The bank's goal is to minimize loss. If they have a good short sale offer that is close to market value, it is in their best interests to approve and save the cost of foreclosing- an expensive process with months of legal proceedings, taxes, and property management issues. The whole process can take months. A buyer can wait six months for their dream home to be approved only to have it declined at the end. The buyer pool for short sales is much more limited because of the problems associated with them and many buyers rule them out all together (and with less competition, the price drops) but a sale advertised as an "Approved Short Sale" is a good sign the sale close like a normal transaction.
REOs are generally in worse condition- the bank-owned houses can be in extreme states of disrepair and come without disclosures or property inspections upfront. This can lead to frustrating surprises during the inspections, In the current market, says Haruko Hata, "Once a contract is ratified, banks never comes back to the negotiation table for price reductions or additional credits in lieu of repairs unless the repairs are for safety or health related issues." If a buyer sends them a $20,000 pest report, a $10,000 roof report and asks for a $15,000 credit, the bank recognizes that if a buyer cancels, they still have to sell the property with this new information.Banks prefer to keep the current buyer in contract as long as their requests are reasonable in order to get the deal done.
But, points out Haruko, "this kind of thing does not happen in this competitive market. The bank would let this reluctant buyer cancel and immediately go for the second highest bidder. So buyers are often encouraged to review a REO property with their contractor or inspector and become well-aware of the property's conditions before making an offer."
The pitfalls with REOs are associated with their specialized contract. Once an offer is agreed upon, the bank will send their own addendum to the CAR contract that strips the contract of many of its buyer protections and contingencies, plus the bank includes clauses that allow them to exit the contract at any time. Overall, REOs can be scary because of the unknowns on property condition, but with an experienced agent to guide them through, a buyer can have a good experience with an REO- and a really good deal. Sadly in our pricey, competitive city with its scarcity of any kind of property, especially this kind, "even a not-so-good-condition REO property can never be a good deal," says Haruko.
According to Ed Deleski. Realtor for Vanguard Properties, points out that short sale scenarios are becoming increasingly more rare in San Francisco. Many of our clients who previously have considered a short sale are now finding themselves with equity in their homes. This is a common occurrence in South Beach where values dipped quit a bit but have rebounded right back to where they were before 2009/10. Buildings such as One Rincon Hill and The Palms are once again highly desirable; people have found long term value in the location and full service amenities.
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