Although short sales are a great way for homeowners to avoid foreclosure and lenders avoid having to write off an entire loan if they cannot move the property in question in a timely fashion, they are costing banks more and more money each year, estimates data firm CoreLogic[1]. Last year, lenders, servicers and investors lost an estimated $310 million due to “suspicious” short sales; this year, the number is predicted to log in around $375 million. A “suspicious” short sale is one in which the lender accepts less than they arguably should have on a property. Generally, data firms identify “suspicious” short sales by looking for properties that undergo multiple closings – one with the bank and one with another party – within short periods of time. This is based on the belief that if the person making the short sale offer had been working in good faith, they would not have been able to sell the house for a higher amount so quickly. CoreLogic estimates that same-day resales tend to average $50,000 more than the short sale price.
Now, as a real estate investor, you may be thinking that this just sounds like the classic “buy low and sell high” axiom that has been crucial to any type of investing for years. However, using this strategy in short sales can put a target on your back as far as short sale “fraud” investigators are concerned. Another red flag? LLC (limited liability company) buyers. “While [LLCs] comprise only two percent of all buyers, they comprise more than 25 percent of buyers in suspicious short sale transactions,” reports CoreLogic senior vice president of product management and analytics Tim Grace, adding that this validates already-existing industry perceptions about LLCs.
Although CoreLogic calls lender “losses” from short sales “unnecessary,” is it really fair to say that investors and other individuals who can negotiate a better price than the banks are fraudsters? Of course, you should not doctor appraisals or lie in order to get a cheaper short sale, but if the property is not going to sell without your participation in the deal, then is it really fair to say you are creating a loss for the bank?
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Tell us about your experience with short sales and whether you feel that this perception that selling a short sale for more than you paid for it is really fair to real estate investors.
[1] http://www.dsnews.com/articles/suspect-short-sales-could-cost-lenders-375m-this-year-report-2011-05-25
May 26th, 2011 at 7:42 AM
NOT THAT THE BANKS WOULD EVER DO ANYTHING THAT COULD BE SUSPECT. NOOOOOOO!!!!!
May 26th, 2011 at 8:14 AM
Another side to the story is how often lenders take an active short sale to auction/foreclosure for less then the short sale offer. Bank of America has done this on 5 of my short sales in the last 2 months. For instance, $350,000 cash offer and opening bid at auction $267,000. Happens all the time.
May 26th, 2011 at 9:01 AM
Did CoreLogic bother to calculate the loss if these short sales would have went to foreclosure? The fact of the matter is that the small time investor is actually helping the market. If the banks could have sold these properties for the re-sale price then let them do the marketing and the rest of the work involved. Once again the banks are trying to take the spotlight off the real culprits to the real estate collapse and blame it on someone else. All the while they rake in billions of profit!
May 26th, 2011 at 9:20 AM
Looks like just another way to help hinder the housing recovery process and place the blame somewhere other than where it should be.
Lets eliminate those who are actually helping the process by moving properties that otherwise would sit for indeterminable periods of time so we can help the criminals (banks) get more money even though it would be detrimental to the overall recovery process.
After raping the American public the banks are now taking losses, Whaah!
Instead of praising those making lemonade from lemons they would prefer those lemons just rot and be wasted because THEY cannot profit.
Don’t be suprised to see our Gov-of the banks-jump on this band wagon and somehow outlaw investor short sales completely.
May 26th, 2011 at 11:27 AM
CoreLogic “talking their book”. As they put out this “helpful” info, it’s often NOT disclosed that they just happen to have a product that addresses this “problem”.
And why all this crow is being made about some $300M in “losses”, let’s ask the question:
How much do lenders/investors lose in REOs?
A: Many BILLION$$; making the $300M or so a mere pittance. AND REO means lender ownership which means lender LIABILITY: prop taxes, ins, HOA fees to be paid, evictions, maintenance, code & blight violations, vandalism, etc.
Once again, a vendor (CoreLogic) making a big deal out of a smaller issue in order to push their product “solution” (without proper disclosure in most cases; which is what investors are so often accused of).
PROPERLY done short sale flips are a useful function (hell Freddie, FHA even recognize them and even give max spread thresholds - 15-20%), but most other powers that be (PTB) don’t want to seem to recognize this and constantly paint investors flipping as “frauds” & “scammers”, and waste/misplace resources chasing all these small fish.
How many bankers and Wall St hucksters have been arrested? Oh that’s right, none!
Moral of story: make a $30k spread on a flip, get arrested. Steal billions in widespread mtg fraud… get a bonus!@
May 26th, 2011 at 4:11 PM
It’s amazing that people are crying about what I consider a standard business pracitice. for decades, REO departments for Banks have sold reo’s at 40-65 cents on the dollar. Most of those sales were to investors who turn around and sell them. At that time it was considered a valuable service to the community because it kept properties from sitting vacant and causing neighborhoods from becoming “run down”. The reo business was not designed for banks to “maxamize” sales prices, it was designed for Banks to get rid of the properties because they are non-performing assets. Most of the properties I have been running into that are short sales and are vacant need work on them, and not just cosmetic work. Those properties will not qualify for conventional financing (unless you use a FHA203K loan, and those can take forever!), so who are the Banks going to sell these properties to? Investors, thats who. Now investors are in the business to make money, so now they are suppose to not make any mone? This is what is wrong with the REO business now.
May 26th, 2011 at 5:19 PM
The banks are free to accept any offer they like.
May 26th, 2011 at 5:39 PM
I have never bought a property and even considered selling it for the same price that I paid for it.
I mean no disrespect to the real estate brokers and real estate sales people out there, but if you would change your way of thinking, perhaps they would be more successful. What I mean is they are trained to find a property and get it under contract so they can sell it. I on the other hand, find the buyer and what he wants and where he wants to live. Then I look for the property that fits his criteria. Trust me it works.