Opportunities for investors and first-time homebuyers: Part 2

Numerous distressed properties continue to exist on the real estate landscape. These distressed properties are comprised of REO (real estate owned) and “short sales.” This month, I’ll discuss short sale properties.

Short sale is a term representing that the proceeds of a home sale are not enough to cover the balance owed on the existing loan(s) associated with the property. An owner is having difficulty, due to any number of reasons, paying their mortgage and has decided to sell the property “short” as opposed to letting the property go into foreclosure. A seller attempts to sell the property; however, the lien holders (i.e., financial institutions or banks) must approve the sale since these lien holders are incurring a financial loss associated with the property.

What’s happening in San Francisco with short sales? Throughout the City right now, there are 86 single-family listings, with an additional 46 listed as being “in contract.” There are 80 condo listings, with an additional 51 listed as “in contract.” Over the last six months, there have been 69 single-family and 70 condo short sales sold. I’ve included the homes “in contract” because a great proportion of these transactions will not be completed due to the variables associated with a short sale. For both listings and sales noted above, the single-family homes are predominantly in the southern part of the City, whereas condos are sprinkled throughout S.F.

For a homebuyer, the primary advantage to buying short sale properties is price, since short sale properties are usually priced to sell. For a seller, one benefit of a short sale is that their credit will be better off than letting their home go into foreclosure. Credit reporting agencies do a surreal job of not disclosing their formulas as to how credit scores are calculated, but the credit pundits suggest that a foreclosure may cost a homeowner 200 to 400 points of credit score, whereas a short sale may only cost 50 to 130 points. This great difference will really alter the seller’s future credit and ability to buy a home into the distant future.

Short sales do have their issues and some of these include:

• Timing: Short sales are great for buyers who have patience. The sales cycle for a short sale can be quite onerous depending on the lender and the number of loans and liens associated with a property. A short sale is not for the weak of heart. Depending on the specifics of the transaction, a short sale may take several months. This can be very frustrating to both the buyer and the seller. Sometimes the property will go into foreclosure during the short sale process. When this occurs, the short sale process becomes void and a new sales process will begin as a foreclosure. Generally, the banks will incur a smaller financial loss participating in a short sale than having the property go into foreclosure.

• Number of participants: Besides the primary mortgage holder, there may be additional participants to the transaction who are referred to as junior lien holders. This could include second mortgages, home equity lines of credit, liens by homeowners’ associations due to outstanding association fees, or other lien holders. All of these additional parties must agree to the short sale. Therefore, after the primary mortgage holder decides to absorb the financial loss associated with their mortgage, a junior lien holder can possibly prevent the short sale from occurring. Ouch! A recent short sale transaction in which I was involved had a primary mortgage holder agreeing to absorb an approximate $380,000 loss, yet the transaction was blocked because a second lien holder would not accept a $3,000 payment while absorbing a $140,000 loss. These numbers may sound crazy, but they are not unusual. This transaction is still in process. If the property goes into foreclosure, the second lien holder will end up with nothing.

The wide array of parties and processes involved in a short sale make it a relatively complex and highly specialized type of transaction. If you have any questions related to short sales, please feel free to drop me an e-mail.

Jim O’Neil is a Realtor for Prudential California Realty at 2200 Union Street and has lived in Cow Hollow for the past 20 years. He has earned his SFR, which is the Short sale and Foreclosure Resource designation. E-mail: