Short sale from potential buyer's perspective - Mothering Forums

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#1 of 17 Old 07-02-2009, 01:47 AM - Thread Starter
 
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Are there any rules of thumb on how much of a loss --as a percentage of the amount owed-- that the mortgage company will accept on a short sale?

At first glance the asking price on the house I'm interested in is a good deal. It's a cute starter home with a lot of potential curb appeal, on a nice street. The asking price is $100K less than what the owner was asking a year ago. More importantly, the house is on the perimeter of a desirable section of a great town.

The street runs alongside a highway. There is a barrier wall that keeps it hidden and muffles the noise; and the house in question is on the opposite side of the street. For the most part the highway noise almost sounds like the ocean.

However, the price per square foot is relatively expensive. The listing only claims 1078 square feet for the above ground living space, but the price would seem to reflect additional "finished" space in the basement. I'm sure if the rules permitted them to claim it as living space they would. My guess is that the basement ceilings are too low (about 6.5' +/- rather than 7.5' +/-). Or, it could be because of the unfinished "transition" space ... the stairway and landing leading from the upstairs to the basement. Also, the head room in the transition stairway space is limited. DH is about 6' 1" and he has to duck a little when making the turn going downstairs.

The owner vacated awhile ago and is now out of the country. The property is occupied, presumably by friends paying utilities only. They seem pretty cooperative (we've seen the house twice now and at our request they weren't home the second time). However, the yard is incredibly overgrown. There could be a body in the yard and you wouldn't know it.

Also, at least half the roof needs to be replaced. The vinyl siding is painted . Someone did some spray painting in the finished area of the basement and there is overspray on the floor . There is some missing trim in the kitchen. The upstairs bathroom has some general condition problems. Likewise for the paint job in the main living areas (grubby, grubby, grubby). Etc., etc., etc.

Adding insult to injury there is an abandoned property two houses down. According to the owner of the house in between, the house is paid off and she pays her taxes but the owner has some sort of grievance with the town. She blames them for a water problem she had. I don't know whom she thinks she's hurting but she walked away about 15 years ago and her yard looks worse than that of the short sale home I'm interested in.

This has to drag property values down on this street, the question is by how much.

My best guesstimate is that the house is worth about $100K less than asking price when looking at homes in comparable condition and applying the average price per square foot (about $220 per sf as opposed to $250 to $280 per sf) to the 1078 square feet of living space. I'm not sure that would quite reflect the devaluation caused by the abandoned property.

The neighbor seems to think that as of a year ago the owner owed about $20K less than the bank's asking price. If so, $100K under asking price would be about $80K to $100K less than what the owner owes on the house, assuming there isn't a second mortgage.

I know that short sales can drag on forever. I don't mind waiting since I can always withdraw the offer but I'm not interested in an obvious exercise in futility if it's likely the bank would drag their feet and ultimately put the house in foreclosure. FWIW, the amount I'm willing to pay is only about 25% more than land value.

So, my question is whether there is there any point in making an offer for $100K or so less than asking price. Especially since it might seem like I subtracted $100K arbitrarily. Would I be better off offering $110K under asking, which might better reflect the devaluation caused by the abandoned property? Or maybe offer a little more, say $95K under asking so the number doesn't seem conveniently rounded off?

Would it help to include a picture of the abandoned house as well as comments on the general condition of the house I'm offering to buy?

I'd appreciate any feedback.
~Cath
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#2 of 17 Old 07-02-2009, 10:58 AM
 
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I personally wouldn't offer 1 penny more than what *I* think the property is worth. If you think it's worth $110k less than the listing price, don't offer any more than that. You are the one who's going to have to pay it off, and a difference of $15k is pretty big. I think when people are making large purchases a sense of creeping decimalism makes thousands of dollars sound like only a little, but in reality a dollar is a dollar is a dollar.

Don't become emotionally invested in this property. If it were me I think I'd walk away just because of the grievance of the neighbor 2 doors down. How do you know she's not justified regarding the water line thing? This could affect your property too. Also, 15 years...doesn't sound like she'll be changing her mind anytime soon, so you would always be living 2 doors down from that eyesore.
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#3 of 17 Old 07-02-2009, 11:02 AM
 
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I would say no to even offering anything. That neighborhood sounds like a distaster and highway noise is highway noise not ocean noise.

"The true joy of life is the trip. The station is only a dream. It constantly out distances us."
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#4 of 17 Old 07-02-2009, 11:13 AM
 
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If there is one lender, I would say make any offer you feel great about. If there are two, good luck but I doubt you will be able to settle on anything. Honestly, I would run, not walk, away from that many problems but you could always low-ball it.

Figure out the cost per sq ft and then start at that# x 0.85 to give you a starting point. Look at previous sales, not listings, and see if you can call on the house that is gross and file a grievance to have the yard mowed. Here, you do it after a warning from the city or they come do it and charge you. The house we are under contract for (pending them fiuxing a leak in the roof) was cited forbeing overgrown. The neighbor called on it. It was vacant for 2 years and is bank owned. They mowed it and citation was lifted.

Jennifer
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#5 of 17 Old 07-02-2009, 11:51 AM
 
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I also wouldn't offer a penny over what you think it's worth. A house is worth what the market supports as a sales price - not what the seller (or bank) thinks it's worth. She may be totally upside down, but that's not your problem. And the bank may laugh, but if that's what it's worth, that's what they need to accept to get it off the books. They don't want to foreclose - that's bad news for them. But if they think it's worth more, that's another story.

I would also caution against the location near the highway and the neighbor situation. I know it's not looking right at the highway, but that's still not desirable, and it's all about location, location, location. If the same house were nowhere near the highway, it would be far more desirable. Even if you fix it up, you aren't moving where it is. Ditto for the abandoned house, though that status could change any day. Still, you have to assume it will be overgrown and nasty forever in a worst case scenario. I wouldn't buy on a street with a house like that myself.

It's really easy for *me* to get caught up in 'potential' for a property - so much so that I justify the negatives. In this case, unless you were getting it at 70% of after repair value (at a min), I would walk away. Just my 2 cents.

Laura

PS. If you walk away, that just means there is something better out there for you.
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#6 of 17 Old 07-02-2009, 12:04 PM
 
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Originally Posted by CathMac View Post
Are there any rules of thumb on how much of a loss --as a percentage of the amount owed-- that the mortgage company will accept on a short sale?
It varies from lender to lender and from listing to listing. They all have rules, but I'm sure it depends on how long its on the market too.

As others have said, do not pay more than market value, but if you really like the house, there is no harm in offering what you think its worth. I would have my real estate agent prepare a market analysis on the house and include that with the offer to show the bank why you think its worth what you are offering.

Mightymoo - Mom to DD (6) and DS (4)
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#7 of 17 Old 07-02-2009, 09:29 PM - Thread Starter
 
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Thanks for the replies.

First let me state the obvious and say that I completely agree that in the absence of a really compelling reason you shouldn't pay more than the market value of a house. I'm sure there are notable exceptions where a house could be worth more to a particular buyer than it is to the average person (e.g. it's right beside a relative you want or need to live near; or you're wheelchair bound and it's handicap accessible, etc.).

Similarly, in keeping with what some have suggested here, I'm not inclined to pay much more than a house is worth to me.

Trying to figure out what the owner owes and what the bank might accept is really just my attempt to determine whether I'd be wasting my time by offering something between what it's worth to me and what I think the market value is.

FWIW, this public school system has an excellent reputation and it offers a language immersion program; and getting into this neighborhood would put my two girls in the very best of the four elementary school districts in this town. Right now I'm in a pretty good town/school system, with a reasonable tax rate and and I live near my mom. I wouldn't even consider moving if this town didn't offer something that the average town doesn't ... something increasingly important in this global economy.

Fortunately it's only one town over from where we are now but all other things being equal, a house in my price range is worth about $100,000 more in this town than the one I'm in and I'm trying very hard to do this while increasing my mortgage as little as possible. Keeping in mind that even if I could find a similar house for roughly the same price I'd be losing 6% in transaction costs.

So, yeah, I am willing to make compromises and maybe take a calculated risk I might not normally such as accepting less living space and tolerating the muffled white noise of highway traffic, or dealing with the abandoned property when the time comes.

Having said all that, I am leaning towards offering about $100K under the asking price. In the unlikely event that they accepted that amount that figure might drop depending upon the findings in the inspection. Which would only help if the repair of any additional problems could easily be deferred.

Anywhoo, thanks for helping me clarify my thinking on this.

BTW, here is an article I found after posting this thread. The 40% discount it suggests is obviously speculative and depends upon a variety of factors. And clearly wouldn't apply if the average buyer would be willing to pay more than 60%. But regarding the house I am looking at, assuming the asking price is a rough gauge of what is owed then an offer of 60 - 65% of that amount is roughly what I think the market value is and what I'm willing to pay.

Quote:
The Psychology of Short Sales by Tanta, April 2008

...in a market which is currently experiencing a “loss severity” of 40% (of the unpaid principal balance...), the breakout would look something like this on average ... :
...
... the deal most attractive to the servicer—the non-delinquent “typical” exposure or adequately-marketed property—is the one least likely to be offered. The “math of reality” works on these deals, but the “math of psychology” doesn’t.
...
... securitization rules (requires) servicers to get investor/trustee approval, plus the endlessly updating numbers on those “models” that the servicers are using to find the “trigger point” where a short sale makes sense.
The last point is something I hadn't heard before but it does make sense that the bank is accountable to someone for the amount it accepts. Letting the house go to foreclosure might be easier than trying to explain why the bank representative accepted 60 cents on the dollar.

~Cath
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#8 of 17 Old 07-02-2009, 09:53 PM - Thread Starter
 
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... I would have my real estate agent prepare a market analysis on the house and include that with the offer to show the bank why you think its worth what you are offering.
mightymoo,
I did ask the agent for some comps of actual sales. I don't know how much stock to put in them since he represents the owner (&/or the bank). And the amounts are skewed due to the small number of distressed houses in my price range in this section of town. He wound up giving me 4 comps, with two of them from a much more affordable neighboring town.

Interestingly, despite the presumed bias towards the seller, the price per square foot on the two in the town I'm interested in seemed unexpectedly low. Perhaps because they sold before peak season, in January and March. However, one of them had semi serious condition issues that did put it on par with this house. I have factored this into my assessment of market value.

I do have a good idea of the condition of this particular comp because I drove by and chatted with the new owners. I am as intrusive and borderline nosy as I need to be when it comes to our long term financial well being. :

If the driveway weren't so undersized with no way to expand it I would be very envious of the deal they got, especially because the real estate site "Zillow" gives it a high walkability rating ... it's about 1/3 of a mile from the grocery store. Of course the dumpster beside the house speaks eloquently of what they'll have to go through to get that house where they want it to be. And they don't have two kids underfoot.

~Cath
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#9 of 17 Old 07-05-2009, 12:07 AM
 
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Originally Posted by CathMac View Post
mightymoo,
I did ask the agent for some comps of actual sales. I don't know how much stock to put in them since he represents the owner (&/or the bank). And the amounts are skewed due to the small number of distressed houses in my price range in this section of town. He wound up giving me 4 comps, with two of them from a much more affordable neighboring town.

~Cath
I would recommend getting your own realtor, rather than using the realtor representing the seller.

Have you had an inspection? It sounds like there has been a certain amount of neglect to the property. Around here short sale and foreclosure houses are always sold "as is" so you defienitely want to factor in any repairs that are needed before you make an offer.

I get what you are saying that the challenges of the location vs. getting into an area you want are worth it for you. I think if the highway noise doesn't bother you and you plan to stay in one place in the long term, then that is not a big deal. However, if you see yourself moving again the next 5-10 years you may want to reconsider. Our neighborhood has highway on one side and the houses near it (also with very large wall blocking it) sell much slower and for much less than houses just a couple blocks away. Same with abandonded properties just a few houes down, etc.
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#10 of 17 Old 07-05-2009, 11:42 AM
 
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Regarding the abandoned property, you could:

  • Go cut it yourself; though it would be trespassing.
  • Get permission from the owner to cut it.
  • Find out the town's obligation. Sometimes a town/county is obligated to cut it (because it is an eyesore/hazzard) and bill the owner (my HOA does this after an obligatory number of notifications).

"It should be a rule in all prophylactic work that no harm should ever be unnecessarily inflicted on a healthy person (Sir Graham Wilson, The Hazards of Immunization, 1967)."
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#11 of 17 Old 07-05-2009, 10:32 PM
 
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Now I am really curious to see the house! :

Resistance is futile Matey
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#12 of 17 Old 07-07-2009, 02:18 AM - Thread Starter
 
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I would recommend getting your own realtor, rather than using the realtor representing the seller.
We aren't quite ready to put our house on the market and we are in the browsing stage, so I don't have an agent yet. However, I appreciate your point. For now I would prefer to have a buyer's agent rather than an "intermediary" Seller's agent, if that's the correct term. Whenever possible I try to deal with the "listing" seller's agent on the off chance that they may be willing to reduce their commission since they don't have to split it with another agent.

If/when we become more serious I might find a "Buyer's" agent, whose fiduciary responsibility would be to me, not the seller.

Quote:
Originally Posted by annekevdbroek View Post
Have you had an inspection? It sounds like there has been a certain amount of neglect to the property. Around here short sale and foreclosure houses are always sold "as is" so you defienitely want to factor in any repairs that are needed before you make an offer.
No, I haven't made an offer yet. But DH has experience in the trades so he has a pretty good idea of what it needs. Having said that, we wouldn't proceed without an inspection and I would be looking for concessions on price for anything that wasn't already reflected in the offer (e.g., the painted vinyl siding, dirty interior paint, etc.). If any necessary repairs were serious enough and I wasn't confident the final sale price left room to do those repairs and/or that I wasn't sure the repairs could be done properly then I wouldn't go through with the purchase.

Quote:
Originally Posted by annekevdbroek View Post
I get what you are saying that the challenges of the location vs. getting into an area you want are worth it for you. I think if the highway noise doesn't bother you and you plan to stay in one place in the long term, then that is not a big deal. However, if you see yourself moving again the next 5-10 years you may want to reconsider. Our neighborhood has highway on one side and the houses near it (also with very large wall blocking it) sell much slower and for much less than houses just a couple blocks away. Same with abandonded properties just a few houes down, etc.
Again, I absolutely agree. The price would have to reflect that the property is less likely to sell quickly in a down market. The agent ball parks the difference in price between this location and a much more desirable location less than a mile away at about $30,000. That differential might be a little low.

One thing I didn't mention that may or may not be a plus is that given the age of the city and the age of the average home this house is relatively young and a more contemporary style (a side split ranch). On the one hand most people looking in this town aren't necessarily looking for a relatively young house. On the other hand, although it does have a few steps up to the second floor and another few steps to the basement, these stairs would be much more manageable than the steep, narrow ones found in the more common Capes and Colonials.

I predict that --given the aging population-- that in the not too distant future more and more home buyers will be willing to pay a premium for single level living and perhaps even for fewer and more "manageable" stairs.

Last night I took a trip to the ER for a severely sprained ankle and I just finished climbing up and down two flights of narrow and relatively steep stairs to finish up the laundry I had to leave in the middle of. So I have a renewed appreciation for the functionality of ranches ... preferably a straight ranch but a front to back or side split looks pretty appealing right now.

They may not be as charming but they are easier on a sprained ankle.

~Cath
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#13 of 17 Old 07-07-2009, 02:40 AM - Thread Starter
 
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[QUOTE=Emmeline II;14036707]Regarding the abandoned property, you could:
  • Quote:
    Go cut it yourself; though it would be trespassing.
    Originally Posted by Emmeline II View Post
    I could totally see DH taking this on but unless the other neighbors were pitching in I wouldn't want him to. Primarily because it would be hazardous ... it's really that bad. Plus, mowing the lawn is just the tip of a very large ice berg.


    Quote:
    Get permission from the owner to cut it.
    Originally Posted by Emmeline II View Post
    Given the history the neighbor in between describes, the owner is not in a cooperative mood. I suspect she takes a perverse pleasure in the condition of the place and she doesn't care who takes a hit on their property value.

    If the neighbor is correct she owns it outright so there isn't even a bank to worry about its equity in the house.


    Quote:
    Find out the town's obligation. Sometimes a town/county is obligated to cut it (because it is an eyesore/hazzard) and bill the owner (my HOA does this after an obligatory number of notifications).
    Originally Posted by Emmeline II View Post
I could look into that if we buy the house but as best I know, in this jurisdiction, that wouldn't apply here unless there were a physical hazard to someone besides a trespasser. For instance a neighbor that took on the job of mowing the yard would probably be on their own if they got hurt. I'm guessing the house is uninsured.

However, I suspect a strongly worded letter to the owner with a carbon copy to the town regarding the safety of a child that might wander onto the property could get the ball rolling.

~Cath
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#14 of 17 Old 07-07-2009, 02:44 AM - Thread Starter
 
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Now I am really curious to see the house! :
Thystle,
I'm typing one handed and I need to go to bed now.

But if I can figure out how to post a picture later I will.

ETA - Is there an MDC copyright rule on the posting of pictures?
~Cath
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#15 of 17 Old 07-07-2009, 12:32 PM
 
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I could look into that if we buy the house but as best I know, in this jurisdiction, that wouldn't apply here unless there were a physical hazard to someone besides a trespasser. For instance a neighbor that took on the job of mowing the yard would probably be on their own if they got hurt. I'm guessing the house is uninsured.
Actually, often the city will get involved because it's a fire hazard. You can contact the local fire house and ask about it. If it's that overgrown, it's definitely a hazard to the surrounding houses, and no fire chief wants to have to deal with that kind of brush fire in town.

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#16 of 17 Old 07-07-2009, 12:55 PM
 
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Actually, often the city will get involved because it's a fire hazard. You can contact the local fire house and ask about it. If it's that overgrown, it's definitely a hazard to the surrounding houses, and no fire chief wants to have to deal with that kind of brush fire in town.
This would be true here; temps are over 100 and brush fires are a concern.

Actually, brush fires were even more of an issue when I lived in Anchorage, Alaska! The city was concerned about people using their property as dumps (old furniture, appliances) and if they were overgrown; and they advertised a number to call so they could deal with those issues.

OP: I wouldn't make any assumptions without speaking to the town/county where the house is located.

I'd still give contacting the owner a go, "Hi, we're your new neighbors, would it be ok with you if we mowed your law for you?" She might say yes.

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#17 of 17 Old 07-08-2009, 08:13 PM - Thread Starter
 
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... OP: I wouldn't make any assumptions without speaking to the town/county where the house is located.

I'd still give contacting the owner a go, "Hi, we're your new neighbors, would it be ok with you if we mowed your law for you?" She might say yes.
Emmeline II,
For the purposes of negotiating with the bank I think I would err on the side of assuming that the town wouldn't step in.

But you make an excellent point regarding a potential fire. I live on the East coast and while we have occasional dry summers and water bans I don't know that an overgrown lawn would increase the likelihood of a fire, but it certainly has the potential to increase the severity (the ability to spread) and make it harder to bring any fire under control.

As far as mowing the lawn goes, there are a couple of problems with that. First, we barely have enough time to keep our own house and lawn in order. Second, the lawn has the biggest visual impact now, but the real problem is the house itself. The roof is starting to deteriorate. It's only a matter of time before a hole develops and it starts to fall in.

But it occurs to me that if we were to buy the house that I would let the town know that not only is it a potential fire hazard but that it is an open invitation to squatters and trouble makers. I do know this town has a reputation for a strong police presence and this street is right off of the main drag, that plus the fact that it's a thickly settled street, with lot sizes under a fifth of an acre are probably the only reasons it's still standing.

~Cath
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