Do very low short sale prices still have shock value? If too many sellers go this route, the shock wears off, and expectation of lower future prices becomes the norm.
Asking Price: $568,000
Address: 26 E Midsummer Irvine, CA 92620
When I was a child
I caught a fleeting glimpse
Out of the corner of my eye.
I turned to look but it was gone
I cannot put my finger on it now
The child is grown,
The dream is gone.
I have become comfortably numb.
Comfortably Numb — Pink Floyd
Recently, an astute observer noted that my being less angry about the Great Housing Bubble may be a sign of Stockholm Syndrome. Have I become comfortably numb to my subjugation to the will of my Wall Street masters that I no longer feel the rage over the injustice? Have I become numb through exposure to this issue every day?
Psychologists know that repeated exposure to any anxiety-producing stimulus will lead to a reduced response over time through gradual desensitization. Perhaps me and many readers have become desensitized to the outrageous behavior of our Government and their Wall Street Overlords.
Kool aid intoxication will wear off through gradual desensitization, and the short sale gambit is at the heart of this phenomenon.
Short Sale Gambit
The short sale gambit is the ploy used by sellers and realtors where a property is listed for sale significantly below recent comps to generate buyer interest and hopefully ignite a bidding war. In our market this year with its limited inventory, this gambit has worked quite well. This ploy relies on kool aid intoxication for its effectiveness. People think the good deal is real, and there will not be other deals like it in the future — they still fear being priced out forever.
To give you an idea of how widespread this phenomenon is, consider the following listings:
- 26 E Midsummer Irvine, CA 92620
- 8 New Market Irvine, CA 92602
- 93 Highland Vw #56 Irvine, CA 92603
- 1 Fallcrest #98 Irvine, CA 92614
- 15 Sagamore #59 Irvine, CA 92602
What do all these listings have in common? They are all priced well below comps to solicit bids in the short sale process. So what do you think happens when sellers do this too much?
Over time, buyers come to realize that sellers are playing a game. The property is listed to attract offers, then the bank takes months to process the offer price, and by the time the bank approves a short sale price, the bidders have long since moved on to other properties. When this practice becomes common — which it is now — buyers become cynical and they stop putting in offers.
What would be the natural reaction of sellers when buyers stop putting in offers? They make the discounts even more extreme. If 5% below comps fails to generate interest, perhaps 20% below comps will (see 22_Rockwren_Woodbridge_Irvine.pdf for an example). Do you see where this is going?
As short sellers increase their discounts to attract offers, it actually serves to make buyers more skittish. Why would you bid on a property with a 5% discount when waiting will prompt a 20% discount? Ultimately, the short sale gambit is self defeating, and it becomes the primary mechanism for lowing prices in the market. Low inventory is the only thing keeping prices high right now. What happens when more inventory hits the market and the properties start competing with each other to attract buyer attention? Lower prices happen.
The Private Mortgage Insurance Problem
The short sale gambit does create a unique opportunity for property flippers. There are many properties where the listing agent has obtained a dozen or more bids on a short sale, but the bank refuses to take one of these offers and instead opts to foreclose, even when the short sale bid brings in more money. Many property flippers are buying properties at auction for 20% less than existing short sale offers on the property — it is practically a no-risk transaction for the flipper. Why are lenders doing this?
If the mortgage is covered by private mortgage insurance (PMI), the lender actually makes more money by foreclosing than by accepting the short sale. If they foreclose, the shortfall at the auction is covered by the PMI company. If they accept a short sale, PMI does not pay out. Basically, the flippers at the auction are making a profit at the expense of the PMI company.
I wonder how many PMI policies AIG has issued? and how many of these losses we are going to pay through our taxpayer bailout?
Asking Price: $568,000
Income Requirement: $142,000
Downpayment Needed: $113,600
Purchase Price: $960,000
Purchase Date: 5/19/2006
Address: 26 E Midsummer Irvine, CA 92620
|On Redfin:||3 days|
contains many upgraded features, hardwood floors, plantation shutters,
french doors, custom paint, epoxy floor in garage, stainless steel
appliances with double oven, granite countertops, central air, cozy
fireplace, 4 large room plus loft. Association has Jr Olympic Pool, Spa
and Clubhouse. Conveniently located near Irvine Spectrum, shopping and
Dining. Within Irvine Unified School District.
The short sale gambit does make for interesting loss calculations — despite the realistic inaccuracy of the results. If this property sells for its current asking price, and if a 6% commission is paid, the total loss on the property will be $426,080. It is being offered for 41% off its peak purchase price.
Asking Price: $368,000
Income Requirement: $92,000
Downpayment Needed: $73,600
Purchase Price: $500,000
Purchase Date: 4/8/2005
Address: 8 New Market Irvine, CA 92602
|Property Type:||Single Family Residence|
|On Redfin:||2 days|
community of West Irvine. ***BEAT THE BANK*** This is an investors
dream. Dual Master Suites, Dual Vanities, & HUGE walk-in closets
plus additional powder room for guests. Loads of storage throughout.
Durable laminate flooring & newer carpet, high ceilings and many
windows that bring in a lot of natural light. Recessed lighting in
every room. Custom Built DUAL Computer Niche, with more storage and
shelving, offers the perfect work space. Separate laundry room. 2 car
garage with direct access and more storage. Custom stamped concrete
throughout the private and enclosed courtyard. Situated in a quiet and
desirable location within the community, which offers a tot lot, pool,
spa, kiddie pool, and tennis courts. Easy access to both 5 & 55
fwys. Near the Tustin Market Place, Farmers Market, Tustin Sports Park,
Award Winning schools, hiking & biking trails and many more
ammenities + LOW Mello Roos roughly $44/mo.
ammenities? At least the words “throughout” and “Separate” were spelled correctly.
This is an investors
dream. Really, why?
This second property is borderline on being priced to market. It is a bit below, but perhaps not far enough to generate bidding-war interest. If it sells for its current asking price, and if a 6% commission is paid, the total loss will be $154,080. It is being offered for 26% below its 2005 purchase price.