The Short Sale Gambit

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.

26 E Midsummer   Irvine, CA 92620  kitchen

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:

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?

26 E Midsummer   Irvine, CA 92620  kitchen

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

Beds: 4
Baths: 4
Sq. Ft.: 2,386
$/Sq. Ft.: $238
Lot Size:
Property Type: Condominium
Style: Contemporary/Modern
Stories: 2
Floor: 2
View: Mountain
Year Built: 2005
Community: Northwood
County: Orange
MLS#: P700613
Source: SoCalMLS
Status: Active
On Redfin: 3 days

A Bella Rosa Home in the exclusive gated community of Northwood II. It
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.

8 New Market   Irvine, CA 92602  front 8 New Market   Irvine, CA 92602  kitchen

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

Beds: 2
Baths: 3
Sq. Ft.: 1,200
$/Sq. Ft.: $307
Lot Size:
Property Type: Single Family Residence
Style: Other
Stories: Split-Level
View: Courtyard
Year Built: 2001
Community: West Irvine
County: Orange
MLS#: S587056
Source: SoCalMLS
Status: Active
On Redfin: 2 days

THIS IS A SMOKING DEAL!!! The LOWEST PRICED home in the very desirable
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.

40 thoughts on “The Short Sale Gambit

  1. cara

    “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”

    Are you sure about your facts there? Through the novahousingblog commentators someone claimed that in the short sale they were buying, the loan had private mortgage insurance, and that while the bank accepted the short sale, the MI came back to the seller and requested they sign a promissory note for some substantial fraction (but not all) of the shortfall in order for the MI to approve the sale. The seller agreed to sign the note and the short went forward.

    In your scenario, I’m pretty sure the MI would have a case to not pay the full amount of the claim if they can get access to those bids for higher amounts. Sure it will end up in court, or at least in the hands of lawyers threatening court, but still, it’s not clear the bank will get its insurance money.

    1. Working in OC

      That’s a good question regarding what a bank’s responsibility might be in helping to mitigate a loss on a PMI policy.

      At the end of the day I think that it would come down to any specific wording in the agreement, and who exactly bought and paid for the PMI.

      If the homeowner bought the PMI then the bank is a nominally connected 3rd party – if the bank paid for the policy, then that might be different.

      At the end of the day – in court – if a PMI company complains that a bank did not help them mitigate their loss a possible defense was, ‘We were never required to help you out’ and ‘You (the PMI company) could have bought the mortgage for the amount owing – but chose not to.’

      Interesting questions all. Any lawyers or people with first hand experience want to weigh-in?

      1. cara

        True it should somehow factor in who was paying for the MI and what the agreement was. I think I lower poster has a good point, that the MI’s doing this on a per-lender basis rather than a per-loan basis might be more effective.

        However, the MI could also just refuse to pay out the full insurance amount if they felt either the short sale went for too far undermarket or the foreclosure was not the least expensive option. In which case the bank would have to sue them to get more than the MI companies determined amount. If MI works the same as car insurance or health insurance, I’d say it’s best for the banks to just take what they can get, in order to maintain getting paid back at all, and to continue doing business.
        (like when BCBS tells the ER, oh we only allocate $40 for X-rays, not $250, and the ER sends a “bill” to the patient that says, “paid in full.”)

        Modguy, lawyerliz? Any experts want to weigh in? I miss Tanta.

    2. Alan

      I’m missing some understanding here too – if flippers are buying foreclosed properties at auction, why are the banks holding so many repossessed properties? It seems to me that when you profile a foreclosed house being offered by a bank, the sales price is at least right now considerably above the price at which the bank took it back. Why didn’t a speculator take it at the foreclosure auction rather than the bank?

      Isn’t it that flippers are buying properties from the bank, and then reselling?

      1. Chris

        Not all foreclosed buyers are flippers. However, auction can be a pain in the rear end for a lot of people who probably don’t have time to do their DDs.

        “why are the banks holding so many repossessed properties?”

        Because they can thanks to Mark-to-Fantasy rule set by the currently lovely govt. You can repo the property at $400k and mark it at $800k and we’re all happily dancing to it.

        GAAP my ass.

  2. winstongator

    If that is the case, that investors are profiting at the hands of MI’s, why don’t the MI’s bid on the properties at auction and keep the profit for themselves?

    I wonder if the United Guaranty unit of AIG had enough reserves or if the general AIG bailout money has gone to them.

    I don’t feel that bad for the MI’s. They took loans that were bad. They should have had access to as much underwriting info as the issuing bank, and they should have had the ability to either charge a higher premium, or refuse to insure.

    There are few enough MI’s that they have a large volume of potential short-sale vs. foreclosures with each lender. Litigating loans one-by-one seems to be a major bad road to go down. MI’s as a whole should know who’s refusing short-sales and who’s not, and they should cut off those lenders from new MI issuance.

    1. NewportSkipper

      “They should have had access to as much underwriting info as the issuing bank, and they should have had the ability to either charge a higher premium, or refuse to insure.”

      They have all three.

  3. Lucky Victim

    Golf buddy bought a condo within the last two months. The condo was a shortsale and yet he bidded higher than the shortsale amount to win. He was sure he was the highest bidder but he wasn’t. The only way he won was the other guy backed out after getting laid off during the 3 month wait on shortsale answer.

    I didn’t see him for awhile so I had no idea he bought a condo. I did hear him mention he was shopping around but I had no idea about this website then. He moved out of renting a 1 bedroom @ $1400 a month to buying a condo and using his savings and paying $2400 a month with HOA dues included. He is married but they are not rich and he was recently laid off due to economy although he did get another job. I would have told him about this website if I had known he was shopping around sigh.

    He was telling me how happy he was that he bought a place and I kept my mouth shut and just congratulated him. I felt bad for him though.

    1. cara

      short sale process taking longer than most people can last at their jobs. Definitely a serious issue. If the likelihood of the buyer staying solvent drops to below 75%, at what point does that need to get calculated in to the net present value calculations for SS versus foreclosure?

      Hmm, me thinks buyers just giving up is still the larger problem. On the other hand, he short we’re trying to buy (in Northern Virgina) had a previous contract fall out when that buyer lost her job. So, 1 example is an anecdote, 2 is a coincidence, 3 is a trend, 4 is data?

  4. IrvineRealtor

    Interesting premise.

    I tried looking up some of the closing info from the MLS to verify…

    -So far through this year, in Irvine, there have been 1168 closed sales reported.

    -Of that set, 194 have been short sales. That is about 17% of total sales. Average DOM for this set is 129 days. Average OLP/SP for these over the course of the year has been 92.66%, or a discount of 7% of the original list price. Biggest drop was a purchase for 33% off on Apricot on 8/11.

    -Of the 194 short sales, 46 have closed over their list price. Average DOM is 70 days. Average OLP/SP among that set has been 105.34% and the maximum overbid was 129% of list price (twice, most recently on Teak Bridge on 8/19).

    It is apparent that the short sale game is not getting any clearer for anyone. Brokers have to spend a great deal of time educating buyers and sellers alike, and often the brokers themselves are confused. It’s hard enough to get a buyer and seller to agree on a price, but when you add in a lender (or several lenders) and more, the complexity escalates exponentially.

    Thank you,

    1. DarthFerret


      Excellent info! I don’t usually expect this kind of precision and candor from realtors. I hope that more guys like you can help to turn the industry around. I also wish that more at the OC Reg would follow the example of you and Larry and post good, hard data like this.

      Thanks again for the good data.


  5. NewportSkipper

    While your facts may or may not be correct overall, MI loans are infinitesimal in Orange County, as the prior loan limit was $417k.

    1. IrvineNeighbor

      My loan was a jumbo when we bought our house in the 90’s and we had MI. MI was required because we weren’t putting 20% down, it wasn’t really a factor of the purchase price. The mortgage was sold and it’s not clear who remained the beneficiary on our original MI or if other MI was then rolled on top to reduce the default risk to investors.

      The mortgage insurance was visible in our loan as a PMI but it can also be purchased by the bank, or the consolidator that rolls the loan into a MBS. In this case, the interest rate is higher due to the high LTV risk and either the investor takes this risk to get additional return or passes it to the mortgage insurer but gets a lower nominal return after the premium is deducted.

      The can be a lot of hands grabbing a piece of the monthly P&I from a single house. I think the short sale moral is – These arrangements work when they work but can get very messy when they don’t and everyone tries to avoid getting caught in the subsequent game of musical chairs.

  6. Craig

    Over half a million for a nice condo doesn’t seem “very low” to me — but it does seem like asking prices are starting to drop closer to the realistic range.

    1. Barren_Irvine

      Didn’t some one in this forum say $250/sq ft is the lowest Irvine will go. Hum, the pundits are eating their own words I guess.

        1. Barren_Irvine

          I will be monitoring this property from now on and see when and at what price it sells. As a matter of fact from now on I will monitor all properties profiled here to see what ends up happening.

  7. DAve


    *Pray the value doesn’t drop another 20% in the first two years you enjoy the “pride of ownership”**

  8. Barren_Irvine

    In the same neighborhood, look at this WTF price; $700+ /sq ft. I am sure he will find a buyer because the school district is SO GOOD!!!

        1. cara

          Maybe Redfin is now listing everything in Irvine as presumed short sales, because really, what homeowner didn’t HELOC themselves to oblivion? (aside from PropertyOwner) They could make it the new default setting.

          1. Property Owner

            Hi cara,

            I see that I am remembered still. It was interesting to see the cash outs and HELOC buying frenzy all around me with neighbors pulling up in new BMW’s and Benz’s. It took a little willpower to not go buy those jet ski’s I wanted. πŸ™‚
            In the end it feels good to have been conservative with my finances. Now that I have closed escrow, looking at my account makes me smile and know I did the right thing.
            I am just waiting to dump that money into another house shortly. Short sales suck! I am in escrow on one and waiting for the bank to respond. Unfortunately the second on that house is with BofA which I heard is a monster.

          2. cara

            Hey good company! I’m in a short sale contract where BofA is the seller’s bank too! On “my” other blog another poster said it took BofA 2 months after they got the appraisal to come back with an actual number that they’d agree to, but it was within spitting distance of the contract, so it should close in a total of 4 months from date of contract, and he/she claims two other BofA SS townhouses nearby both closed within 4 months of escrow, so I have high hopes. Low expectations, but high hopes.

      1. badcandy

        That listing is odd. The price moved around in strange ways…to be listed at 1.3M as a short sale after being listed at 600k *and* 800k in a SIX WEEK PERIOD?

        Could be some “typing in the dark” problem. Ya never know. πŸ˜‰ 1-3 is “close” to 4-6 or 7-9 if you also remove a zero from the end. Or maybe they have so many properties that they just had a mental meltdown and input the wrong numbers along with that great description. Northwoods? Backyark? That’s working for your 3%. *shakes fist*

        1. Barren_Irvine

          You are probably right. The pictures that are associated with a 1.3 mil home is just breath taking. I think the Realtor made a HONEST mistake…

  9. WishUponAStar

    I wanted to see this property, but apparently you can only see it if you make an offer. I decided to pass.

    1. Chris

      Get an agent to offer $1 above the asking.

      I’m sure they’ll counter….ignore the counter-offer or tell them you’re no longer interested after seeing the house if you don’t want the house.

      It’s not like you have to put in a deposit or something to see the damn house πŸ™‚

  10. tlc8386

    The problem with the heloc absuse is that it’s not just housing nor is it just wall street and the bankers. It’s everyone who has power to control money and who gets that money.

    I stumbled upon this written by a doctor who is very angry over health care reform. I suggest everyone open their minds to what is the true problem in this country and that is Greed and corruption.

    Lack of regulation in all these areas have created this mess of fraud. I always say “Follow the Money”

    My anger over all of this has not even budged, those that took money without intention of paying it back is as if they robbed their bank. Those that stole from patients with insurance and not paying their claims is the same —stealing–the bankers the same–ect. ect.

    Our country needs to wake up to all of this CRIME.

      1. tlc8386

        Money does not equal crime. Business without any regulation and laws do because someone will always find a way to take more which equals Greed.

        14 billion dollars in 5 years is what 23 Ceo’s paid themselves from our insurance money.

        What did our doctors make, what insurance claims were paid?

        Mortgage bankers paid themselves billions as well.

  11. DarthFerret

    The listing says it’s a condo. A 4/4 condo? What’s up with that? Is there a shared wall somewhere? There doesn’t appear to be from the pics and map.

    I smell some hidden info here.


  12. DarthFerret

    IR: “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.”

    I find this dynamic to be extremely ironic. The shadow inventory, the gov’t rescue, the long foreclosure process, all of it has been a desperate attempt to engineer this banker’s and politician’s dream of an orderly, steady, and gradual decline in the housing market. Quite ironically, however, the same greedy and desperate homeowners and RE industry workers that played the other half of the coin that got us here are foiling the banker/politician’s orderly slowdown.


  13. diogenes jr

    A bit off topic, but just a follow up to my recent comment about the Stockholm Syndrome:

    A) I trust you know I was kidding, or perhaps “using hyperbole to make a point” is the better way to phrase it. We’re all a little shell shocked by now given all the madness that has occurred in the past 3 to 5 years. Kudos for seeing the humor/sigh of resignation/modicum of truth in my post.

    B) Thanks for the kind reference to an ‘astute observer.’ I haven’t been called astute in ages %-P

    C) I was going on memory. I was vaguely recalling that the SS was based on a bank robbery gone bad in Sweden in which the hostages were held for about a week. After the robbers were captured the captives refused to testify against them in court and I think one of the female captives actually married one of the perps while he was in prison. Evidently it is not that uncommon a reaction to extreme duress and perhaps can be seen just now in the very sad story of the girl in Antioch who was kidnapped when she was 11. Apparently she never tried to escape.

    Anyway, thanks for your very measured, intelligent reply to a post I thought might have been a little harsh shortly after I pressed ‘send.’ I’m glad you didn’t see it that way. I saw my shrink today and related the whole thing and he assured me you’re NOT suffering from SS.

    D jr

  14. Rockon

    I decided to pass. The problem with the heloc absuse is that it’s not just housing nor is it just wall street and the bankers. It’s everyone who has power to control money and who gets that money.

  15. HomeTelos LEO

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