Tuesday, September 16, 2008

Not What It Seems

FDA warning: Short sales aren't always what they seem. (Of course that's not really courtesy of the FDA, but you get the idea.)

I've been thinking for about 2 weeks about how to write a post explaining the epiphany I had recently regarding short sales. Today's graphic finally gave me the inspiration I needed. It's courtesy of; you can see the brief post accompanying this fabulous graphic here.

I've been showing homes to investors seeking "a great deal" and of course we looked at a lot of short sales because they're often priced so darn low. We put offers in on short sales. Sellers accepted our offers and sent our offers to their lenders. Then we waited.

And waited.

And waited. Five months passed without the bank accepting our offer.

Just like the graphic for this post, short sales aren't always exactly what they seem.

Short sales can seem like an outstanding deal! But the reality is that you, as a buyer, are negotiating a price now for a home that you don't  know when you'll actually own.

You're making a stab in the dark, trying to predict the future price of an asset but you don't know exactly when "future" is.

If the market were going up this would be a great opportunity for buyers! Buyers would be crowing about their investing brilliance, like they were in 2005 and early 2006. "We bought a home in May that was worth $40,000 more than we paid by the time we moved in on July 1st!"

Sadly, the market (at least in my corner of the world which is North Central Phoenix) is still drifting down. What's worth $200,000 in September might be worth only $180,000 by next spring depending on which corner of the vast Valley you're in. Or things could stabilize and it'll be worth $197,000 next spring. Nobody knows. Like many blogging Realtors, I keep a careful eye on the MLS stats and I'll be able to call the recovery when it happens, but I can't predict the future. No one can.

If you're looking at short sales as a marvelous investing opportunity, you must factor in the time value of your money. At least factor it in the best you can, given that you don't know exactly when you'll be able to say "I bought it."

For my dollar, lender owned homes are a much better deal. Lenders usually respond to purchase offers within a few days or a week. Once the buyer and lender have agreed to price and terms, the sale usually closes within 30 days. It's vastly easier to predict the value of a home 30 days into the future than 4 to 6 months into the future. Considering a short sale? Consider lender owned homes instead.