BiggerPockets

I was wondering how you guys feel about short sales. Do you guys think its worth the time to wait for a short sale or do you guys go straight for REOs because they can close quickly and you know what price you're getting the property at. Las Vegas market right now is about 48% of the market but only make 41% of last week new escrows where REOs make up 21% of the market and account for 44% of last weeks new escrows

The reason a lower percentage of SS listings end up in escrow compared to REOs is because an REO does eventually have to go into escrow whereas a SS can end up in foreclosure.

There are two very good reasons why REO's do not sell like REO's.

1. The servicer/lender/investor needs to be incentivized to
to accept a short sale offer. This means, by comparison, the net proceeds in a short sale should be higher than as an REO. Most people do not realize a short sales have a much higher administration cost than do REO's.

Also, in deed of trust states, foreclosure expenses are usually lower than in mortgage states. So, that added administration expense assumed by the short sale process often times will offset the anticpated foreclosure costs.

2. Short sales, generally, tend to be in better condition than compared to REO's. During the short sale process, the property tends to be occupied by the owner or a tenant. It is when they become vacant damage and vandalism can occur which perpetuates devaluation.

Therefore, in Nevada and other deeds of trusts states, I would expect a buyer to pay a slight premium over a short sale.

You can look for short sale situations which best supports your strategy. For instance, if your a fix and flipper, perhaps look for short sale properties which enough disrepair to preclude it from being fiannced by a retail buyer.

As for success rates, short sales are always going to be much less successful, not just because the servicer/lender/investor has REO's to fall back on, but because at some point there becomes a zero sum gain (lack of incentive) for them.

Vikram,
interesting post, I was wondering what techniques you use to make deals and aquire your REO's do you just make bids once they hit the MLS, or do you work with an REO banker. Just interested in your process if you are willing to share.

I have to respectfully disagree.

I belong to the local AZREIA who spend a lot of time gathering data from from independant sources including the Cromford Report which is one of the most dependable real esate statisticians for phoenix real estate. The report takes both ARMLS and Non-mls (closed sales) transactional data into account so it is most comprehensive report available.

I have included a analysis report by sale type for November showing price per square foot sales are higher for shorts sales than REO's.

http://myrealblogs.com/wp-content/uploads/2011/01/Pages-from-12-2010-AZREIAMeeting.pdf

Historical price per square foot sales by type:

http://myrealblogs.com/wp-content/uploads/2011/01/Pages-from-12-2010-AZREIAMeeting-2.pdf

Since this does not take into account specifiically the east valley, I cannot dispute your findings. However, I can say, if your data set is comprised of actualized closed transactions versus active listings, then I believe your data is flawed or your conclusions are inaccurate I can show you both the ARMLS and the Comford Report for Scottsdale and Mesa support the greater Phoenix data results.

It clearly does not make economic sense for the servicer or investor in each and every case.

Why is this? There are no simple answers here, but here are some reasons which challenge the notion that a short sale makes economic sense.

1. It is very inexpensive to foreclose in a deed of trust state.

2. Servicer's make more money in fees charged to the investor as an REO than they do as a short sale. Many servicer's had to ramp up operations thereby increasing capital investment for overhead. The net result of this is a sudden need to increase service revenues to pay for and profit from their investments into their servicing business.

3. Servicer's are very slow with loss mitigation and by the time a short sale makes it through the loan modification process, in many case, several months have gone by reducing the upside for the lender. A default that has just occured stands a much higher chance for a successful short sale over one that occured month and months ago in my experience.

4. Frankly, i think servicer's/investors do not want to reward bad behavior. I have seen servicer's refuse to accept an offer despite the obvious value in the deal. In fact, I have seen several times a short sale offer being declined and then selling at auction for 20% less.

I have been involved in hundreds of short sales over the years. Although 4 years ago I would have concluded the very same thing you said..."[it] makes economic sense" becuase it really did indeed. However, defaults were not taking years to foreclose either.

The rules have changed! No longer is it good enough to argue that it makes sense for the lender as whole.

As for the OP's own market, I believe he should take into account the similarities between the Phoenix and the Las Vegas markets and draw your own conlusions.

One other thing that can misleadingly depress REO prices is the number of partially complete houses in this area. Those houses sell for what seems like a big discount from ARV when in reality the discount is mostly offset by higher rehab costs.

Finally, we also notice that REOs are, on average, somewhat less desirable than trustee sale and SS listings. Many of the most attractive floorplans and lot locations get offers at the SS stage and often get bid up at auctions while REOs tend to have a higher proportion of the dogs.

AGAIN, I am not disputing that Vikram's premise does not have merit in theory. Under ideal conditions, discounts will exceed REO's as the time value of money is a huge factor in determing the whether the lender will net more as a short sale than as an REO.

However, the reality is the average short sale today as been in default nine to twelve months before a short sale offer is presented. They may have tried to effect a loan modification, or they may have just sat around waiting to be foreclosed upon. You see, by the time the average offer is presented, much expense has been incurred including legal fees for the trustee, title reports, appraisals, filed inspections, insurance, etc. making a short sale less viable.

Since my company has handled hundreds of short sale transactions since 1994, I can pretty much tell you that, in practice, it is very difficult to get an actual discount below REO as-is value these days.

Why?

1. Time value of money is not that large of a factor as costs basis is relatively low since fed funds rate remains relatively low.

2. Foreclosure costs are relatively low. The last property in which I redeemed just before the auction, the trustee fees were $2,200.00.

3. Delays in getting foreclosures through the system.

4. Increased competition by hedge funds purchasing pools of assets which ultimately lower overhead costs.

5. FDIC seizures and sales of asset agreements with bank which lower their cost basis on the assumed NPN's.

6. Disdain for investors purchasing properties at deep discounts.

7. Disdain for the borrower.

8. 2nd mortgages

9. Deficiency rights

I think a lot of investors are entrenched in theory, but I am in the front lines battling day in and day out. I deal with the loss mitigation people on a daily basis. They are telling me that they cannot match REO as-is values. Dictating to me the max discument is 10% despite the fact the opening bid at auction is less than our offer, or telling me the investor needs to net X.

When you walk a mile in my shoes, then I will listen to your theories. But, make no mistake, they are just that, THEORIES.

Scott, I am not a theory guy either. I think theories are only good if they are consistent with the data. I also know that you are a very good short-sale negotiator and know what you are doing, so I do not dispute that either.

The conundrum here is that I have analyzed vast quantities of data here in the East Valley based on MLS closed sales in 2010 and have noticed the lower prices of SS consistently in a like-for-like comparison with REOs. My data is much more reliable and granular than macro-data such as from the Cromford Report.

In any event, either the East Valley is an outlier, or there was something about sales in Q2 and Q3 of 2010 that caused SS to be cheaper, or James's assertion is valid, or the areas that you have recently been dealing in are outliers, or something else.

What time value of money are you guys using for your arguments above? I think that may be the source of differing opinions.

As one who has had my offers in before REO properties hit the MLS, I can assure you it does happen. After the offer has been submitted by the listing agent (acting as my agent as well) to the lender / servicer, the listing agent THEN puts it on the MLS - so of course you and everybody else can then see it, but by then it is usually too late to get an offer in (other than as a backup).