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I’m a home seller, can I cancel the contract on my home?

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It doesn’t happen very often, but occasionally a home seller will decide that they don’t really want to sell their home after all.

What can they do?

If your home is only listed for sale and there isn’t a pending offer, then you can cancel your listing agreement. Maybe. It depends on the brokerage you have listed your home with and how your listing agreement is written.

Thompson’s Realty will let a home seller cancel their listing agreement with no strings attached. We realize that sometimes situations change. Be advised, not all brokerages will let you cancel a listing agreement. You should be able to at least take your home off the market. Check your listing agreement. Some brokerages may charge you for expenses they have incurred to market your home. Your options should be spelled out in your listing agreement. Read it carefully…

What if my home is under contract for purchase?

Well, you’ve got a problem. The purchase contract you signed is a legally binding agreement to sell your property under the terms of the contract. Breaking such a contract is generally considered a breach of contract:

Breach of contract n. failing to perform any term of a contract, written or oral, without a legitimate legal excuse … Breach of contract is one of the most common causes of law suits for damages and/or court-ordered “specific performance” of the contract.

Ugh. Law suits for damages. Court orders. Sounds expensive, and it is.

What is the home buyers recourse if you breach your contract and decide not to sell your home?

Typically the home buyer will seek court-ordered relief in the form of “specific performance”. In short, they take you to court and ask the judge to force you to uphold your end of the deal. And the vast majority of the time, they will get exactly that. Should you fail to sell the home after the judge tells you to, well now you are looking at contempt of court charges and all the fun and expense that entails. In this case, you might not need your home anyway as you may well have a new place to stay in The Big House.

What exactly is “Specific Performance”?

From the law.com dictionary:

Specific performance n. the right of a party to a contract to demand that the defendant (the party who it is claimed breached the contract) be ordered in the judgment to perform the contract. Specific performance may be ordered instead of (or in addition to) a judgment for money if the contract can still be performed and money cannot sufficiently reward the plaintiff.

Here is a great article, written by an attorney, with more information on specific performance.

The vast majority of the time, a seller being sued for specific performance is going to lose. After all, you entered into a contractual agreement to sell your home. The buyer has more than likely paid out of their own pocket for inspections, an appraisal, and possibly some mortgage fees. In addition, they may have sold their own home, or arranged to terminate their lease. Not to mention that they stopped looking for a home because you promised to sell them yours. Your real estate agent or the buyer’s agent might even be able to come after you for commissions due since they procured a willing, able and ready buyer for your home.

Occasionally a seller might win a specific cause complaint, but typically that only happens if the seller can’t sell the home. Not because they don’t want to, but because they can’t — as in they no longer can convey clear title.

Any other options?

You could always try asking the buyer if they would agree to a mutual cancellation of the purchase contract. It’s pretty unlikely that will fly because, as previously mentioned, the buyer already has significant monetary “skin in the game”. Maybe if you agree to reimburse them for their costs, and maybe if they are getting cold feet and/or are the nicest people on the planet then they might agree to a mutual cancellation. In the current Phoenix real estate market where many buyers have submitted offers on multiple homes, only to have their hopes and dreams dashed by being outbid, I think that it is pretty unlikely that a home buyer under contract is going to say, “No problem. I’ll just go back to the stress and pressure of finding another home”.

If you do manage to get a buyer to agree to a mutual cancellation, I would strongly suggest having an attorney draft the cancellation agreement so that you are ensured the buyer can’t come back later and sue for specific performance anyway.

In short…

If you are a seller looking for a way out of selling your home, you need to speak to an attorney. Breach of contract can have serious legal and financial implications. Don’t screw around with it. Your agent probably isn’t an attorney. Seek your agent’s advice (which should be, “speak to an attorney…”). If your agent says, “Eh, no big deal, happens all the time!” then… well, good luck. You’re going to need it (and a healthy checking account balance as well).

Disclosure: I am not an attorney, in any way shape form or fashion. And an attorney is exactly who you need to be speaking to if you’re considering breaching your home sale purchase agreement. The above is based on my professional experience. Laws and real estate purchase contracts vary by state and possibly city. Get off the Internet now and find an attorney if you are considering breaching a contract.

Photo Credit: By controlarms on Flickr. CC Licensed.

 

7 Habits of Highly Effective Real Estate Agents

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Here’s the third installment of our “7 Habits” series, following up 7 Habits of Highly Effective Home Buyers and 7 Habits of Highly Effective Home Sellers.

What, you didn’t know this was a series?

Yeah, me either until about 10 minutes ago…

Here we’ll explore seven habits that highly effective real estate agents practice. In an act of shameless self-promotion, we’ll throw in that if you are a Phoenix home buyer or seller, you need to only call Thompson’s Realty to find an agent that practices these seven habits (and more) in their daily routine.

Effective Habit #1: Understand the Real Estate Contract and Supporting Documents

It seems stunningly obvious. An effective real estate agent should understand the real estate contract and all the documents that surround and support it. In the state of Arizona, we have standardized purchase and sale documents that are pretty much the lifeblood of a real estate transaction. Yet nearly every day we are presented with evidence that there are agents out there with fundamental misunderstandings, or misconceptions, about what these documents include.

THAT’S CRAZY TALK!

Yeah, it should be crazy talk, but it’s actually reality talk. Agents need to understand every single line of the real estate sales contract. There are critical timelines in that document that must be followed to protect your client — be they buyer or seller.

Home buyers and sellers — you should review the standard contracts and other documents before you make or consider an offer on a home. ASK QUESTIONS. The docs are drawn up by legal types and are often worded in ways only those people can manage. A good real estate agent should be able to explain every line of the contract to you in plain English. You need to understand these documents. And if your agent can’t explain them, well…

Effective Habit #2: Patience

“Patience is a virtue.” I don’t know who first said that, but they were right. (Actually, according to several sources, the saying is believed to have originated in “Psychomachia,” an epic poem written in the fifth century. Now you know.)

Real estate agents need patience. Patience in dealing with other agents, with lenders, with title companies, with inspectors, with appraisers, with banks, and yes, even with their clients. Let’s be honest, some of you client types are not the easiest people to work with.

The real estate sales process is long and arduous, and not for the feint of heart. Patience is required to navigate the often stormy waters of a real estate sales transaction. The patient real estate agent, one that can shrug off the inconsequential and zero in with laser focus on the crisis of the moment is the agent that closes those transactions that can slip away from the less patient.

Effective Habit #3: Understanding the Real Estate Market

Local knowledge of the real estate market is important in helping a home seller set a price, and a home buyer submit an offer. Local knowledge is important for helping a home buyer find that perfect home. MANY real estate buyers and sellers rely on an agents local knowledge, and as such, ya gotta have it. “Local knowledge” doesn’t just mean memorizing the number of homes listed for sale and the median sales price, it means understanding the schools, shopping, medical facilities, HOA rules and regulations and anything else a potential buyer may need to know in order to make educated decisions on where to buy. For sellers, understanding the real estate market is critical in being able to properly prepare and price a home for sale. Forett at Bukit Timah by Qingjian received healthy response from the day of launch in 2020. 2021 will see more units sold according to the Singapore Real estate trends

Effective Habit #4: Understanding the Client

Thanks to the human genome, every individual is different. You need to understand, and be able to extract when necessary, what your client’s needs, wants and desires are. What is their motivation for buying / selling? What do they HAVE to have in a home vs. what would “be nice” is crucial to undertand so you, and they, don’t have to wade through thousands of potential homes trying to find the right one.

Ask people what they most need out of their real estate agent, and I’ll bet you a significant number of people will tell you, “I want my agent to understand my needs and requirements.” That usually comes right after, “I want my agent to communicate with me…”

Effective Habit #5: Communication Skills

Most of what happens in a real estate transaction, if you really boil it down to the root, is communication. Communication between buyer and seller agent, agent and lender, and especially agent to client. Great communication skills are rarely genetic, it requires study and practice. I’m not saying you have to be a skilled orator on the level of say a Dr. Martin Luther King. It’s not “speaking skills” per se that are required, though it helps if you don’t bumble and stumble and sound like a buffoon. Communication involves speaking, writing and even listening skills. You must be able to communicate effectively — that means losing the acronyms and not speaking in real estate terms that people outside the real estate space may not understand. Timeliness of communication is critical as well. Sometimes, even if there is no change in the transaction, reaching 0ut to your client and letting them know that is just as importnat and talking to them when a big matter is at hand.

And for God’s sake, answer email’s and phone calls!

Effective Habit #6: Technological Skills

No, you don’t have to understand how to write computer programs or solder a component on a mother board. But in the year 2011, it is important for real estate agents to have at least some fundamental tech skills. Skills that go beyond just knowing which way to face the document in the fax machine. I’ve seen agents that can’t fumble their way through an MLS search, or fill out a contract electronically. How they survive is beyond me. Want to really serve the younger home buyer? You better learn to text. Want to work with out of state clients? Learn to use electronic signatures, and learn to fight the idiots that don’t accept them. Want to market a home on the Internet? Well then learn how to do that.

None of this stuff is really all that difficult to grasp. Go to Google (google.com. It’s a web site). Go to YouTube. Teach yourself some basic tech skills. If you can’t teach yourself, sign up for a class. There are a bazillion of them being sold for free.

Effective Habit #7: Be Likeable

I’ve said this numerous times in speaking engagements of all sorts — people pick a real estate agent because they like them, which is why many go to the real estate agents Greensborough. Perhaps that is oversimplification, and perhaps it seems odd to say this in an article about seven habits of highly effective real estate agents. But the bottom line is this: real estate sales is not rocket science. It doesn’t take years of formal education and training to be a good real estate agent. What separates any given agent from another is a razor-thin margin. There are only so many ways to complete a real estate contract. Marketing skills are important in selling a home, but the greatest marketer on the planet can’t sell an over-priced home, or a home in bad condition (unless that has been factored into the price). Put “Agent A” next to “Agent B” and you’ll be hard pressed to be able to quantify why one is superior to the other. Many times agent selection by a home buyer or seller boils down to whether or not they like you.

Yes you.

So don’t be an asshat. No, you don’t have to burry your nose into your clients posterior (that’s really not “likeable”, it’s ass kissing, which few people truly find likeable). No, you don’t have to be your clients BFF. No, you don’t have to be a “yes man” and agree with every word your client utters, nor do you have to tell them everything they want to hear. In fact, rarely will you be telling clients what they want to hear because a solid 9/10ths of real estate sales involves educating your clients and that usually means telling them what they don’t want to hear. Just be honest. Brutally so. While the truth in and of itself may not be likeable, your clients will ultimately like you for being honest. There are numerous great places for real estate training that can help you hone all of these 7 habits in order to get you to the top of your real estate game. Validum Institute is considered one of the best institutes that provides nationally recognised real estate training in Queensland.

Be yourself. Be true. Be real. That’s likeable. Leave fake smarmy sales guy at home. Or locked in a trunk somewhere. No one likes fake smarmy sales guy.

Bonus! Effective Habit #8: Reader Submission

What do YOU, oh avid reader, think is an effective habit of an effective real estate agent? If you are a home buyer or seller (or ever have been) what do you look for in an agent? If you are a real estate agent, what habits have you developed that helps separate you from the gaggle of other agents plying their wares? Let us know in the comments!

Photo Credit: Lincolnian (Brian) on Flickr. CC Licensed.

Specifying a Lender. Steering? Illegal? Or just Stupid?

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There was a “featured” post on Active Rain (a real estate blogging platform) today that discussed real estate listing agents placing certain requirements into the Multiple Listing Service (MLS). The article, titled Can the Listing Broker Specify the Lender?, (must be a logged in Active Rain member to access) expressed concern with what appears to be a growing practice of inserting into the MLS statements along the line of:

Buyer must pre-qualify for a loan through lender XYZ to submit an offer

In the 120 some-odd comments that followed, many agents expressed outrage at this practice. Some went on to offer the following arguments against it:

  • It’s illegal (a Fair Housing violation) because it is Steering
  • The seller has no right to dictate these terms
  • The listing agent has no right to dictate these terms
  • The listing agent is doing this without the seller’s permission
  • It doesn’t matter what lender performs the buyer’s pre-qualification because all lenders in Arizona are licensed, and held to the same standards

Let’s examine each of these arguments…

Requiring a pre-qual from a specific lender is steering

Steering is illegal based on the Fair Housing Act. What is steering? Typically it is defined as:

The illegal funneling of home buyers to a particular area based on the desire to keep the makeup of that neighborhood the same or intentionally change it (source).

There are many definitions of steering out there, but this is the gist of it.

Requesting a buyer to be pre-qualified by a specific lender is hardly steering as a Fair Housing violation. Just because a buyer may feel “steered” toward using a specific lender, that doesn’t mean it qualifies as illegal steering.

The seller has no right to dictate these terms

Sure they do. It is their home, they can dictate pretty much whatever they feel like (within legal limits of course). A seller can dicate that they will accept only cash offers. Heck, they could dictate they will only accept a sack of nickels if they really wanted to. A seller can dictate that they will only accept a full price offer printed on pink paper. If a seller wants to dictate that a buyer must be pre-qualified with a specific lender, so be it. They aren’t specifying the buyer has to get a loan from the specific lender, only that they want the buyer pre-qualified by that lender.

The listing agent has no right to dictate these terms

This is probably correct. A listing agent could advise their client to restrict buyers to pre-qualifying with a specific lender, but they shouldn’t dictate that term. Personally I think that would be poor advice, more on that later…

The listing agent is doing this without the seller’s permission

Really? And you know this how? Unless the MLS states, “I the listing agent never got my seller’s permission to say this but…” then you are merely speculating that the agent hasn’t discussed this with their client. Speculating on other’s intents and actions is ill-advised. There’s no point in it. Just stop it.

It doesn’t matter what lender performs the buyer’s pre-qualification because all lenders in Arizona are licensed, and held to the same standards

This argument, simply put, is a load of hooey. It’s absurd to think that because lenders hold a state issued license that they are all equally competent. Agents that feel all lenders are the same because they are licensed apparently feel all real estate agents are the same too. After all, real estate agents must also be licensed by the state.

Some commenters on the post mentioned that because there is a standard pre-qual form, all pre-quals are the same.

Another load of bovine fecal matter.

Sure the form is standardized (in Arizona) but that doesn’t mean all pre-quals are created equal any more than all real estate purchase contracts are created equal.

The Bottom Line

The practice of forcing buyers to pre-qualify with a specific lender (or use a specific title company for that matter — something we see far more frequently) is not “steering” and it’s highly unlikely that it is illegal (hey, I’m not an attorney so I can’t say with 100% certainty that it is a legally allowable practice. I’ll go with 99.99% certainty, but not 100%).

Don’t get me wrong. I think it is a ridiculous practice. It’s annoying as hell. Making buyers jump through extra hoops to put on offer on your home is dumb. I know for a fact some buyers simply walk away from houses for sale where this demand is in place. How that benefits the seller is beyond me. I also know agents that will just roll over and accept the demand on their client’s behalf.

If you are an agent and your buyer client is opposed to getting pre-qual’ed with a certain lender, then submit your offer without that qualification. If the seller counters they want their lender to pre-qual your client, counter back with NO. Could your client “lose” the home? Sure, if the seller stands pat on their demand. That’s a decision and risk assessment your client will have to make.

But consider this — we’ve had at least three buyer’s that I can recall that said they weren’t wasting their time pre-qualifying with the sellers choice of lenders. And you know what? Turns out once the seller had that offer in their hand using their specified lender wasn’t so important after all…

 

 Photo Credit: kevin dooley on Flickr. CC Licensed.

 

7 Habits of Highly Effective Home Buyers

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If you read the article published here last Thursday, 7 Habits of Highy Effective Home Sellers, then you probably saw this one coming…

This time I’ll try not to leave one of the seven habits out. Though by accidentally doing that with the seller’s habits post, we got some outstanding contributions from readers. Be sure to read the comments in that post for more insight.

Why seven habits of effective residential real estate buyers? Because over the years we’ve seen some traits (habits) the our successful buyer clients share. What is a “successful buyer client”? Let’s just define it as someone who finds the real estate investment they want, and gets through the often arduous property buying process without killing themselves, a loved one, the seller, our their real estate agent.

Effective Habit #1: Get pre-qualified (or pre-approved) for a loan

You can’t effectively search for single family homes or even a luxury apartment if you don’t know how much you can afford. In today’s lending environment, it is crucial to know BEFORE you begin a home search what type of mortgage, and how much of a mortgage you can get. In fact, in Arizona you can’t even submit an offer on a home without including a “Pre-Qualification Form” with your offer. Well, technically you can submit an offer without it, but I don’t recommend it. The vast majority of sellers are going to want to see some evidence that you can get a loan for the home. These days, many luxury real estate incline homes listed for sale get multiple offers, why would you relegate your offer to the bottom of the pile because you didn’t bother to submit a pre-qual form?

It is crucial to work with a good lender throughout the home buying process. If you don’t know a lender, ask your Residential Real Estate Company for a few recommendations. Interview a couple of lenders and pick one and stick with them. Few things add more stress and headache to a real estate sales transaction than changing lenders mid-stream. Find a lender that won’t just tell you the maximum amount of a mortgage you can get, rather find one that understands that qualifying for a certain amount and being able to make the payments are two different things.

Here is an oldie but goodie for more info on getting pre-qualified/ pre-approved for a mortgage.

Effective Habit #2: Define your must haves, like to haves, and can not haves

Tell your real estate agent, “I’m looking for a 3 bedroom, 2 bath house in the Phoenix area.” Your trusty agent goes into the Multiple Listing Service (MLS) and enters a search for said 3 bedroom 2 bath homes. They will swiftly see that there are 6,401 such homes currently listed for sale in Phoenix (4,058 if you eliminate homes that have offers submitted).

You can’t possibly look at 4,000 – 6,000 potential homes, just click this link see it for yourself!

Tell your agent, “I’m looking for a 3 bedroom, 2 bath home between $200 – $225K. Single story, without a pool and at least a 3 car garage,” and there are 36 homes listed for sale that meet that criteria.

You CAN look at 36 homes. Add into your search criteria you want a home built after 2007 and you are down to 18 to choose from. Only interested in living in Gilbert? Now you are down to 3 houses to view. You can do that in a couple of hours, tops.

When searching for townhomes, determine what you MUST have in a home. Then determine what you would LIKE to have in a home. Talk to your agent about these things. Don’t forget to include what you CAN’T have in a home — that will often be more important than anything else.

Don’t know exactly what you must/like/can’t have in a home? That’s OK, it happens ALL the time. Your agent can help you by showing you different home packages with different features to help you get a better understanding of what you’d like in a home.

But at some point you are going to have to make decisions and not wander aimlessly about, looking at any home that may possibly fit some undefined set of criteria. That would be a waste of your time, and the time of your agent, the home sellers, your lender and everyone else that is involved in a real estate transaction.

Effective Habit #3: Be realistic

You’ve read on the internet somewhere, or heard on a late-night infomercial that you can get bank-owned homes for pennies on the dollar in the Phoenix area. You want to be an investor! You can’t wait to but that $400,000 home for $130K and then rent it out for $2500 a month. You’ll be rich!

Now it’s time to wake up. You can’t buy homes in Phoenix for pennies on the dollar. Banks, no matter how evil you think they may be, aren’t stupid. They sell their inventory of bank-owned homes at pretty much market value. Why wouldn’t they? Would YOU sell your home for pennies on the dollar? Of course you wouldn’t. You’d let the market determine the value of your home (that may be oversimplified, but that’s basically how it works), as will a bank.

Maybe you’d like one of those $40,000 homes you’ve heard about. And you want it in north Scottsdale. On a golf course.

Well, you can’t have it. It simply doesn’t exist.

Both of the above are extreme examples of being realistic. Less obvious examples might be something like you want a home built in 2010 that isn’t in a Home Owners Association — probably doesn’t exist, unless you look way outside of the metro area. Or you want granite countertops in a home built before 1950. Probably does exist, but your choices are going to be limited.

Being realistic also applies to things besides the home itself. Buying a short sale and expecting the owner to make a bunch of repairs (or any repairs)? Good luck with that. Buying a home and thinking if the home inspector finds anything wrong with it, I’m not buying the house? Well you might as well stop right now because I can assure your there aren’t any homes where the inspector finds nothing to report. Get your brand new built to your order home constructed and an inspector will find some items to address (and yes, you should get a new build home inspected — more than once).

See, “Phoenix home buyers, are you being realistic?” for a more in-depth discussion on Habit #3.

Effective Habit #4: Be flexible

As a home buyer, it is important to be flexible. Unless you are having a home built to your exact specifications, it’s very unlikely that you will find the absolutely perfect home for you. Maybe you find a home that has everything except the perfect kind of flooring, colors, cabinets, whatever. If you have some flexibility built into your must haves and likes, you will find the entire process much less painful.

Understand that in most cases there is a living breathing human being involved in the other side of your transaction. Home sellers are people too. Nit-picking them to death in negotiations and repairs isn’t likely to do much good and could quite possibly do harm. This isn’t to say you should cave to every demand the sellers make. You should stand firm on things that really matter and be flexible where you can be in order to move the transaction along.

Effective Habit #5: Understand the home buying process

You don’t need to understand every nuance of the home buying process — that is your agent’s job. But the more you do understand, the less stressful and mystifying the process will be. Trust me, buying a home is a stressful event. Anything you can do to reduce that stress will go a long way not just toward saving your sanity but in helping ensure the transaction moves to closing.

One of the most important things to understand is your purchase contract. There are two parties to a real estate contract — you the buyer, and the seller. The seller will either be the person who owns the home in the cases of regular / traditional sales and short sales, or the lender in the case of bank-owned / foreclosure homes. Sometimes the “person” in a regular or short sale is actually an “entity” such as an LLC, partnership, or even a corporation. Regardless of exactly who/what owns the home you are buying, you are entering into a legally binding contract when you have your offer accepted, and there are obligations that contract binds you to do. There are timelines that must be complied with, and if they are not, you can suffer some pretty serious / expensive consequences. Your agent (or lawyer in states that involve lawyers in real estate transactions), your lender, your title company, the appraiser — all will work diligently to ensure a successful closing, but ultimately they are not parties to the contract. YOU need to (with advice from your agent and/or attorney) understand all the terms and conditions of your contract.

It is also helpful to understand the escrow, appraisal and lending processes. The successful completion of each of these are fundamental to your closing on your new home.

Do not be afraid to ask your agent questions. Lots of questions. Be advised that everyone in the process tends to toss about terms and acronyms that only those dealing with this stuff on a daily basis understand. Sometimes we forget we’re speaking in a different language. Don’t be shy. If there’s a term you don’t understand, ask.

The lovely wife has contributed a total of five posts to this blog — and four of them compose a killer series on the home buying process.

Effective Habit #6: Be responsible

As a home buyer, you are going to have to work with a lot of different people in order to make sure your transaction progresses and ultimately closes. Yes, your agent will take on the burden of most of this, but you are still ultimately responsible for your actions.

You are (most likely) financing your new home. As such, it makes sense that you need to be responsible for maintaining your credit worthiness while your mortgage is being processed. Listen to your agent and lender and don’t go buying a car before your mortgage processing is done (yes, I’ve seen it happen). In fact, don’t buy anything on credit without speaking to your lender. And if you think you can quit your job a week before closing and still get that mortgage, think again (yep, seen that too).

When you are looking at potential homes, be responsible and respectful that you are in someone else’s home. It’s OK to look in their closets, to flip light switches, to turn on the stove. But be responsible and leave the home in exactly the same condition you found it in.

Much of this habit really boils down to two things: 1) use common sense; and 2) treat others how you expect to be treated.

Effective Habit #7: Have fun!

We already mentioned that buying a home is stressful. Take a look around at lists of “life’s most stressful events” and you’ll see things like taking on new debt, financial change, moving — that’s buying a house folks. You are about to enter into one of the single largest financial transactions of your life. Stress is a given.

But buying a home is also an exciting time! There isn’t a law that requires you to mope around, dreading every moment. There’s nothing wrong with having fun during the process. Hopefully you’ve selected an agent that you enjoy working with. Ditto for your lender. That doesn’t mean you all need to participate in group hugs or go camping together and join hands around the campfire singing Kum Ba Ya. But it’s OK to laugh, to enjoy yourself, to have a little fun in the process. If you’re not sure where to start, check here.

The Bottom Line

Buying houses for sale burscough doesn’t have to be torture. If you understand the process, work with the right people and try to have a little fun along the way there is no question that you can find a great home and get the transaction closed. Think about the habits shown here, do a little online research (why you could start right here on Phoenix Real Estate Guy!), have open dialogs with your agent and lender and you too can make it through a home purchase.

And no, applying seven habits, or even one hundred habits is going to ensure you have a successful home buying experience. Nothing can guarantee that. But you can certainly increase the likelihood of a less stressful and successful transaction by applying some of the habits listed here.

For you, oh avid reader, let me know what I missed. Feel free to add a habit or thought in the comments!

Photo Credit: morberg on Flickr. CC Licensed.

Why are there so many short sales in the Phoenix real estate market?

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This email came in on Friday from a couple in Canada that were searching for homes right on this very site:

Why are there so many short sales?

This was followed 30 minutes later with another email:

This is frustrating.  All of the nice places are short sales.  What are the odds of buying a short sale as a Canadian?

Let’s tackle the first question first”¦

Why are there so many short sales?

Here’s a chart that shows the median sales price for all homes sold in the Phoenix area from January 2001 through August 2011. Keep in mind the “median price” reflects the price point where half the homes sold are lower than the median, and half are higher. So June 2006 (the tallest bar on the chart) shows the median sales price in the Phoenix area was $265,000. So that month, half the homes sold for less than $265K, and half the homes sold for more than $265K.

Personally, I think median price more accurately reflects current home values than average price because it only takes a few very high value homes (or for that matter very low value homes) to increase (or decrease) the average price. Median price is much less sensitive to outliers.

Phoenix-area-median-sale-price-trend-2001-2011

What this chart shows is that median sales price is the lowest it’s been in over 10 years. So the odds are pretty dang good that if you bought a home n the Phoenix area in the past 10 years, it is worth less ”“ perhaps significantly less ”“ now then it was when you bought it.

Sure, there are exceptions. This chart reflects median value, not the values of every single home sold. And there is no way to know from this data whether a home was paid for in cash, or financed with a mortgage using anything from zero percent down to 10, 20 or more percent down.

But you get the idea. Home values in general have dropped significantly. MANY homes are purchased with little to no money down financing, so there are MANY homes out there where the owner is underwater on their mortgage ”“ they owe more on the home than they can sell it for.

And that folks, is the definition of a short sale ”“ where the lender approves selling the home for less than the loan on it. There are simply a lot of homes out there worth less than what is owed on them. And don’t forget that many people refinanced their homes when values were exploding in 2005 ”“ 2007. Cashing out all that “equity” might have seemed like a good idea at that time, but now those people also owe far more on their home than what they could sell it for today.

What are the odds of buying a short sale as a Canadian?

About the same as they are for a U.S. citizen. Not to sound flippant, but there really isn’t anything all that different between a Canadian citizen buying a home and a U.S. citizen doing the same. The biggest hurdle most Canadians face is finding a lender that has a “foreign national” mortgage product. Not all do, and most will usually require 30% down. But get over that hurdle and the differences between a Canadian and a U.S. buyer are negligible.

The problem with buying a short sale, regardless of your citizenship, is the successful closing is almost entirely dependent on two things almost completely out of your control ”“ the lender (or lenders if there is more than one) and the listing agent.

The lender is really in control. They are, after all, the ones getting shorted on what is owed them. As such, they have the right to approve or deny (or ignore) any short sale offer you make.

And they can take weeks to months to make decisions.

The experience of the listing agent is also a critical component in the success of a short sale transactions. Let’s be blunt, there are agents who have listed properties for short sale that simply do not have the experience needed to poke, prod and essentially harass a lender to make a decision. On the other hand, there are some very experienced short sale agents that have a high success rate in getting short sales closed. The sad part of the equation is the experience of the buyer’s agent has little impact as they can not (normally) deal directly with the seller’s lender.

It is extremely difficult to gather statistics on the successful closing of short sale listed property. You may hear “only 10% of short sales ever close” bantered about but I have yet to see anyone who says that back it up with data. At this moment in time, there are 10,607 active short sale listings in the Phoenix area and there were 2,023 short sales closed last month. So that’s roughly 1 out of 5 listings (or 20%) closing. But even that number is tenuous at best.

Over the last year, short sale listings are down, and closings are up. Anecdotally some banks seem to be getting more cooperative. But there is little doubt that to actually close on a short sale one needs a bit of luck, a great deal of patience, and a cooperative lender. A good short sale listing agent helps tip the odds tremendously.

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