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.

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.