Denver-area housing market long on short sales
Method gaining popularity, but not everyone sold on it
By John Rebchook, Rocky Mountain News (Contact)
Published February 13, 2009 at 12:05 a.m.
Photo by Linda McConnell / Special to the Rocky
Katy Stuart, Jason Byrne and John Bauer, principals in REALsponsible, stand in front of a Park Hill home on which they made a short sale. The firm specializes in similar deals.
A newly renovated home on a quiet, tree-lined street near City Park sold last November for $387,000 -- $125,280 less than the balance due on the mortgage.
A McMansion in Evergreen was going to be sold for $1.5 million when construction started two years ago, but now the lender is mulling a $375,000 offer for the partially completed house.
A 1,522-square-foot home in Aurora is on the market for $119,900, almost a third lower than what the owners paid for it in the spring of 2002.
All are examples of short sales.
A short sale is when a lender allows a homeowner to sell the home for less than the mortgage balance, avoiding a lengthy and costly foreclosure.
The bank gains because it typically loses about half the amount with a short sale as with a foreclosure.
And while the homeowner still loses the home and gets no money, as the owner would in a foreclosure, short sales are less damaging to credit records.
And investors and buyers of homes can get screaming deals, much like buying a foreclosed home from a bank.
The downside is that short sales are lengthy, time-consuming and complicated transactions that frustrate home sellers, buyers and investors.
In addition, the Colorado Division of Real Estate is investigating companies that do not fully disclose to all parties involved in the short sale transactions that involve "simultaneous sales."
In these deals, the company will buy the home for less than the mortgage amount and immediately sell it to someone else for a profit.
There's nothing wrong with that, as long the homeowner selling the property and the two banks - the original lender and the one providing the loan to the new buyer - are aware of what is going on, said Zachary Urban of the commission.
A report last week by Zil low.com said that 11.4 percent of the homes sold in 2008 in the Denver area were short sales, compared with 10.9 percent nationwide.
But not everyone is sold.
One broker called them a "colossal waste of time," and a prominent lender said the hype is overblown.
Still, the concept appears to be gaining ground.
"Five years ago, no one knew what a short sale was," said Ed Jalowsky, owner of Hottest Homes Realty.
"Now, every home being sold in the Denver area for less than $300,000 is a short sale - or at least that is the way it seems," he said.
A Denver Tech Center-based company, REALsponsible, believes it is taking the industry to a new level by offering one-stop shopping for all of the parties involved in a short sale: homeowners facing foreclosure, banks and buyers.
The market for short sales is huge and is just starting to be tapped, said Jason Byrne, one of the company's three principals.
"We think of ourselves as the 'thought leaders,' in wholesale short sales," he said. "I think foreclosures will grow to be as big as the Resolution Trust Corp. by a factor of at least 10."
The RTC, created by Congress in 1989, took control of troubled assets owned by failed savings and loans, selling about $500 billion in collapsed real estate and bad loans at huge discounts. Colorado was especially hard hit because the S&Ls had been big players here during the oil boom days of the mid-1980s.
REALsponsible, which uses a line of credit from its investors to buy homes, renovates them and then sells or rents the houses, has completed about 90 short sales in the past year. It is looking to expand to areas with lots of foreclosures, such as California, Las Vegas, Phoenix and Florida.
Short sales can provide great deals for buyers.
Joe Manzanares of RE/MAX Leaders, who represents a buyer willing to pay $375,000 for the partially completed home in Evergreen, said if Countrywide Financial accepts the offer, it will be one of the "craziest" deals he has ever seen. Of course, the cash buyer he has lined up will have to pump at least a couple of hundred thousand dollars into the home to finish it.
But not everyone agrees that short sales are taking off or worth it.
Jim Smith, owner of Golden Real Estate, had this to say about them this week in his online real estate column: "Having listed a short sale myself, I have experienced this colossal waste of time, and I'm no longer willing to list such homes."
Smith said banks won't tell you the amount they will accept until you bring them a "live" contract, and the deals usually fall apart because it takes such a long time to get an answer from the lender.
Lou Barnes, principal of Boulder West Financial, agrees. There are so few short sales being completed that they aren't worth the effort, Barnes said.
"I was teaching a real estate class and I told my students that they would be better off doing their laundry than wasting their times on short sales," Barnes said.
His skepticism is based on a national report by the Federal Housing Finance Agency, which was created last July to oversee Fannie Mae and Freddie Mac. The report showed only 1,721 short sales completed in the U.S. in September and 9,521 in the first three quarters of 2008.
Jalowsky and others can't believe those numbers are correct.
"It's probably 90 percent of my business," said Jalowsky, who completed about 60 of them in the past year.
SHORT SALE SNAPSHOT
* What it is: A short sale is when the seller's mortgage lender accepts a payoff less than the balance due on the loan.
* Who is eligible: Homeowners typically need to be behind on their mortgage payments, be able to provide a legitimate hardship and have little or no equity in their homes.
* Advantage to sellers: Typically, a seller, once back on his or her feet financially, can buy a home in another two years, instead of the five to seven years following a foreclosure. Also, a short sale is typically less damaging to a credit rating than a foreclosure.
* Advantage to lenders: Studies show that lenders lose far more money with a foreclosure than with a short sale.
* Disadvantages: Short sales take a lot of time. Many investors and home buyers walk away from a deal because the bank has dragged its feet on accepting a short sale offer. Many troubled homes have at least two loans on them, and it is difficult to get the second lien-holder to agree to the short sale. Also, as with a foreclosure, the homeowner still loses the house.
* How to find short sales: Metrolist now requires Realtors to list homes on the market that are short sales.
SHORT SALES HOMES ON MARKET
* Adams County: 298 homes, 74 condos, 372 total
* Arapahoe County: 21 homes, 11 condos, 32 total
* Broomfield County: 169 homes, 35 condos, 204 total
* Denver: 45 homes, 48 condos, 93 total
* Douglas County: 27 homes, 4 condos, 31 total
* Jefferson County: 111 homes, 22 condos, 133 total
* Total: 671 homes, 194 condos, 865 total
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February 13, 2009
7:26 a.m.
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leavemealone writes:
The figures above regarding active Short-Sales are inaccurate.
There are WAY, WAY more Short-Sales for sale as we speak.
February 13, 2009
7:51 a.m.
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Marshdale writes:
Leavemealone:
I believe you are correct on this. I assume you are in the Real Estate business. I'm in developement. The shear number of homes I saw being sold at over inflated prices the three previous years before the downturn was astounding. I am now seeing these homes for sale in astonishing numbers with little or negative equity attached. I do not believe these numbers either. However, they may be just reporting those that are recorded, and not the ones that are in process.
February 13, 2009
7:58 a.m.
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leavemealone writes:
Yes, I am...23 years & counting.
:-)
These numbers are definitely from left field?
There are hundreds of Short-sales listed in Arapahoe County alone, etc...
February 13, 2009
8:32 a.m.
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INC writes:
right there with ya there leavemealone, Marshdale...
the problem arises in the scarcity of renters with an income.
one can snap up dozens but have to beat the bushes to find adequate renters.
February 13, 2009
8:33 a.m.
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WarrenJimmyBuffett writes:
"it will be one of the "craziest" deals he has ever seen."
It is only "crazy" if you don't understand the fundamentals of home pricing. Since home prices have been well beyond fundamentally rational prices for the last 10 years or so, when the prices return to LT historical levels every deal will be "crazy." Reversion to the mean can be a bad thing for those with leverage. Especially when the real estate agents who advise buyers (who use leverage) do not know what that means.
February 13, 2009
8:47 a.m.
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leavemealone writes:
For sure....Cost vs Value.
Now we have some balance in the market(s).
One day @ a time.
February 13, 2009
8:51 a.m.
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Blind_Pete writes:
Warrenjimmybuffet, I believe that the market has already returned to long term historical levels. Assuming a 5% inflation rate, by my count the correction has been made. But, that is not to say that the pendulum won't swing further, due to consumer expectations. Then, we will be due for an upward correction.
I'm not in the real estate business though. So, do you professionals agree with my assessment? I'm curious.
February 13, 2009
8:58 a.m.
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INC writes:
I must admit I preferred the balance during 1995- 2002...
rents kept climbing, and one could flip a house simply by purchasing paint and delivering it to the structure.
Rent just kept going up and up.
my biggest single profit came in 2000... $65,000 I owned it for 72 hours and simply bought paint. The new purchasers did not want/like the new stove I had bought for it either.
February 13, 2009
9:02 a.m.
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BetterEducated writes:
Pete, I'd interpret what WJB said as a "no" to your question and assuming that's correct, would agree.
I'm in the business and feel prices still have not reached the bottom, in fact many things on the market are still way overpriced from my perspective.
February 13, 2009
9:09 a.m.
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INC writes:
Blind_Pete,
Houses are loosing value, depending on the area where they are. some are stable some are not. Commercial structures are loosing at a slower rate as no one needs warehouse space. Commercial housing (Apartments) are stable for the time being. But rents are decreasing.
February 13, 2009
9:16 a.m.
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leavemealone writes:
INC,
You nailed it. However, Metro Denver is very close to the bottom.
We'll just have to see how long the bottom stays flat, so to speak.
February 13, 2009
9:24 a.m.
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k2ken45 writes:
It's a buyers market, not a borrowers. If only I could get the credit..... I would like to get into a small home near the light rail. I got the cash but no credit.
I hope for everyone that we are at the bottom.
February 13, 2009
9:32 a.m.
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steve00 writes:
What happens to the real estate agent fee in a short sale? Do they still get the same percentage? If there is no equity and just a balance the creditor eats, where does that fee come from? The seller, the buyer, God, the government?
February 13, 2009
9:44 a.m.
Suggest removal
leavemealone writes:
We get paid through the short-sale process. The foreclosing lender pays it through their "Net" (After all costs of selling including commissions) - this is the final amount that they'll (The Lender) receive at closing.
February 13, 2009
9:56 a.m.
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micmac writes:
I am surprised no one has mentioned the most serious drawback to a short sale. At tax time you will get a 1099 from the lender who wrote down the loan. You will owe income tax on the the amount written down.
February 13, 2009
9:56 a.m.
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INC writes:
Thanks Leavemealone... I am a professional. I get paid on the equity or rents per property. A short sale only provides me with volunteer work. and to be rid of "money pits".
February 13, 2009
10 a.m.
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leavemealone writes:
No 1099 associated with the short-sale. Pres. Bush & congress changed that up for the time being a little over a year+ ago.
February 13, 2009
10:01 a.m.
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leavemealone writes:
INC,
For sure!
These short-sales transactions are a lot like swimming upstream!
February 13, 2009
10:13 a.m.
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INC writes:
leavemealone,
See we can agree on certain topics... it is only our difference of method we argue about. Now if only we could get the rest of our respective party's (D&R's) to work together, we would all be better off.
February 13, 2009
10:19 a.m.
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WarrenJimmyBuffett writes:
C'mon, people. Do you really think overinflated home prices are going to hold as we are just entering a severe recession/depression? If you do, you are foolish. However, no rational argument can pursuade the irrational who pin their predictions on hope and greed. The irrational are doomed to failure in a falling market.
February 13, 2009
11:38 a.m.
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leavemealone writes:
INC,
I agree 100%
:-)
February 13, 2009
11:40 a.m.
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leavemealone writes:
Warren,
National Recession vs Local Recovery.
Metro Denver has been flat to digressing for several years.
We're ahead of the National Trends (Good or Bad).
:-)
February 13, 2009
11:54 a.m.
Suggest removal
chickenlittle1234 writes:
leavemealone - Like INC, I knew there were areas we would agree. I'm also in real estate, though commercial investment. We're looking at acquiring nonperforming notes and foreclosures, both here and in other hard-hit markets such as south Fla, and AZ.
Allow me to second your analysis - the Denver market is probably near bottom. An odd upside to never really flying out of the 2001 recession - every cloud has its silver lining, I suppose. Along these lines, we also see commercial real estate tanking (vacancies first, foreclosures next, probably starting late this year or early 2010). As odd as this may sound, I see the spike in short sales, deeds in lieu, etc., as a positive buy sign. I recently analyzed the both res. and comm. mkts here in Denver during the S&L days, and the buying window lasted about 3-4 years due to forced sellers like lenders or the RTC. The turnaround took a few more years, though the fundamentals sprang back - always good for cash flow, but not necessarily translating to huge jumps in value. That didn't start to happen until 2002, and then man-o-man, INC was right, you could mow the yard and flip the house for a 15-20% profit. That's several years away from now, but then, real estate should be for investors, not traders. When the traders and flippers come back, that's time to sell.
February 13, 2009
12:01 p.m.
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underthebusinvestments writes:
25 People to Blame for the Financial Crisis
http://www.time.com/time/specials/pac...
February 13, 2009
12:24 p.m.
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spelvin2002 writes:
This is the first intelligent forum I have visited in the last several months. The conversation has been enlightening and instructive, and has thrown considerable light on a problem that has all too often been blamed solely on the political persuasion of an adversary.
February 13, 2009
12:34 p.m.
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TC writes:
Ditto spelvin2002
February 13, 2009
4:43 p.m.
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market_man writes:
Apparently most people don't understand the value of holding a rental property with a 5% mortgage when inflation takes off a couple of years from now. Will be proven to be one of the smartest moves possible.
February 13, 2009
8:14 p.m.
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leavemealone writes:
chickenlittle1234 writes:
"leavemealone - Like INC, I knew there were areas we would agree."
Yes we do....
:-)
February 13, 2009
11:21 p.m.
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nhs76 writes:
I believe the greatest unreported story of this housing market is the obsolescence of many types of existing single family homes, such as basic ranches in the $100-250K price range in the Denver metro area. They're plentiful, but they're not what today's buyers aspire to purchase with their life savings and future earnings, even on the low-mid end of the market. It's like trying to sell a wood-paneled station wagon suitable for a 1950's-type family to a high-tech worker.
If I'm right, what caused the housing bubble to collapse is not only the subprime mess and the earlier leaching of home equity for consumer spending but also the unrecognized devaluation of the underlying housing stock.
February 14, 2009
10:59 a.m.
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thecondoguy1 writes:
Kudos to Erin Toll, sorry you are stuck with this mess but you seem to be up to the task.
These short sales are the owner/sellers foreclosing on themselves.
There are plenty of people willing to be complicent in defrauding the investors who hold these mortgages, such as the brokers going door to door pitching people on the opportunity to sell and avoid paying on their obligation. No more than undermining the value in the community by this "short sale" listing offered below market (soon to become market), with the intent of beating down and defraud the note holder out of as much as possible. Lord only knows where this will stop, maybe where there is no commission left.
Remove the incentives to foreclose such as reinstate the IRS obligation for forgiven debt and enforce the stigma of long term impaired credit and I bet there would be fewer foreclosures.
February 18, 2009
4:40 p.m.
Suggest removal
rayrobb writes:
leavemealone writes:
"No 1099 associated with the short-sale. Pres. Bush & congress changed that up for the time being a little over a year+ ago."
This is not true - there is no 1099A - Acquisition or Abandonment of Property - associated with short sales, those are for foreclosure. A person who sells their house on a short sale will receive a 1099C - Cancellation of Debt. A person would also get one of these if any portion of their debt is forgiven through the partial claims process (FHA Loans mostly), or any other modification that would write down the amount that they owe on the loan.
February 23, 2009
10:24 p.m.
Suggest removal
Videobarbs writes:
Great comments/insights on the housing situation. I rent so I'm lucky to be watching from the sidelines, but saddened at the tragedy of so many people who thought they were "homeowners" when they weren't. I sold my house in 2001 at the height of "le petite recession" of 2000-2002 and boy do I feel relieved to not have that burden to deal with.
I would tell people that there are getting to be some great bargains in housing out there, but ONLY if you plan on living in it for the next 20 years. The days of buying a house to live in and as an appreciating investment - only to sell it in a couple of years are over, perhaps for a generation until another group of gullible buyers come along (and they will).
Does anyone remember how under Clinton, they lowered the capitol gains - that a person could sell their house in 2 years and not have to deal with capitol gains taxes? Could that have contributed to this crisis?