The Ugly Reality of Short Sales in Your Neighborhood
Short Sales Reduce Your Property Values
A WARNING: This blog post is not for the faint of heart. There is nothing warm and fuzzy in what I’m about to write. This is one of those “face the brutal facts of your current reality” stories. This is a blunt discussion of what happens when your neighbors have financial problems, when the economy turns sour and how their misfortune visits your doorstep….literally!
Short Sales
By now, most home owners have heard the term “short sale.” It’s become an all-too-common situation for homeowners this last year. For those of you who aren’t familiar with short sales, here’s a simple definition:
A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. (click here to read the Wikipedia article)
Sounds simple enough: a home owner gets into financial trouble and can’t pay the mortgage. They try to protect their credit rating and avoid foreclosure by asking the bank to accept less than what they owe on their mortgage. Wow! Sounds simple enough, right? For the purposes of this post, I’m not going to discuss the complexities of the short sale process. I’ll save that depressing subject for another day. What I’d like to focus on here is the serious, negative consequences short sales can have on a neighborhood.
A Neighborhood in Kenmore
Recently, a homeowner in Kenmore asked me to do a market analysis on his home. He was alarmed that homes in his neighborhood were listed as “short sales.” He had heard that this wasn’t good news and he needed some reassurance that his property value was OK. I crunched some preliminary numbers before I went over to talk with the client.
Here’s what the numbers looked like:
I happen to be very familiar with this neighborhood. All of the houses were built within several years by the same builder and the condition of all the homes are good. It’s a desirable area. Nice place. Unfortunately, three homes in this neighborhood are currently being offered as short-sales (as pointed-out by the red arrows) and, as I explained to the worried homeowner, the short sales have stagnated his property value (and those of his neighbors).
The client’s home happens to be an identical model as the property currently pending at $365,000. The homeowner thought his house was worth $475,000 based on his original purchase price and the asking prices of other houses he’s looked at. He wasn’t too happy when I showed him the comparables: Here’s the problem:
The direct comparable home at $365,000 was originally listed one year ago at $530,000 when the market was at its height. As the year went by, the sellers continued to drop the asking price until they could no longer pay the mortgage. Furthermore, the two active short-sales have lowered their prices.
The bottom line? I can’t spin this any other way my dear readers, the number of short sales in this neighborhood has pretty much eroded any equity gains the neighborhood experienced from 2004 until now. Conventional wisdom tells us that if one, single property was sold under distress, the comparables run by an appraiser might not come in low; however, this is not the case here. Sellers in this neighborhood will have a hard time proving higher prices when the prices are declining.
In fact, if I had a buyer interested in this neighborhood, and he/she was patient enough to get involved in the purchase of a short-sale, it’s good news. The pending short-sale at $365,000 was only listed for one week at that price. If the transaction actually closes, the buyer did very well indeed.
The ugly reality of short-sales in your neighborhood is that your property values are at risk. I’ve heard a lot of sanctimonious individuals recently, criticizing others for a “lack of personal responsibility” if they can’t pay their mortgage. The fact is, there are some people who did get in over their heads; however, I personally know a number of hard-working people who have lost good-paying jobs and they are in financial difficulties they never imagined. Just remember that we are all in this together and we need to be careful not to judge each other too harshly. Together we stand…….
James is a skilled and knowledgeable Associate Broker & Realtor with Keller Williams. Whether he’s selling an existing home or helping clients find their dream home, he provides quality real estate services in residential properties and relocations.
James and his wife Virgina have lived in Seattle since 1986 and bought their first home, a 1940’s project, in 1989. James is passionate about the Pacific Northwest and is dedicated to helping others find their home here.
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