One component that I have encountered several times recently – Sellers who are setting their prices based on what they owe. What is a buyer (and Realtor) to do when the Seller won’t negotiate below that price, and would rather go to foreclosure than sell?
If the market value is $200,000 and the Seller owes $250,000 – where do we go?
Update: here’s a related story –
Now, however, some mortgage borrowers who stretched financially to buy a home with temporarily-low “teaser” payments and no money down – and haven’t owned it long enough to gain any equity – are taking the position that it’s hopeless to try to save the house. They’ll await foreclosure and use their money to try to keep up with other monthly bills instead.
“We see people coming in who say, ‘We’ll just let the home go. We don’t have anything in it anyway,’ ” said King, who has been a consumer counselor for 15 years.
That change in attitude helps explain why there is a subprime mortgage crisis and why banks – who analysts say made credit too easy for too many – have had to set aside billions of dollars in reserves to cover potentially bad loans.
Most buyers curiously ask: “what did this Seller pay for their home?” In the past, the focus did not need to be on that number as it really did not play a major role in price negotiations between Seller and Buyer. Well, the tide has turned and now it’s becoming a much bigger factor in price negotiations.
“What did the Seller pay” was irrelevant then and it’s irrelevant now.
Then, it was a matter of “how much the seller was going to make;” now it’s a matter of “how much is the seller willing and able to lose?”
But … as I mentioned on Dave’s blog – if the seller bought the house for $200k, it appreciated to $230k and they took out a HELOC – and now it’s worth $215k – will they be willing and able to take a $15-25k loss?
Jim, I guess we disagree… for example: an original owner (or an owner for a substantial amount of time) might (and I say might for many various reasons) be more willing to negotiate. Two examples from 2007: a) property listed at $630K that eventually sold at $375K b) property listed at $324K, now on the market at $248K….(which I predict will go contingent very soon given the much more attractive price point). In my opinion had these Sellers purchased in ’05 those price drops would not have likely happened.
Pavel – thanks for discussion. Absolutely, and I agree with you; what is happening, IMHO, is that there is no real consistency. Two very different situations could be happening on the same street.
What if that house that was listed at $630k and had been purchased for $350k had a maxed-out $200k HELOC? There is no way that they could have accepted that offer for $375k.
That, and the sellers who purchased with 95%-105% financing in the past two years …. with short-term I/O ARMS …
From a financial standpoint, it’s hard to find fault with this approach. If I’m faced with losing tens of thousands of dollars to sell my house, or just quitting paying my mortgage and sticking that loss to the bank, it’s an easy decision.
I’m sure one’s credit takes a hit, but I know 75% of the C-ville homes for sale I’ve been in are vacant, which likely means: the owners already got another house/loan/etc., so what’s the downside?
Morally, it’s a different question, but even then, I have little sympathy for the ARM and I/O mortgage hawkers that went out of business because of the credit bubble. Of course, we all will pay for it in the long run, as shareholders and taxpayers.
As an active buyer, I am not going to get attached to a home that was purchased in the last three years, because it has burned me twice when the seller decided to set the price based on what he/she needed to make. Really, you have to add 7-8% to your purchase price just to get past agent commissions and closing costs.
My new approach is this: buy the home that someone paid under $200,000 for back in 199X. In 2005 it was worth $350, but now it’s worth $275, and they’re still getting more than they paid and will let it go for fair market value, not “what I need to make” value.
I’m not sure I’d say this is “holding the market back”, but most assuredly, these sellers are not going to show up at closing with $50k in cash to complete their ‘short sale’. If they had that kind of cash, they’d wait out the market downturn. The behavior, from seller perspective makes perfect sense. So, yes, of course, whether or not the deal closes, it matters what the seller owes. If you mean, “this is making prices sticky to the downside” or “this is prolonging the decline and correction” or “this is preventing efficient price discovery in the market”, then sure, those get much closer. If they market were “freed” from this, the transaction volume would certainly go up; median and average prices would plummet of course.
These properties are reappearing post-foreclosure as REOs (at least three I’m tracking) with what are, so far, nominal price reductions (insignificantly small). But, as in “officially” declining markets (Matt Hodges: C’ville may not yet be tagged as such, but it will be soon enough) like Spotsylvania, eventually lender-owned inventory accumulates to the point where the lender will take the ‘short sale’. The big question mark is whether or not lenders actually take title or leave it sitting in the borrowers name until they complete the sale (so as to avoid all sorts of liability). Interestingly, it appears that in some cases, where investors aren’t showing up for trustee’s sales, some lenders are putting off the sales and allowing the borrowers to keep it on the market.
This, of course, is why the MLS statistics are so lousy anyway – they don’t include foreclosure auctions and other data available in the land records. That is, they don’t really accurately reflect the real market.
Scott – I’m sorry it’s taken me so long to respond.
thank you for saying what I meant. I can’t argue with the Sellers’ choice to go to foreclosure rather than take out a loan to pay the difference. Their reluctance and inability to take the market value offers is holding the market back in the sense that these houses are keeping the inventory numbers high, and in one sense, prices high as well – because they won’t/can’t sell for market value.
Regarding the MLS, of course you are right. That said, the MLS still offers the best data source available … for now.
REO properties are a growing part of the inventory, but there is no reliable way to track them, unfortunately.