What happens when you list a short sale too low?

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Education & Training with HD Realty BK662006

What happens when you list a short sale too low?

 

Anyone that’s been in the field at all over the last year has seen it:  a home that is in a $120,000 neighborhood is all of a sudden listed as a short sale for $75,000.  I just saw that very situation first hand in a neighborhood that I own a rental property, in fact it’s the first home I ever bought and Tim & I lived there for 3 years before turning it into a rental, so over the years I’ve tracked the values in there VERY closely, it’s kind of my temperature gauge for the real estate market.

After I got over my initial anger over how someone could POSSIBLY list a property that much below market value in MY neighborhood, I started thinking rationally about why this might not be a good practice.  Here’s a few ideas that I came up with and I’d love to hear any others you might have.

Bank turns the short sale offer down.  Come on… banks aren’t stupid (oops, sarcasm!).  If a house is solidly worth 120 and the BPO comes in at 120, they’re going to turn down 75!  Yeah, you’re going to get offers, pretty quick and probably multiples, but if it’s never going to get approved you’re wasting YOUR time, your BUYERS time (and their agents’), and you’re not only wasting your seller’s time but maybe also costing him his house.  You’ve gotten his hopes up that his credit will be saved and his home will be sold, but alas, it was not meant to be because his agent didn’t understand the short sale process.

Another thing is often the bank will ask you for listing history such as:

  • How long has it been on the market?
  • How many offers have you gotten?
  • What price(s) has it been at and for how long?

If I had listed that same property at $129,000 then lowered to 125 then 120 then 115 then 110 and then we get an offer at that point for 104, I can very reasonably show the lender that we TRIED to get more but this is the best offer we were able to get. If I list it at $75,000 and get an offer the next day for $74,000 then the bank is going to wonder if we COULD have gotten more for the property if we had marketed better, priced better, marketed longer, etc.

On the other hand… maybe some how, some way, the bank DOES accept the ridiculous low offer.  How does that play out?  Well, I’m glad you asked!

The lower the property sells for, the larger the 1099 “phantom income” or deficiency judgment will be.  That’s right, to calculate out the 1099 Cancellation of Debt amount OR a deficiency judgment, they take the amount you owe the bank minus the amount it sells for and the difference is how much you technically still owe them.  So the lower the selling price, the larger the amounts they still owe.  This also applies to the lender asking for personal notes or cash brought to closing.  (do you think the “lowball lister” explained this to their seller?)

If that property DOES close at $75,000, you’ve just set a new Market Value for the neighborhood.  Typically short sales sell for fairly close to market value, so if you do get one through, the market takes notice.  When you list yours for 75 then other sellers in the neighborhood feel pressure to lower their prices too.  This results in the continued decline of market values.

I think that deep down in their hearts, EVERY real estate professional wants our values to stabilize and stop this awful downward spiral (hey, did you ever notice that a downward spiral is EXACTLY like a toilet flushing?)  When an agent lists a property low like this, that stabilization seems less and less likely.

Your commission is lower.  Yes, that’s a complete sentence and a complete thought.  Don’t get me wrong… I NEVER make decisions based on the commission amount, but in this case, a higher price is not only better for YOUR pocket, but is also better for the Seller and their lender.  If you are acting as a single agent for the seller, lowball listing prices are probably not in the seller’s best interest.

 Although the buyer’s might love you!  Oh wait, probably not.  Not once their agent explains to them that you listed it low to try to “drum up interest” and get multiple offers and you expect them to come in over asking price.  Buyers don’t like that line any more:

If you really want the house you’ll have to bid $20,000 over the asking price…

Uhhhh… that’s what got our market in the pickle that it’s in!  Slight difference now though… we’re not telling them to go in over MARKET value like in the boom, only above ASK price (but still at or below market).  We know that, but the general public is VERY gun-shy about this right now…

These are just a few I came up with in my head… what can you think of that I missed?

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Rainmaker
910,070
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

I always try to list them a little on the high side and then drop the price every few weeks until we generate an offer.  It makes the offer a whole lot easier to justify to the bank when the house has been on the market for a while and you have gradually reduced the price over a period of time.

Also if you list the property too low and for some reason it gets bid up over asking price, you might have an appraisal issue.  Saw a news story on TV over the weekend.  Not sure how they got their numbers, but the claim was that over 20% of the financing deals are now falling through because appraisals are coming in low.  If the list price is $75,000 and the offer is $80,000, the appraiser is going to struggle that much harder with the value.

Jan 05, 2010 08:23 AM #1
Rainmaker
3,471,957
Gita Bantwal
RE/MAX Centre Realtors - Warwick, PA
REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel

Great post. It is important to list with an experienced agent.

Jan 05, 2010 09:42 PM #2
Anonymous
perry smith

Great post Andy you alway have superb information.

Jan 09, 2010 02:24 PM #3
Rainer
28,271
Jean Kelly
,GRI, Kiser Realty - The La Cita Group - Titusville, FL

Hi Andy:

My better half is posting some comments on your post.  It is to the point and all of your points are valid, so let's expand a tiny bit.  Jay is a Certified Distressed Property Expert, and has has also completed the "coveted" FAR approved class "Short Sales and Foreclosures, What Buyers Reps Need to Know".  His take: Get your CDPE training and stop wasting money.

Your First Point, The Banks will turn them down.  You are, of course correct and everyone, including the agent who erred in pricing the property in the first place, has wasted their time.  Did they do a BPO and ignore ther results, or are they just stup..d. 

Second, the bank is going to make sure future offers on that property get lost.  Do loss mitigators, work-out professinals and negotiators have a dirth of work to do?  Well NOOOOO!  Believe me this agents files will be lost.  That brings us to a vital third point:

Third point, and MOST VITAL - this agent is not representing his/her seller and may be a reason for the seller actually experiencing a foreclosure, even in our lovely Judicial State, Florida, where arbitration is being suggested by overworked Judges.  The agent who even suggests a starting point below the market is opening their broker to risk!

To your listing history scenario, again right on target.  Personally I will now and forevermore have my Distressed Property owner sign an addendum at the time of the listing, setting forth the price changes and timing for bringing the price down in an orderly fashion!!! Good Idea?  YES OR NO!  The history is built into the contract, so you can show the bank that you tried (as you suggested).

The deficiency can be negotiated by well-trained Realtor.  We are, in truth, the only party to the contract that shouldn't have a strong bias either way.  With that and a little knowledge, we can ask for language that eliminates the possibility of a deficiency judgement and if we are REALLY good, has the mortgage payoff reported to the credit bureau as paid in full.

One parting comment:

The only Distressed Property owner I have little sympathy for is the one who used their property just like a checkbook.  Sellers who treated a HELOC or other mortgage product as if it were earned income should have seen it coming.  They earned their punishment, and at best a deficiency judgement is well deserved.

Jan 17, 2010 06:31 AM #4
Anonymous
Michelle

Excellent information as usual Andy. 

It's like a slow, aganozing death of your real estate business.  Putting your self out of business with each listing you take and price incorrectly.  Not to mention each buyer who comes  thinking they are getting a real deal who gets angry that things don't work with the seller's bank.   

mmmmmmm and some wonder why some people are frustrated in this business.

Keep reposting it Andy, the reminder is helpful for many and often.

Michelle

www.OnlineClosingTeam.com

Oct 06, 2010 04:24 AM #5
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Rainmaker
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Andrea "Andy" Tolbert

Broker, Safety Expert, Instructor
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