Seattle Bubble

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34 responses so far ↓

• 1 Ray Pepper // Apr 11, 2008 at 5:40 pm

  We are knee deep in short sales here at 500 Realty. I phoned this question in to our appraiser network and here is what I got:

  “One sale does not a trend make” In essence an appraiser will NOT use that sale as a comp and it will NOT effect the overrall value of a given mkt. **However if a 2nd home closes at the same price(or near it) then we are forming a trend** and it will surely begin to effect the give area.

  There you have it! Enjoy the sun!

  Ray Pepper
  Broker
  http://www.500Realty.net

• 2 alex // Apr 11, 2008 at 6:29 pm

  Ray Pepper has showns us the light: the attack of the bubbleheads! Here’s how it works:

  1) We all gang up and chase houses for sale in neighborhoods around recent short sales.
  2) We then make lowball offers on them, hoping to be the “2nd home” that defines the trend.
  3) The rest of the neighborhood will inevitably take a steep fall and the bubbleheads save the day, providing affordable housing for the masses!

• 3 Sandy // Apr 11, 2008 at 6:40 pm

  This scenario is hardly unique. I am seeing homes that would have sold for $750-800K last year now selling in low $600Ks. New construction is driving pricing in those areas where it is prevalent. In Snohomish county the builders are slashing prices and it is affecting everybody.

  Okay, okay. There was a bubble. Y’all happy now?

• 4 Rhonda Porter // Apr 11, 2008 at 6:58 pm

  I would think a lot would have to do with where the home is located. I would not think an appraiser could ignore a strong/similar comp. I’ll check with some appraisers and report back….

• 5 Ira Sacharoff // Apr 11, 2008 at 8:16 pm

  If there were a few houses sold in the neighborhood of similar size, age, style, etc that all sold for 800 thousand, and then a similar house was sold as a short sale for 600 thousand, it would be considered the outlier and not used as a comparable.
  But what if the comps are empty REO houses and foreclosures?
  And I think that fraud or something resembling it was not that uncommon even as recently as 13 months ago…there was a certain amount of that nod nod wink wink stuff going on which stretched out the duration of the bubble.

• 6 Jillayne Schlicke // Apr 11, 2008 at 8:41 pm

  I would be royally pissed off if I were a buyer and the appraiser ignored that comp. Wouldn’t lenders want to know about those comps, too?

  We need an appraiser to help us out. Let me see if I can go round one up.

• 7 Sandy // Apr 11, 2008 at 9:11 pm

  I was being a little facetious (and maybe even flippant) in my last comment but now that Battlestar Galactica is over I can be slightly more serious. Ira is correct that if it is one property and everything else is still selling close to the old price levels than the $600K would be treated as an outlier. However, in the current market I think these kind of sales have the potential to influence the trend more than they might have in the past. I also think that in those cases where agents aren’t doing their homework thoroughly before listing a property these kind of sales can have a lot of influence.

  For instance in a neighborhood of homes where homes usually went for $750-800, we had a home recently listed for $587K but it was totally trashed. Someone bought it in less than a week though and will put some money into it and be left with a very nice house. Another property went pending a few days later at $615K–also, in pretty poor condition and the sellers were in a distress situation also. Now I know this neighborhood and I know that this pricing is unusual and probably not really reflective of what a normal buyer and seller would agree to but they’re also the only sales posted there in the last 6 months or so. So now the question is, are they still outliers or are they really indicative of what buyers will pay to live in this area? If buyers are afraid they’re going to lose money then it makes sense they’ll only move in on properties that are offered at a discount.

  Most likely we’re not going to see 30% price drops become the norm but properties like this are going to have an influence on the general direction and speed in which we go that direction.

  What I want to know is who the frak gave them a zero down loan on that amount. You’re basically putting them into a million dollar house, no money down. Who thought that was a good idea?

• 8 economist // Apr 12, 2008 at 5:34 am

  Any arms-length sale within a reasonable time frame is at the market price. People can come up with all sorts of rationalizations as to why it isn’t, but that doesn’t change anything. Likewise it’s irrelevant as to what anyone considers a “comp”. The market price is set by each and every sale. The seller is going to get what the most willing buyer offers. If nobody is willing to pay more than what the short sale down the street went for, tough bananas.

• 9 wreckingbull // Apr 12, 2008 at 9:37 am

  I have to agree with economist.

  Why does it even matter ‘why’ the home is being sold? If I am the buyer purchasing at $610K, I really don’t care that the family sold due to a short sale or due to Daddy getting transferred to Columbus, Ohio. I feel it was worth $610K, I offered $610K in a transparent environment, no one else outbid me, isn’t that the market price?

• 10 BK Attorney // Apr 12, 2008 at 10:06 am

  In the scenario the 2nd mortgage would get nothing and would not participate in a short sale. Thus the 2nd forecloses and the only way to sell the property and avoid the 2nd is in a bankruptcy (BK). I have seen this scenario 8 times this month. I know of 20 more.

  How does foreclosure impact the neighborhood?

  On a different note:

  I have heard from good sources that appraisers are being told to hold values down in order to protect lenders. Just the oppisite of a few years ago.

  We have gone from greed to fear in the lending market.

• 11 david losh // Apr 12, 2008 at 10:46 am

  I have a couple of short sales on my books with one sold and closed two weeks ago. That short appraised for above sales price.
  Lenders make a short sale very difficult for the buyer, seller, and agents. It’s there job to bite, scream, tear, and complain while writing down a deal. They then come after the seller for the defeciency after closing. Bottom line is that the short sale is not for every one and the buyer pool is very small. It’s a brutal process.
  The appraiser appraises the short sale based on other comparable properties. A short sale does not reflect fair market value. It’s a distressed property sold for a distressed, fire sale price. If a house is involved in a fire then sells for below market it’s not fair market value.
  What is bothering me today is the number of inexperienced agents taking short sale classes then attempting to represnt buyers and sellers. I’ve helped a hundred people over the years with defeciency sales. Most end up in bankruptcy or foreclosure. It’s required that a seller try to resolve thier own situation and attempt to get the lender fair market value, but after that it’s usually best that the seller get an attorney and fight the deficiency. Otherwise the seller is on the hook for the remainder. So really for the agent it’s not a pay day, they are providing a service for the seller for free. After a fair listing period it’s in the sellers best interest to get an attorney.
  There are times when an agent can get close to fair market value. The lender in those cases may be grateful to get more than they could hope for from a foreclosure or court action. In those rare cases it’s in the seller and lenders best interest just to close the books.

• 12 S-Crow // Apr 12, 2008 at 11:07 am

  On a personal level (I’m not an appraiser nor an agent that values property as a function of their work) I tend to agree with Economists sentiment. A short sale is market value for said property, but to the extent that it would establish a baseline value for the house across the street in the same development or for others two or three blocks away, I don’t know.

  If I were a buyer, I would clearly want to know what all the sales were in a given development or neighborhood to help establish some sort of value. If a short sale (s) were included in the group, then it would have an impact on my offer. How much, I’m not sure. If I found that similar property were financed in the same or similar manner, (ie…100% financed or very close to it) as the short sale, then I would start to question the efficacy of values in the development or neighborhood.

• 13 deejayoh // Apr 12, 2008 at 11:44 am

  I don’t see why a short sale is considered a “non-market” event. It’s a short sale for a reason, right? If the seller could have sold for more than they paid for it, they would have. If the bank thought the property was worth more in their hands, they’d have taken back.

  I think ANY sale that is $200k off comps is probably going to be looked at suspiciously as a comp - but the fact that it is a short sale? I don’t understand the relevance.

• 14 Sandy // Apr 12, 2008 at 11:54 am

  Well, actually there are different types of value. Not every sale is reflective of market value. Some sales are more indicative of what is called “orderly liquidation value” and that is what this sale sounds like to me. I put this over in the forums once but I’ll post it here too since it’s relevant.

  The definition appraisers use for fair market value is, “The most probable price (in terms of money) which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: the buyer and seller are typically motivated; both parties are well informed or well advised, and acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”

  There a lot of ways in that definition that a sale might not be reflective of market value–”undue stimulus” such as divorce, death in the family, job loss are often the reasons why a sale ends up being short in the first place. A seller would typically not, and a lender would typically not, be willing to take a 30% loss on a property unless there was some outstanding reason why they needed to do so.

• 15 Apella // Apr 12, 2008 at 12:44 pm

  Many lenders are requiring additional information with many appraisal reports having Non-REO (Bank term - Real Estate Owned) sold, REO sold and Active Listed both REO and non REO Comps. I have had some appraisers say that lender clients are requesting up to 9-12 comps in an appraisal report. This way they get a better picture of the current market as a whole. I have had or have had appraisers tell me that lenders are requesting the amount of listed REO properties with in the market area as well.

  As far as comps before the foreclosure(s) became an issue many lenders would require two types of appraisals. The first for refinance or purchase where the comparables were typical for the market or “Non REO” and then if the property was going into foreclosure the lender would request the same with a short sale price with typical REO comparables. This may have been done because at the time the typical buyer of REO properties were cash buyer/investors. Because the lending world has changed so much today and that many markets have such heavy REO inventory that the REO inventory is now typical listings/solds/comps lenders are requesting more data in appraisals.

  Because each market and/or neighborhood is different based on the typical buyer for that market/neighborhood lenders will look at each market or neighborhood with different views and therefore require different appraisal data request. In normal speak, if the neighborhood is one bought into by employee transplants who do not have time or money to fix up a REO then the market/neighborhood consist of typical Non-REO comps and so that is what the lender may want to have the property compaired against, if the market/neighborhood has such a high raito of REO property where the buyer can not help to take the property into account when buying then the lender will request that data be taken into account for the appraisal report.

  Common sense would dictate that in an open market supply and demand with discounts taken into play would hold an effect on the remaining inventory. With appraisals the true use of an appraisal is to address a problem solving issue per the clients needs and time limits/guide lines.

  In my personal opinon, REO ratios do hold effect on over all market values providing that the REO comp is typical for the market or part of a trend.

• 16 Eric Arrrrr // Apr 12, 2008 at 12:55 pm

  Hi gang,

  I think the answer to this question of whether short sales should impact neighboring valuations is obvious:

  When we look at the reasons that so many of today’s sellers are in distress, it isn’t because there was a massive run-up in the rates of deaths, divorces & job losses.

  And so when a seller chooses to take a 30% loss instead of an even greater one, we should ask: is this the result of death, divorce or job loss? Or is it the result of the same circumstances we’re seeing everywhere: fewer qualified borrowers, mortgage rates resetting, low or negative owner equity, over-abundant new construction, and interest rates set to rise?

• 17 jon // Apr 12, 2008 at 1:01 pm

  The bank has several extra motivations:
  - avoid legal costs of foreclosure
  - avoid risk of damage to a vacant building
  - no mortgage income, unlike the occupant selling who gets value by living there
  - the stock market, when pricing the stock of the bank, will assume any REO held by the bank are all crack dens, so they might as well sell at that price.
  - banks are constrained by their reserve requirement, so converting property to cash means they can lend out more of their deposits.

  Lenders would probably ideally prefer all mortgage appraisals to be based on the price when sold as a short sale, but there is no way to get that number in a non-depressed market. So they go by normal market value and adjust for the cost of a short-sale through down payment, PMI, or higher interest on second mortgage.

• 18 Sandy // Apr 12, 2008 at 1:51 pm

  I think you misunderstand what I’m saying here. First of all, there are a whole lot of reasons why someone might sell their property short. I am going to surprise a lot of people when I tell you that while yes, there are some people who choose to sell short for the reasons Eric Arrr mentions, ie., “fewer qualified borrowers, mortgage rates resetting, low or negative owner equity, over-abundant new construction, and interest rates set to rise” those people are not the majority that are in this situation. The majority of homeowners who are underwater on their loan will choose to stay put if they can, for as long as they can, because most people like their homes and want to keep them. Of course, there are a minority who fit your description but it isn’t the norm and isn’t likely to be the norm any time soon.

  In my experience (and it’s been quite a bit of experience lately) something else besides just a fluctuation in the market usually needs to happen before a homeowner is going to want to take a loss on their property. Most do think of it as ‘their” property and most are aware that a lender is not likely to let them walk away from what is owed. And bottom line it is a minority of people who won’t try to stay in their home if it’s at all possible. Most of the short sale situations I’ve seen do involve other changes in the seller’s life that push them in the direction of having to sell.

• 19 Sandy // Apr 12, 2008 at 1:59 pm

  Also, it’s not that there has been a rise in deaths and divorce, but when there is little or no equity (as is more often the case now that the market is changing) the way those divorce/death (and numerous other) types of situations play out is that it ends up being a short sale rather than a situation where there is equity to work with.

• 20 uptown // Apr 12, 2008 at 2:16 pm

  The comments here are just too damn funny.
  A sale is sale is a sale is a sale.

  I know many would like to stop prices from going down and will do what ever they can to hide short sales, but it won’t help in the long term. You never heard RE salesfolks talking about ignoring outlier prices on the hide side during the boom, but we should ignore them on the down? Give it a break folks.

• 21 softwarengineer // Apr 12, 2008 at 2:31 pm

  HOW ABOUT SWEETHEART SALES THAT ARE OMITTED TOTALLY FROM THE DATA BASE???

  I bought a Bellevue home for about 60-70% going value from a relative in 1990: believe me, relatives selling homes to relatives is about the only way you can get a gift from a parent bigger than $10K in a year and the only way the kids caould qualify for the house….ask Seattle homes owners, a good chunk got into real estate that way or through inheretance.

  You think theSeattle Middle Class can afford $600K homes?….LOL

• 22 david losh // Apr 12, 2008 at 3:27 pm

  OK, it’s a little bit clearer to me what you’re driving at. I do have a listing in a new construction mess out in Lynnwood that won’t sell for value. Yes, a short should be counted if that’s the only way to get it sold. Technically that’s called a deficiency sale. The seller usually comes to the table with cash or takes a deficiency judgement.
  I encourage people to bite the bullet, rent the place, rent for cheap, and pay the monthly. It’s thier mess, they should take care of it. In the Lynnwood case I’m trying to get a Lease Option with the seller contributing to the monthly. It’s the only way.
  I don’t take whiner listing where some one wants out simply because. They have to have a compelling reason to sell. Lenders also want to see a compelling reason to sell. Losing your job, divorce, the dog died, the truck won’t sart are usually ignored by the lender.
  Mortgage fraud, or real estate fraud are the number one reasons lenders want to get loans off the books today. In my opinion we should all be on the same page on this one. I do think the Real Estate agent or Loan Originator should be on the hook for a great many of the deficiencies today.
  It doesn’t change the fact that in the world of REO properties it’s all business. The buyer/investor and lender/investor are making deals that make sense to them. This isn’t a mom, dad, and the kids buying for future gain or security. In short sales it’s about how much both can walk away with.
  Some Real Estate agents, who really have no business writing a short sale, whine about how thier darling little buyers are looking for a home and the lender isn’t nice to them. The lender is a multi billion dollar corporation who could not care less that these are the perfect buyers for the home. It’s numbers, dollars, and a deal will still be there tomorrow. They don’t care they don’t have to.
  In that regard it shouldn’t be counted as a comp. A lender taking less without foreclosure is for a reason other than normal circumstances.

• 23 Sandy // Apr 12, 2008 at 4:19 pm

  uptown–good grief is all I can say to your comment. No one is trying to hide anything. Every single sale is a matter of public record. No one is trying to pretend they don’t exist, and no one is pretending they have no effect. What we are trying to say is that not every sale is a good indicator of fair market value for a home. If an agent or appraiser is doing their job like they should, they should investigate any sales that seem odd for the area, and then determine whether to use it, apply an adjustment, etc.

  PS–software engineer–all sales will show up in the county records even if they weren’t on the MLS. Good practice is to check there, though again, not everyone is doing their homework like they should.

  A sale may be a sale, but not all sales are indicative of fair market value. Please go here: http://en.wikipedia.org/wiki/Market_value . Read the entry–it’s a pretty good explanation of what fair market is and how different types of situations will affect it.

• 24 Fast Freddy // Apr 12, 2008 at 8:46 pm

  Honestly, there is no reason to worry about short sales. Why? They just don’t happen! At the risk of ridicule by all on this site, I made an offer on a short sale home 2 months ago and am still waiting for an answer from Countrywide/Bank of America. The offer was 15% below market value and was accepted by the loss mitigator/negotiator at CW but the investor is just sitting on it. The lure of 5.75% interest rates and obtaining a home for $80,000 less than it was bought for a year ago was just too tempting for me.

  The delta between what the seller owes CW and my offer is $35K and from my understanding, foreclosures cost the mortgage lender $60 to $75K, yet the house stays empty. I don’t believe some institutions want short sales to occur and prefer to go through foreclosure. If this is a false assertion on my part, please let me know because a 35,000 loss seems like less damage than a 60,000 loss while the house sits.

  If it seems like I’m frustrated, well, you got me! Stay clear of short sales unless you can wait 3 months and are willing to accept a “no” answer.

• 25 Sniglet // Apr 12, 2008 at 9:42 pm

  Unquestionably a lot of short sales in a neighbourhood would drive over-all prices down. One or two might just be viewed as anomalies.

  However, I am going to agree with Fast Freddy about the slim chances of short-sales ever occuring. Even the most seriously depressed markets have precious few short-sales these days. The reality is that most lenders are just unwilling to take significant losses through sales, and won’t really start seriously contemplating losses till they have reposessed the property through foreclosure.

  Most buyers looking for deals should just wait till the properties are real-estate owned. Even then, you have to wait. Lenders are extremely reluctant to accept low-ball bids on REOs. Instead, they will slowly lower the price by $10K or so every few months until they find a point where it clears.

  In summation: to get good deals on foreclosed homes, wait for a couple years after the neighbourhood has had dozens of REOs. By that time the deals will be getting pretty sweet. Until then, no one is ready to deal. The home-owners simply can’t accept a realistic offer because it is for less than the mortgage, and the lender will be unwilling to accept significantly lower prices until all the comps in the neighbourhood show massive depreciation. Thus, we wind up in a waiting game, with REO prices being slowly reduced month after month until they finally hit bids.

• 26 Jillayne Schlicke // Apr 12, 2008 at 11:03 pm

  Hey, thanks, Shane.

  Shane is an appraiser and blogs under the name apella. See comment 15.

• 27 economist // Apr 12, 2008 at 11:50 pm

  Unquestionably a lot of short sales in a neighbourhood would drive over-all prices down.

  I disagree. As other posters have pointed out, an increase in short sales is a result of an overall decline in the market price, not the other way around.

  If X houses are for sale it matters not a whit whether they are short sales or they have equity. The market price is where supply meets demand. Period.

• 28 Pegasus // Apr 13, 2008 at 11:52 am

  I am sure the county assessors will do anything and everything to prevent lowering the value of their tax base. Thus the proposals of giving money away to prevent foreclosure. Also the real estate industry will do anything to keep real estate valuations from slipping because of the impact on the industry. However once the dam breaks everyone will have to accept the fact that regardless of how we get there the sum total of the real estate will be lower.

  An example of how ridiculous the extremes to prevent reality and natural forces work is a recent letter from the SEC to the financial industry whom many believe are already bankrupt if they valued their assests fairly. Each quarter the financials disclose more nightmares as they announce massive cash infusions while they fess up to some offsetting write-downs. The SEC recently issued a letter that allows wiggle room in pricing their assets at current values to prevent actual fair values from reaching the public and to keep the insiders from the pokey. The SEC’s solution for the contractionary version of this dynamic is simple: ignore those market prices if they are too ugly. From the release:

  “Fair value assumes the exchange of assets or liabilities in orderly transactions. Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. ”

  If you ever invest on margin and your broker issues you a margin call for either more money or a liquidation trying telling him that the value of your securities are distressed and that the actual value is much higher thus eliminating the need for more capital. Tell him what is good for the goose is good for the gander and then watch them liquidate your account post haste.

• 29 BK Attorney // Apr 13, 2008 at 12:06 pm

  Fast Freddy:

  This is the scenario where the seller files bankruptcy and motions the court to sell the home free and clear of all liens. I have never had oppisition to such a motion. The advantage to the seller is that they deal with their debt in one place and avoid the cancellation of debt income from the IRS.

  My experience is that short sales where a 2nd is involved just don’t a happen.

• 30 just_checking // Apr 13, 2008 at 12:07 pm

  I don’t the chance of short sales is slim. I have personally seen atleast 3-4 short sales go thru in the past 3 months (this is in only 2 zipcodes and price range i follow)

  As for countrywide, they are notoriously incompetent or plain overworked. They take
  their sweet time in deciding. They probably have the highest bad loans in the industry anyway.

• 31 S-Crow // Apr 13, 2008 at 12:34 pm

  BK Attorney, Sniglet & Fast Freddy,

  Short sales are occurring in our Puget Sound Market.

  Our office has closed several short sale transactions with 2nds. A lopsided number of short sales around the country were purchased with 100% financing, thus, a good majority have 2nds involved. Just got another short sale approval late last week with a 2nd mortgage that was essentially wiped out .

  Lenders are taking a beating, no bones about it.

• 32 Sniglet // Apr 13, 2008 at 1:03 pm

  S-Crow,

  I am pleased to hear that short-sales are actually occuring. Maybe things are changing. Nevertheless, short-sales have remained a very small portion of the market almost everywhere, even in the most stressed regions.

• 33 Astroboy // May 11, 2008 at 7:03 pm

  S–Crow,
  So, IYO, am I wasting my time learning how to negotiate with banks and do short sales for families facing forclosure. I lot wisdom is let them sink! A lot people 2-3 from now will find it very hard to qualify for a good mortgage because of this credit hit. That won’t help the RE recovery.
  Also, I believe a lot of families got in trouble reaching for the American Dream and taking some very bad advice they paid for and didn’t understand at signing. I can’t blame them for this problem, entirely.

• 34 Astroboy // May 11, 2008 at 7:07 pm

  Sorry about the way I commented; I didn’t profread it…Astroboy

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