Short Sales seen offering home buying opportunities
They are an alternative to purchasing houses in foreclosure, advisers say
By Janet Morrissey
March 8, 2009
Although economists are predicting that home prices could fall another 15% to 20%, many financial advisers see select buying opportunities for clients willing to nab a home from distressed sellers — in particular, those purchased through short sales.
In a short sale, a troubled homeowner gets permission from a lender to sell a house for less than the value of the mortgage and closing costs. In many cases, the homeowner has defaulted on the loan and possibly even received foreclosure notices but wants to avoid the stigma of a foreclosure tacked onto their credit report.
"There are some opportunities, especially if you're willing to live with the property for 10 years or so," said Rodney Loesch, a Columbia, Mo.-based certified financial planner with Waddell & Reed Inc. of Overland Park, Kan.
"But the one thing I'm always recommending is to do a lot of due diligence," he cautioned.
Mr. Loesch recalled how one client was planning to buy a home in Virginia in foreclosure last month until an inspection discovered that the septic tank didn't work.
"You've certainly got to go into it with your eyes open," said Mr. Loesch, whose firm manages about $35 million in assets.
IN BETTER SHAPE
Since the owner is still living in the home at the time of the sale, the property tends to be better-maintained than one that's empty following a bank repossession. Also, the buyer faces less risk of structural damage or vandalism caused by angry homeowners' seeking revenge after being booted out of their homes in a foreclosure proceeding.
"There's so much vandalism of foreclosed homes," Mr. Loesch said.
"When copper prices were high, people were breaking in and stealing copper pipe and things like that. So you're talking about some major plumbing expenses and electrical-wire [problems]" in some foreclosed properties, Mr. Loesch said.
In many cases, lenders are open to a short sale to avoid the time, legal costs and other expenses associated with a foreclosure proceeding, and many don't want the hassle of be-coming property managers until the foreclosed home is sold.
Distressed sales, which include short sales and foreclosures, ac-counted for about 45% of all transactions in January, according to the National Association of Realtors in Washington. However, some markets are seeing a bigger surge than others. "Close to 80% of all sales are either foreclosed properties or short sales in Santa Ana, Calif., but less than 20% in the Chicago region," said Lawrence Yun, chief economist at the NAR.
"We saw a 90% increase in short-sales transactions at our firm" in the past year, said Matt McCabe, vice president of the National Short Sale Center Inc. in Scottsdale, Ariz., which acts as a liaison between the lender and homeowner. The firm is handling about 2,000 loans, up from 1,270 a year ago.
Indeed, there's no shortage of distressed properties up for grabs.
The number of properties receiving foreclosure filings, which includes default notices, auction sale letters and bank repossessions, stood at 1,345,697 homes in 2008, up almost threefold from 470,526 in 2007, according to RealtyTrac Inc. of Irvine, Calif. And that number is expected to escalate this year.
Historic low interest rates and battered home prices offer opportunity for people seeking homes at bargain-basement prices from distressed sellers as long as the buyer intends to stay in the home for at least five years, advisers recommend.
Jim Weil, a CFP with Financial Strategy Network LLC in Chicago, said one of his clients purchased a property from a bank at a deeply discounted price, with a plan to live in the home when he retires in five years. "He wasn't concerned with trying to buy it, and turn around and sell it in two or three years for a quick profit," he said.
"If you're planning to use it as a primary residence or a secondary residence and you're trying to find a good place at a good price, then I think you should go ahead and consider doing that," said Mr. Weil, whose firm has about $600 million in assets under management. But be prepared to hang on to it for three to five years, he said.
"Even if homes should drop in value short-term until things stabilize, it would still be a wise purchase if they're planning to be in the home for seven to 10 years," said David Dahl, a chief financial planner at Dahl Financial Services Inc. in Polo, Ill., which manages about $27 million in assets. The government's $8,000 tax credit for first-time homebuyers sweetens the purchase. "They're really getting a gift from the government to make their down payment," Mr. Dahl said.
The credit alone, though, shouldn't tip the scales to purchase. "If you bought a place for $500,000 and it falls by 10% in value, you've lost $50,000, and your tax benefit was $8,000," Mr. Weil noted.
Most advisers warn clients against purchasing a home as an investment, even if it's dirt cheap in foreclosure. "Rental rates are not moving up, because there [are] still quite a few vacancies on the apartment side," Mr. Dahl said. As a result, it would be tough for an investor to find a tenant willing to cough up enough rent to cover the investor's monthly mortgage payment, he said.
Some economists are predicting that home prices could fall as much as 20% more in the next year. However, Stephen Kim, senior real estate analyst at Alpine Wood Capital Investors LLC in Purchase, N.Y., believes that "home prices have corrected as much as they need" and that any additional decline will just be a "temporary overcorrection." He predicts that the government's stimulus package will speed up the housing rebound and that "new-home construction could double within a year."
Still, many advisers are recommending that clients wait until at least late 2009 before buying a home in the primary housing market. "Many economists say prices could go down 15% or 20% further, so why, as an investor, would I take that risk?" Mr. Dahl said. "My own recommendation to clients is to wait — this market hasn't troughed."
