James Frangella, Monterey, Carmel, Pacific Grove real estate specialist
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Monterey real estate, James Frangella
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by James Frangella
Written August 30, 2008 7:00pm PT/Revised October 2, 2008

Gee, where do I begin? I would imagine we need to ask a couple of questions. What is a short sale, what are the advantages and what are the disadvantages?

In a nutshell, a short sale is where the seller needs to sell their property and owes more than its worth. The seller finds a buyer to buy their house at today’s market value. The bank then agrees to take less … if the bank wants to.

For an example, a guy buys a 2 bedroom 1 bath house for say, $500,000 in 2005. Then three years later, for whatever reason (mostly because they couldn’t afford it in the first place), they need to sell it real quick. Unfortunately, the real estate market takes a dive and the house is worth only half of what it was worth in 2005. Ooops! 

Keep in mind, this buyer bought the house with 100% financing. Some silly bank lent this buyer all the money. Silly bank. Here’s how that worked;

Buyer calls bank: “Hi, I want to buy a house for $500,000. I have no money and can’t really afford it.”

Bank: “No problem. When do you want to move in?”

That’s it, folks! 2005 was a great year for home buyers, real estate agents, loan officers and, of course, the banks.

Fast forward to the summer of 2008. Home buyer needs to sell because it takes a couple of years for the home owner to realize they couldn’t really afford the monthly payments. They have a choice: walk away from their home and give the house back to the bank or try to sell it and salvage some dignity and most importantly, their credit rating.

Here’s how this works;

Buyer calls bank: “Hi, can’t make my payments anymore. Will you take less than I owe you if I can sell my home for what it’s worth today?”

Bank: “No problem. When can you move out?”

Would it be fun if it was that easy? But it’s not. Check out my website at www.jamesfrangella.com/1841soto to follow the negotiations just for the bank approval. I still have yet to close the deal after twelve long weeks.

So … what’s the advantage to the potential buyer of a house in a short sale? The answer: you really, really, really want that particular house. There you go!  Otherwise, you would be better off waiting for the bank to take the house back and buy it directly from the bank. Or go find another house that is not a short sale.*

That is the only advantage I can think of to buy a house in a short sale. I wish I could think of more, but I can’t. Hold on to your horses! I just thought of another one.

If you wait until the bank forecloses on the property, which would take months and months anyway then the buyer would have to compete with other buyers to buy the same house. Compete with other buyers you ask? Yep! This is one hot market right now for affordable housing. Ask any buyer trying to buy in the low price ranges.

CLICK HERE to see the sales activity ratios for the Monterey Peninsula. Note that Seaside has a plethora of affordable priced homes. Also note that for every two houses on the market in that city, just about one of the two is under contract! Projections show that Seaside will have more units sold in 2008 than any year since 1999! Can’t beat that with a rubber hammer.

This hot market equates to the cold hard fact that there are multiple offers on many of the bank-owned properties. Multiple offers means competition among buyers and that means a bidding war. Did you read the Herald’s article on that house on Trinity Avenue in Seaside? Thirty-five to forty-five offers! You know it sold for more than list price! How does a homebuyer compete? Well, there are short sales to choose from. The competition is less fierce as most folks (and agents) do not want to mess with a brutal short sale.

Just remember, short sales doesn’t mean short escrows. Long drawn-out affairs are the norm. And there is no guarantee the seller’s bank will even approve the sale. Not many buyers like to wait patiently for 2, 3 or even 4 months to close an escrow then maybe discover the bank rejected the sale at the final hour. Silly bank.

In summary, if you really, really like the house or the neighborhood and no other house will do then go for it, short sale or not. One more thing. Make sure the listing agent knows what they’re doing. This is really important. Otherwise you would just change the name from a short sale to a long sale.


* This would be a normal seller. Hint: a seller who owes a whole lot less than what the house is worth.