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Posted by on Mar 1, 2012 in Ethics, Flips, Fraud, Short Sales | 15 comments | Print Print

Short-Sale Cannibalism

Sent in by an anonymous flipper.  Fifteen percent of this year’s NSDCC sales have been round-tripped:

We’ve purchased a couple at trustee sale recently where the “comps” are all short sales and REO’s. 

Typically it’s never a problem getting 5 – 10% more than a distressed sale as most good appraisers understand the nature of the discounted distressed pricing. 

Recently however we’ve been dinged on three sales because the appraisers didn’t give us consideration for the fact ours is an equity sale vs. the distressed sale comps.  Prior to this we hadn’t been knocked down on price as a result of an appraisal for over a year. Either we’re in the midst of an unlucky streak with  incompetent appraisers, or maybe there’s a shift taking place in the appraisal community.  Too early to tell I suppose.

There was a nicely-upgraded, 3,576sf house in Chula Vista that we got outbid on today.  The opening bid was $440,920. 

There are only two recent closed “comps” in the whole neighborhood. The first closed for $510,000 on 1/26/12 as a short sale. The group that bought it is a competitor of ours and the listing agent who was also the selling agent in this transaction handles all of their listings. So he listed it low and pocketed the listing by not accepting other offers. He even stated in the confidential remarks “No showings at this time, an all cash offer has been presented to lienholders for consideration.” He double ended the deal and sold it to his buddies.

Three days after they closed escrow on this house for $510,000, they relisted it for $639,000!

They obviously couldn’t have done much in the way of improvements in 3 days, nor would they have needed to as it was the former model home. And I’m sure you can guess who got the new listing. The weird thing is they just withdrew it from the market today. Probably because at 27 days on market it’s getting a little stale so they’ll likely relist in the next couple of days.

The other “comp” is the same exact situation, but different agent. Put it in pending status immediately after inputting the listing so it shows 0 days on market. Don’t think this one’s a flip though….likely an end user. But once again the agent double ended the deal and sold it to someone they obviously know. The sale price on that one was $525,000.

The homes in this neighborhood are worth over $600k (highest sale on street was $1,425,000 in 2005).

 The winning bid on this house today was $512,100. The guy who bought it is one of the old timers at the trustee sales…..he’s been doing it a long time. The true market value of this house is likely in the $600k – $625k range. He’ll have no problem finding buyers but will he get his appraisal based on the fraudulent comps? Obviously he doesn’t think it’ll be a problem.

In the meantime, this is just one more additional unknown we have to consider (among the many unknowns) that makes this business more and more of a gamble every day.  If this is, in fact, the start of a new trend we’ll have to make the decision going forward whether we hold firm – or fold.  If we don’t hold firm and accept distressed sale pricing as market value, then that will drag values down even further.  The short sale agents will have to come in lower than our comp to tempt future buyers, and we in turn will be faced with lower distressed sales prices that could affect our appraisals.  Could become a vicious never-ending cycle.

15 Comments

  1. If only there was some way to stop all the shenanigans going on with insiders + crooked realtors.

    Oh wait there is it’s called foreclosure.

  2. Lower house prices? bring it.

  3. On the appraisal topic, I just refi’d and found the appraisal formula amusing.

    - Ocean view is worth $30K. Whether it’s a tiny sliver of blue over a 3-story apartment complex or a sit-down 270 degree panoramic ocean and Torrey Pines Reserve view makes no difference.

    - Lot size variation is valued at $1 per sq. ft.

    Take two homes of similar quality and size. Home 1 has no view on a 3500 sq. ft. lot. Home 2 sits on an acre lot with a panoramic ocean view. Following this formula, I can get home two for just $70K more!

  4. Rampant problem here in Phoenix

  5. From what I can tell…

    MOST short sales are fraudulent in a significant manner.

    I’d more say it’s the rare one that isn’t. Of course, by the time the banks figure this out, it’ll be too late and the scammers will be onto another one.

    Chuck

  6. Agreed.

    It’s the realtor-in-the-commission-candy-store syndrome.

  7. The house that sold for $510K looked fishy to me too. I don’t think they will get $639K. If someone does buy it, they are either impatient or uneducated buyers. They’ve been doing open houses every weekend since it was listed. I’ve walked by with the kids a few times. The other one that sold for $525K seems about right for a short sale. Probably had some good activity at that price. Paying $512K on the steps for something in that tract is way too risky. I guess flippers need product. I’m seeing way too many short sale opportunities to take that kind of risk on the steps. Looks like the competition is keeping margins super tight. We dabbled with the court steps in 2009/2010 until margins tightened up. Glad to see stories about my neck of the Woods. Short sales are the way to go in this market. End users like myself can score great deals if they are patient. I’ve seen about 10 killer deals here in Eastern Chula Vista in the last six months.

  8. Can’t really compare the two houses even if they are on the same street. The one that went pending @ $635K is over 1,000 sqft larger. The smaller 3200 sqft home only has 3 bedrooms. Although the smaller home is 1 story, you don’t get that kind of premium for 1 story in Chula Vista. I also think that the smaller home will struggle to find a buyer of 600K. There are similar 1 story homes north of Proctor that are more popular (IMHO) and struggling with the 600K barrier.

  9. This happened to us when we were in the process of buying our last home 2 years ago. The REO listing hit the MLS in the morning for an asking price of $499k. The house was in a neighborhood where the comps were $650k-$725k, so something struck me as odd. (Prior to the bank foreclosing, the property was listed for $799k in 2009.) Before we even had a chance to see the property that afternoon, the listing went pending. We did check it out anyway and it was over the top fabulous!! Initially, I didn’t feel too bad that someone got their first because I thought whoever it was had probably outbid our $625k offer anyway…our max budget. To our surprise, the house eventually closed for $500k!!! No surprise, the listing agent also represented the buyer. All I could think was how shady the system was, how the bank had hired this guy to protect their interest, and it turned out he was only in it for himself. The bank writes off the loss and it’s all of us taxpayers who are on the hook. Not to mention the well below market value comp that the neighbors had to deal with.

  10. “All I could think was how shady the system was, how the bank had hired this guy to protect their interest, and it turned out he was only in it for himself.”

    With the way things have turned-out, can you blame “him”?

    At this point, it’s everyman for “himself”…

  11. The problem is really obvious in the Phoenix market. If you follow new listings (ADOM = 0) throughout a busy day, many more are listed AWC (active with contract/contingent) than are listed as active. They are mostly short sales, with some “traditional” sales mixed in.

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