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DanvilleSanRamon.com

Real Estate - November 14, 2008

Are short sales good investments?

Yesterday, while exercising my dog at the dog park in Alamo a lady asked me to explain to her the difference between short sales and REO's, and was wondering if they were good investments. A good question considering all the media hype they are being given.

In a nutshell, here's the difference. A short sale has the original homeowner still in possession of his property; however, execution of the sale will result in insufficient funds to cover the seller's outstanding liabilities (notes, taxes, liens, commission, etc.) and the lender(s) must agree to the sale. Often short sales do not close, leave the purchaser in limbo for months, and ultimately do become foreclosures. An REO is simply bank-owned property after surrender or foreclosure and is short for Real Estate Owned. Banks are in the business of making loans that they count as assets and don't necessarily want to hold foreclosed real estate which they view as a liability that costs them money.

Purchasing a bank-owned property tends to be less complicated and easier than a short sale. In either event, while you may well purchase these distress sale properties for less than the original owners paid and perhaps even less than the bank(s) loaned, the likelihood of acquiring a property for less than it is actually worth at the time of sale isn't assured.

The lady's question of whether or not these distress sales are good investments depends on a number of things: (1) the investor's goal; (2) the ultimate purchase price; (3) the carrying costs; and (4) the market's recovery speed. High numbers of short sales and REOs tend to have a depressing effect on the market, pushing prices down. Once started down, prices tend to continue to fall even after inventory normalizes, which makes timing a market bottom difficult. In the chart below, you can see the number of listings as of Oct. 20, 2008, in various local markets and the degree to which short sales and REOs comprise the inventory of homes for sale.

On a positive note, to date Lafayette and Alamo have been impacted only slightly by short sale and REO inventory, and their prices have been holding more solidly compared to more highly impacted markets. On the other hand, Antioch is a market in very bad shape. Inventory is extremely high, short sales and REOs account for a very large percentage of property listings, and prices have fallen precipitously. Does this mean that Antioch is a bargain compared to Lafayette? Perhaps! Antioch properties are certainly less expensive and the prices have fallen farther, but which market is more desirable and can better resist a prolonged recession if we indeed experience one?

From another perspective, a conventional purchase in any market where the seller has significant equity in the property can often be purchased for a better price than either a short sale or REO. We recently demonstrated this to a young couple searching for their first home. After six months of chasing the short sale market in Dublin, we acquired a superior home for them in Walnut Creek for less than a similar short sale home in Dublin. The original owner had held the property for nearly 40 years and had room to negotiate. As my mom loves to say, "Just because it's 'On Sale' doesn't mean it's a bargain!"

If you are thinking about investing in Real Estate, please give us a call, we will be happy to share with you all we know. If you would like to receive a free comparative market analysis to determine your home's current market value, please give us a call.

Data presented in this column is based in whole or in part on data supplied by the Contra Costa and Alameda Multiple Listing Service and other quoted sources. Joe and Nancy Combs, Remax and the MLS Service do not guarantee the accuracy of this information.

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