Saturday, January 29, 2011

Short sales as comps

Art by Larry Mayo, Mayo Surfboards.

Are short sales good comparables to establish fair value for non-short sale properties? Not really. The recorded sales price is often understated. Many times a bank will require a contribution at closing from a seller or a promissory note for some or all of the deficit. The amount of either of these is not usually noted in the MLS or in the property tax records when the short sale closes . An interested person or agent looking at recent comparable sold properties may see that Comp A closed for $150,000 and Comp B closed for $160,000 and use these to establish fair value for Property C. No matter that the seller for Comp B paid $10,000 to the lender in lieu of a promissory note or that the seller of Comp A signed a promissory note for $25,000. The effective selling price was $175,000 for A and $170,000 for B but our intrepid researcher only sees that the record shows $150,000 and $160,000. Let's not forget that the write-off and subsequent reduction in taxes for the bank are effectively additional proceeds as well. [But, as pointed out by a couple of readers, shouldn't be used as an adjustment to the price of a compared property as tax implications are not exclusive to short sales.].

Our take-away: If you're looking to purchase don't walk away from the fairly-priced property you want because you demand the same price (as recorded) as the short sale unit down the street. As always, bargain hard but realize that the recorded price of the short sale comp you're using to base value on probably does not reflect the entire amount of proceeds from the sale.

"Institutions will try to preserve the problem for which they are the solution."
-- Clay Shirky