Banks are not Charities

Okay, I get it. Everyone wants a deal. It is a natural part of our economy. When buyers hear the words “short sale” or “foreclosure” or “REO”, their eyes often light up like those crazy shoppers who get up at 4:00 AM to shop the day after Thanksgiving. And short sales, foreclosures/REO’s can be very good values, especially if they need work. But I find that buyers often have unrealistic expectations about what kind of price they can get on these distress properties.

To understand this, it is important to keep one fact in mind… banks are not charities. Banks are not interested in giving buyers “good deals”. Banks are regulated financial institutions (some would argue not regulated enough, but I digress) and they have a responsibility to their stock holders to maximize profits. Banks are driven by profits, or in this case the desire to minimize losses. So when a bank gets a property back in foreclosure, or is asked to take a loss in a short sale situation, they do not think “gee, how low can we sell this house to give some lucky buyer an incredible deal?”. Instead, they act to protect their interest. They will typically send out a couple of appraisers and perhaps get a price opinion from a realtor so they can determine the realistic market value

of the property. Then they will do everything in their power to sell it for as much as possible.

It is a amazing to me what some buyers expect. If I have a short sale or foreclosure listing at say $800,000, I inevitably get calls from buyers asking if they will take $500,000, or $600,000. Sure… when pigs fly. The banks price it at $800,000 because they believe that is what it is worth. Sometimes they are right, and sometimes they are wrong and have to adjust the price downward. But they are always looking to maximize the selling price. It is a business decision for them.

In short sales, their decision is simple… is it better for the bank to take a loss today, or to go ahead and foreclose and sell the property themselves? The answer to that question depends on the offer. In the bank’s opinion (and in this situation the bank’s opinion is the only one that counts) if the proposed sales price is more attractive than foreclosing, managing the property, and selling it as an REO, then they will approve it. If the offer is too low, and they feel they can sell it for more if they foreclose, then they will reject the offer and foreclose on the home.

Here is a chart showing the average sales price to list price for non-distressed sales, along with short sales and REO/Bank owned sales that have closed since January 1st in the Pleasanton, Dublin, and San Ramon real estate markets. As you can see, short sales and foreclosure sales sell for very close to asking price, and actually sell for a higher price relative to asking price than non-distressed sales.

This is mainly due to the fact that sellers of short sales and foreclosures are serious sellers, and their process for pricing property is not based on emotion. As a result, they are usually priced aggressively in the market to attract serious interest. That is why short sales and foreclosures can be excellent values, especially if there is work that needs to be done. Just don’t expect to get it for 30% or 40% below the asking price.