Some of the more difficult listing appointments our group encounters these days are ones that involve short sale conditions. In this situation, the seller owes more on the property than what it is worth in the current market.

A year or so ago, we were having to explain how short sales worked to anguished sellers. These days, sellers call us, say they are underwater with their mortgages, and ask if we can help get them out from under crushing and/or mounting debt. And contrary to popular belief, short sales are not only occurring in condo conversions and lower end properties, but in the luxury home market as well.

How and why do short sales present such potential for real estate investors and home buyers? Most short sales situations we encounter in San Diego involve homes that were purchased in the last two years with 100 percent financing, or homes that had been refinanced—often a number of times. Many of these properties are also encumbered with Option ARM mortgages, whose rates have reset to unaffordable rates and may have negative amortization.  

No well-advised buyer would ever pay an inflated price for a home to accommodate a home seller’s inflated mortgage debt.

In fact, we routinely check the outstanding mortgage debt on properties we show to home buying clients to check short sale potential. Many buyers don’t want to go through the protracted hassle of waiting for lenders to respond to offers. Others are willing to trade time for opportunity. Regardless, we feel compelled to advise buyers of the possibility.

It may be anecdotal evidence, but we seem to be encountering more homes at the low end of the luxury market that will likely be sold under short sale conditions. In the San Diego market, many of these properties are newer tract homes that are in the $1 to $1.5 million range. These sellers have also had the added burden of having to compete with builder’s inventory that is/was being sold with ultra-generous incentives.

And what does the near-term future hold for short sales in the luxury home market?

Difficulties will arise with some of the luxury home purchases and refinances that were accomplished with Option ARMs and their “teaser” entry rates. A million dollar mortgage that originated 30 months ago and had payments starting around $2600 per month could now be readjusting to just under $7000 per month. And refinancing out of these products is often daunting, because of hefty prepayment penalties.

It is a story that is still under development.

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