Something I'm Missing?

[Jay Neaves]

First, a confession - I am a total newbie, never done a deal and still in the learning phase. So the chances are I'm missing something really obvious but I've been analysing a deal on a house and it seems too good to be true. For me analysing deals now will help me do it more effectively when I am financially ready to invest.

I wondered if the experienced investors here on BP could shed some light on what the issue might be so I can look into it. I am a firm believer that when something looks too good to be true - it is!

The house is a Short Sale 3/3 -1800sqft on around a 1/3 of an acre. It's in a very nice area (I used to live in that area) with an award winning school district, low crime area of the burbs. Basement, 2 car garage.

I'm 4000 miles away so I haven't been to view it so I'm relying on the pictures. From the pictures it looks like there are minimal repairs needed. I'd estimate $5k maximum but like I said I'm relying on pictures which could be old!

Not much in the way of comps - 2 currently listed with an average price of 123,623 and 3 sold in the last 12 months with an average price of 135,269. Looking at the sold comps - $178k, 173K and 55K with the $55k being a 2 bed 800sqft smaller than my target house.

Asking price is under 75k, and the one hiccup I can foresee is that it's well water, but it's possible to hook up to city water & sewer for $20k, if that's something that is something that needs doing. So, allowing for that and for some minor rehab, it seems to me that there is still $30k in this deal.

There has to be something I'm missing on this one.

[Tom A.]

Hi Jay,

You got my attention when you mentioned the house is in Commerce Township. It was pretty easy to figure out which house you were talking about and it turns out I live about 4 miles from it. I'll give you a little more info that may explain why it appears to have been hanging around for so long, when it actually has had a number of seller-accepted offers over the last 14 months that it's been listed.

As you know, it's a short sale. What you may not realize is that the way our local multiple listing service (MLS) works is that if the seller of a short sale property accepts a buyer's offer then the status of the listing changes from ACTIVE to CCS. CCS means "Contingent - Continue to Show". There are various reasons for the contingency, it can be inspection, financing, or in this case, awaiting short sale approval from the bank.

Since the status code CCS says "continue to show" the listing is still considered an active listing despite the fact that there is a seller-accepted contract on the property, and these listings are rarely shown to any other potential buyers. Previously, short sales that were awaiting bank approval were given PENDING status, which meant they would not show up on searches of active listings. Listings with a status code of CCS however do show up as active listings even though the seller has accepted an offer.

That's the case with this house. It went CCS on March 16, meaning the seller has accepted a buyer's offer. Now, this doesn't mean that the buyer won't back out of the deal, or that the bank will accept the buyer's offer. In fact, this house was first listed as a short sale in January of 2011 and since then has gone CCS and then come back on the market five times. During that time the price has gradually been reduced from $116,990 to its current price of $73,900.

Obviously the house has some issues, probably related to the well and septic field since the listing mentions that it can be hooked up to city water and sewer for $24,000. Based on the length of time between when the house went CCS and when it came back on the market I suspect that some buyers backed out due to inspection issues and other buyers backed out because they were unable to get financing. I wouldn't be surprised if we see it come back on the market for a sixth time.

I looked at the comps in the area and I believe the two that you referenced are ranch-style site condos in the subdivision to the North. Those were built in 2001 and are more of a premium product than the house in question which was built in 1964. I would not use those as comps. There is a subdivision northwest of this property, across M-5, that's more comparable and in that subdivision homes are selling for around $110,000. I think the house in question is a lot closer to that number for ARV than $135,000.

Finally, while I apologize for the length of this post, there is one other valuation technique I use as a "sanity check" in areas where I am very familiar with the market. Since this is pretty much in my backyard, I know that home prices have dropped roughly 40% since 2002. The house in question sold for $167,000 back in 2002. Assuming, and this is a critical assumption, that that price represented a fair market value back then, this implies a current value around $100,000. It just so happens that the 2002 sale was a bank foreclosure, so that price may be slightly low. Then again, 2002 was a pretty strong year in the real estate market in Metro Detroit so the price didn't need to be discounted much.

Putting it all together, I think you can see why this house has been listed for so long, and why it's not much of a deal for an investor.