Everyone pays more when below-board practices affect an industry. In the world of buying and selling California real estate, honest home buyers and sellers are affected negatively when short sales become a prominent part of the landscape.
A short sale is when a property is sold for less money than is currently owed on an existing mortgage. The home owner selling the residential real estate obviously loses money – the negative difference between what was originally paid for the house versus the eventual selling price. The only real benefits to short sellers are that they avoid having a foreclosure on their financial record and they are in a position to find a living arrangement they can afford.
In a short sale, the mortgage holder loses because it decides that getting less than expected is better than getting nothing at all, should the owner default on the loan. Most everyone else in the real estate market is hurt, because lenders must raise their mortgage interest rates across the board to cover the losses of short sales. The only possible winner in a short sale situation is the buyer of the house, who obtains a property for less than fair market value.
Flipping, which is legal, is when a someone buys a house for less than market value and then resells it shortly thereafter for more than they paid. In a depressed market such as currently exists, repairs and improvement are often made to the property to increase its value and immediate desirability. Otherwise, the new home owner will probably need to retain ownership until the market rebounds, which costs them money for maintenance and real estate taxes. At today’s market-recovery rate, the holding period could be a long time, which eliminates the chance of making a profit on the property.
Flopping, which is illegal, is when a home buyer and others, such as a real estate appraiser and/or agent, collude to establish a value for the property that is actually considerably less than the true current fair market value of the land and structure. The home is then rapidly resold for more than the buying price, but often still less than fair market value to quickly motivate buyers and unload the property at a profit.
For more information about short sales, read the articles Short sale (real estate) on Wikipedia and How To Do a Short Sale: Why Would a Lender Accept a Short Sale? in About.com’s Home Buying / Selling section.
Here are a few more few more recently published related articles about the California real estate market:
- Real estate dealings call for fair expectations in the Sunday Real Estate section of SFGate.com, the home of the San Francisco Chronicle
- What you can buy in San Francisco, San Rafael on SFGate.com
- Study: Less short sale fraud here than in state, nation in the Real Estate section of Bakersfield.com
- Distressed Homes Dominate California Sales in the Real Estate & Mortgages section of TheStreet.com