Analyzing failed short sales that became REOs

By
Real Estate Broker/Owner with Pacheco Realty & Financial Services

MLS data holds a wealth of information that can provide explanations, support or negate assumptions by quantifying real estate transactions that fit certain criteria. Here is a look at MLS data in Fremont, CA which aims to gain a better perspective of short sales that become foreclosures. Specifically, this is an attempt to answer and put numbers to the following questions: 

  • What percentage of sold REOs were previously listed as short sales?
  • What is the sold price of REOs vs. their list price when they were short sales?
  • How long were the short sales listed before they were pulled out of MLS?

To set the base of this analysis, the following MLS data were pulled:

  •  Sold REOs that were short sale listings within 6 months prior
  • REOs sold Jan. 1 - Mar. 25, 2011 (recorded sold per MLS)
  • Property types included were Single family homes, condos and townhomes in Fremont, CA.

 

The results: 

  • All in all, there were 93 REOs sold since the beginning of 2011 to date, i.e., recorded sold as of the date of this study, 3/25/11. Of these, 18 (19%) were previously listed as short sales. It should also be noted that most of these short sales were with offers at some point in the listing period.
  • The chart below illustrates the price positions of the 18 properties when they were short sales vs when they became REOs.

Failed short sales that become REOs  


REOs sell 3.5% lower than the short sale price potential of these same properties 6 months prior to foreclosure.


 

  • The listing period of short sales, on average, is 152 days, or roughly, 5 months. This is different from Days on Market, which does not count the time that the property is on Pending status. Short sale listings with offers are typically changed to Pending status throughout the time that the offer is submitted to the lender for approval. Needless to say, the “waiting period” accounts for the bulk of a short sale’s cycle.

The above results indicate that, on average, a foreclosed property could have sold for nearly $12,000 higher if the prior short sale was successful. [Note: This is based on Fremont data, and may be different in your specific area.] This is missed opportunity. But consider, too, that foreclosing a property involves expenses, such as, attorney’s fees, preservation and maintenance costs, etc.

How many times does it happen that a failed short sale becomes bank-owned? Is it worth foreclosing if there is a short sale just waiting for an approval? And how long is the approval process, and could this account for the fallout of short sales – oh, this is opening a whole new can of worms…

 

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Rainer
108,684
Robert Schmalz
West Los Angeles Real Estate Group - Santa Monica, CA
Cal. Lic Broker

That was a pretty detailed post and was interesting for me. I specialize in Short Sales in the Santa Monica area. I am willing to bet the price banks could have gotten as a short sell vs an REO i sa lot larger then $12,000. For one thing in a short sale the bank has no costs to paint or make basic repairs. They have no costs for maintaining the property, getting the owners out of the house, cash for keys etc etc. On top of these costs the house itself are usually a mess vs a short sale where someone is living there doing the right thing. Yes I really believe your numbers are very low, Short Sale to REO. Has to be a much higher percenatge in the sell of short sale

Mar 29, 2011 01:46 PM #1
Rainer
20,160
Bryan Cerny
Rose & Womble Realty - Chesapeake, VA

Great post...I have pointed out the same information in the Hampton Roads area.

 

You would think the banks would do this analysis and realize that they are losing, per this example, $12,000 per home.  They worry about pennies on carrying interest for dollars transfering through their systems but they will let this lump sum go on every home that moves to foreclosure.

Mar 29, 2011 01:50 PM #2
Rainer
126,275
Mike Dennis
Keller Williams Realty Southern Arizona (Sierra Vista) - Sierra Vista, AZ
Associate Broker GRI, ePRO, CIAS, CDPE Sierra Vist

Thanks, Jane.

I believe your analysis works in many, if not most communities. I ran some numbers for the Tucson market. (My town, Sierra Vista, Arizona, is too small to model this way.) Tucson is at the edge of my market area, and there have been lots of short sales, and REO transactions, there.

Your model showed the same trends for Tucson, though the numbers are a bit different. Still, there is a $10,000-$20,000 difference between listed short sales, and REO sales.

Lesson learned, I hope.

Be safe.

 

Mike

Mar 29, 2011 01:55 PM #3
Ambassador
425,499
Bill & Cyndi Daves
Hiawassee, Young Harris, Blairsville, Hayesville, Murphy and Beyond! - Hiawassee, GA
TeamDAVES - Your REALTORS In the GA/NC Mountains!

The difference is simple.  If a bank agrees to a short sale, they don't necessarily recoup their loses from any government backed guarantees that might be in place.  If they follow thru with the foreclosure process they recoup their investment and losses from entities such as Fannie Mae, Freddie Mac, etc.

Mar 30, 2011 12:48 AM #4
Rainmaker
552,368
Joseph D. Federico
Donahue Real Estate Co. - Dedham, MA
Eastern Massachusetts Real Estate

Jane-Great post indeed

Mar 30, 2011 02:25 AM #5
Rainmaker
461,303
Marcy Moyer
Keller Williams Realty Palo Alto Probate & Trust Specialist - Palo Alto, CA
CDPE

Jane great post.  It seems to make more sense to do a short sale, but there are other factors involved, like insurance which seem to derail them.

Apr 03, 2011 03:09 PM #6
Rainer
64,421
AmeriFirst Winston-Salem
AmeriFirst Financial (Winston-Salem, NC) - Winston-Salem, NC

Brilliant post Jane.  Bill and Cyndi in #4 above make a good point.  I'd love to know how this specifically works out as it seems that there is actually a financial INCENTIVE for the banks to stick it to the Fannie and Freddie as they are being bailed out by Uncle Sam... well, ultimately, us.

 

Apr 11, 2011 05:13 PM #7
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Rainer
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Jane Pacheco

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