Did you know that banks are continuing to contribute daily to the declining market?  Even though they have tightened their belts in terms of loaning new money, I see them squander their investors' money on a very regular basis.  Here's how:

The Short Sale

At this point, short sales are about 2/3rds of my business so I am working with them quite regularly.  Time after time, I counsel my client on how to put in a good offer to the bank while also protecting their equity position in case the market continues to decline.  As a basic rule of thumb, it makes a lot of sense for a bank to accept an offer that is about 10% below current market value.

The Bank's Response

For a while, banks seemed to "get it" when it came to their position in these transactions and the bank's response would be either to accept the offer as submitted or counter with a number that better met their criteria.  That works because it gives the buyer an opportunity to accept the counter, counter back, or simply walk away from the transaction if the bank is trying to pull them higher than their best offer.

Lately, however, I am watching many banks reject offers outright (even at amounts that they had previously accepted on the same property).  With no opportunity to respond, the buyer is left either randomly increasing their offer in hopes that the bank will accept or simply walking away.  Most buyers opt for the latter.

The Money Wasting Part

On the surface, it may look like the bank is actually protecting their investors' money by employing these tactics.  However, the money wasting part comes after they reject the offer.  They then foreclose on the homeowner, spend around $30,000 or so on the foreclosure and turn around and list the property on the market at well below the price that my clients had offered on the short sale.  This is an obvious waste of money on that particular transaction, but it gets worse!

Pushing the Market Down

Here's the bad part.  When a bank or several banks perform this way repeatedly, they are effectively pushing the market down in that neighborhood.  Let's say a home sells as a foreclosure at $30,000 less than the rest of the market.  One house like that might not affect market values, but the problem is that this happens repeatedly.  The buyer of the next short sale in that neighborhood now uses the foreclosed home as a comparable and offers even less than before.  The bank rejects the offer, forecloses, and then sells at a price even lower.  Can you see where this is headed?  Eventually, it pulls the values down in the entire neighborhood because the gap between the price of the distressed properties and non-distressed properties is too great.  To compete, even non-distressed homeowners must lower their prices.

I'm all for buyers getting the best deal and declining prices are good for that in a sense.  However, with this sort of activity some buyers are leery of even making offers because they are concerned about what the value of the home will be a year from now.  Fortunately in Tucson this is not happening in every neighborhood, but there are pockets where I see this and wonder when the banks are going to see the big picture.