REO’s, Short Sales, or a Good Ol’ Straight Deal? (Cont.)

A closer look...

In my previous blog post, REO's, Short Sales, or a Good Ol' Straight Deal?, I laid out some interesting 2nd Qtr. figures relating to REO's, Short Sales, and, what I referred to as a, "Good Ol' Straight Deal" (describing a conventional arms length transaction between two parties, a willing and able Seller and a willing and able Buyer).

My goal was to objectively explore the impacts Short Sales and REO's are having on the local  real estate market and, to identify any notable value gains between the various sale structures.  Additionally, it will provide us a baseline from which to measure any future trends as related to those types of sales.

Here we go...

During the 2nd quarter of 2008, REO's and Short Sales accounted for 20% of all single family residential home sales in Chico, California and, as previously stated, REO's sold at a ratio of nearly 4 to 1 Short Sales.

Short Sales, on average, tended to be 6% smaller in size than REO sold homes, cost 8% more, and took nearly twice as long to enter an escrow closing agreement.  Per square foot, REO's sold for 14% less than their Short Sale counterpart.

Okay...what about conventional home sales?

First of all, keep in mind that I have been using averages, instead of median figures for the previous calculations, where things might look different.  But, for now we will continue to look at averages...

On average, Short Sales sold for 17% less than their conventional sale counterpart, but were a fractional 3% smaller and took 8% longer to sell.

REO's, on average, sold for a whopping 24% less than conventionally sold homes, were 3% larger in size, and sold, 43% faster!  Per square foot, REO sales reflected a savings of 28% vs. conventional sales!

So, do things look different when we apply median figures?

Now, it does get a bit interesting...

REO's sold for 2% less than Short Sales and 8% less than conventionally sold homes.  Using median figures, cost per square foot also adjust toward the center.

• Short Sales: $170/sq. ft. (vs. $177 average)
• REO's: $157/sq. ft. (vs. $152 average)
• Conventional Sales: $177/sq. ft. (vs. $212 average) reflecting the greatest difference

So, if we were to take a 1,633 square foot home (an average of all three types of home sales) and multiply it by the respective median square foot price, this is what the 2nd Qtr. consumer would have paid for the typical home:

• Short Sale: $277,610
• REO: $256,381
• Conventional: $289,041

Now, I know that is a lot to digest.  And, I know you're probably wondering why mess around with averages and then go changing everything with medians.  Well, I guess the answer is this... both average and median information is available to us.  Which one we choose to use to substantiate a theory may depend on which works best to support that theory.  And, as I have said in the past, "numbers and statistics can be funny things".  So, it is best to be wary of what it is you're looking at.  But, I digress.  I am not trying to fool anyone here and I am not trying to verify a theory.  In fact, the differences between Short Sales, REO's and Conventional Sales look pretty similar, whichever application is used.  For a good explanation of averages and medians, you might look here.

Getting back on track and letting go of the numbers for a moment, it would be prudent to discuss how each type of sale might affect value.  Just because the price may be lower on one particular property vs. another, that doesn't necessarily mean that it is a better value or, put another way... a better buy.

For instance, while REO's may save you (on average or median) 8 to 24 percent vs. a conventional sale, there are other factors to consider.

First of all, the seller will be a bank that will probably be using a servicing company to assist in the process.  They will be represented by a listing agent whom really doesn't do a whole lot more than convey terms and information to the selling party via email (although, not necessarily a bad thing, considering the emotional component is essentially non-existent).

Secondly, the seller will very often choose the title and escrow company to be used during the transaction.  This may not seem like a big deal, but for you the buyer, and mostly for your agent, it can be challenging moving an escrow through a distant third party unfamiliar with local practices and procedures.  Hint: Hire a good agent.

Also, keep in mind that the bank (the seller) will typically expect you (the buyer) to move quickly and adhere stringently to time frames, while they tend to move more slowly and at their own pace.  Basically, they are in control!  Another item to consider is title.  You want to be sure that once the transaction is complete, the property is yours and is free of clouds and liens.

And last, but certainly not least, REO's are almost always in poor to fair condition and in need of work (the extend of which is up to the buyer to determine) and sold, "As Is".  So, you need to do your HOMEWORK.  Great deals can be found in this market.  But, the process can also be challenging, especially for the novice buyer.

Short Sales... I hesitate to say this because short sales are probably good in that they prevent (if they go through) the need for more costly foreclosure... but Short Sales can be a real pain for everyone involved.

They often take months awaiting approval from the bank to close, hanging the buyer up and often costing, not only time, but money investigating a property that ultimately may not attain final bank approval to close.  There are many, many stories out there that make this point... the bottom line is that they are tough.

But, is the inconvenience worth it in the end?  Maybe.  Maybe not.

Banks have an interest in avoiding the often more costly foreclosure process and short sales sometimes prove to be a means of doing that.  However, each bank is different and each must have some sort of threshold of loss they are willing to accept.  Buyers may find a savings over a conventional sale of 4 to 17 percent, but will most certainly have their patience tested in the process.

Furthermore, similar to REO's, condition of the home will most often be inferior to the typically sold home, simply because the Seller's may not have kept up on home repairs and maintenance as a result of financial contraints.

Chico Real Estate Voice, for more...