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Business Decisions of Short Sales & Foreclosures Create Artificial Real Estate Values

Foreclosure rates are on the rise. It is not news anymore. In fact, it's no longer funny to banks and sellers. Both are taking large financial hits. One of Dallas Morning News Real Estate reported that 1 in 10 owners are delinquent on their mortgages and some recent data supported the fact that 50% of the work-out programs offered by banks in these delinquencies move on to foreclose on their properties.

An ALTERNATIVE to FORECLOSURE
Short sale is an alternative option for some homeowners prior to foreclosure. Short sale is a process where the mortgage lender agrees to accept a lesser amount to what is owed on the property. Homeowners that take this route walks away with a blemish credit most of the time. If you consider foreclosure as a "total" wreck in an automobile accident, a short sale is like a "fender bender". Credit still gets ding but not as bad.

These short sales are flooding the banks by tens of thousands every month. For many owners, short sales is a much better solution. For the banks, this may seem to be a good solution to foreclosures. Banks are not in the business of holding and owning real estate. The last thing they would want to do is to end up with a portfolio of real estate. Some banks reported that it costs them at least $20,000 in attorney fees, property management fees, labor and time when a foreclosure happens. Hence, banks agree to accept less than what is owed in a short sale process, especially when there is a ready and willing purchaser out there.

With the amount of short sales that come through the market right now, banks and lenders cannot process these applications fast enough. Guidelines are getting more stringent as banks and lenders evaluate how much debt should be forgiven. Some of them are not weighing the "hardship" as much. It now becomes a business decision on whether to approve a short sale or not.

Banks and lenders know the market values of these properties. They run numbers by real estate agents and appraisers. They plug that information into their risk models to see if they should take these losses or not. Evaluations are placed on the current homeowner's financial situation, realizing their encumbered income and how "delinquent" the homeowner is. If a homeowner is delinquent 1 month and the house is on the market for 30 days, chances of short sale approval is slimmer than an owner who is in the "foreclosure" process and house on the market for 200 days. Naturally, banks and lenders are more willing to take a bigger loss in the latter situation.

A SHORT SALE Example:
For example, a house is valued at $100,000. The homeowner owes $96,500. The short sale came in at $80,000. The homeowner has not made mortgage payments in 5 months and the foreclosure date has been set. The short sale is approved. The $16,500 is forgiven. With George W.'s Economic Stimulus Plan, the seller do not need to recognize this $16,500 as income. He walks away with a blemished credit, but better than foreclosure. A buyer is happy that she gets to purchase the property for less than market value. The bank ends up without the foreclosed property. A Win-win situation for everyone involved.

Thus, many of these houses, be it through short sale or foreclosures (bank-owned), lenders and investors are unloading these properties and flooding the markets with them.

What If You Are a "Regular" Seller?
Along comes Sally the regular home seller who also wants to sell her house and move-up in the market. Sally cannot sell her 100K property for 80K like her neighbor with a short sale can. Two doors down, another property for sale - also a bank-owned property. The house across the street, the seller listed the house $5,000 below market and receives a contract in 20 days. Sally the Seller has been on the market for over 6 months at her $100K listing price.

Many of these prices today are driven by solely business decisions banks and lenders make everyday. They no longer reflect the true market value.

Here in Frisco TX where where many houses are relatively new and homeowners had taken out adjustable rate mortgages and 95% or 10% conventional loan mortgages cannot sell their houses for what they owe. a 30-year note pays 90-95% worth of interest in the mortgage payment. Hence very little principal is paid down on the loan at the beginning.

Great Time for Buyers Today
This is where we are today. For buyers, this is an unreal signs of time to buy. However, when you place an offer, be sure to know whom you are dealing with. You can offer an unrealistic low-ball offer to banks and see if they would accept it. The chances are slim that you would see a "normal/ regular" seller accepting an offer 10-20% below market value. When negotiating, a low-ball offer may leave a bad taste in the seller's mouth's only to come back with a counter-offer that is unreasonable.

With the increase of short sales and foreclosures with supported low market prices, I see more unreasonable offers from buyers. Their explanations, "I am not sure how much lower this market will go?" They seem to make offers based on a market prediction, not based on the market value. What is the Market Value anyways?

My Frisco TX Real Estate Market Prediction
I predict the short sales and foreclosure markets will continue to affect the Frisco TX real estate market for at least another 12 - 18 months. It could even go well into 2010 and 2011. The option and adjustable rate mortgages due to adjust in the coming years. The present homeowners intended to refinance before the term is up and in addition to count on an increase in wages. Unfortunately, both of these didn't quite pan out.

Hence, this is the state we are at right now:

Banks are flooding the markets with properties and selling below market values.

One or two foreclosures or short sales cannot affect the market. But with tens of thousands of these entering the market every month, our market values are bound to be affected.

Real estate prices remain stable or declining.

This affects other home sellers and our real estate markets with artificial values.

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I proudly serve and sell real estate in the northern suburb cities of the Dallas metroplex. If you are thinking about purchasing or selling your home in neighborhoods of Frisco, Plano, Dallas, McKinney, Allen, Little Elm, Prosper, Celina, Richardson, Dallas M-Streets, Dallas White Rock Lake area and other surrounding areas and more importantly, want to work with a local area expert, contact me at your earliest convenience.

It is a competitive market, hence it is important that you choose to work with the realtor who knows these communities like none other. I employ a systematic market approach in selling your home - an intentionally unique proposal that most real estate agents do not use. If you care to be on your way to a successful closing, contact me immediately to see how different my proposition will be.

Contact:
Loreena Yeo
Realtor®/ Broker of 3:16 team REALTY
(214) 783-2210
loreena@loreenayeo.com

Copyright © 2008 by Loreena Yeo (3:16 team REALTY). Business Decisions of Short Sales & Foreclosures Create Artificial Real Estate Market Values.
Do Not Copy. Serious actions will be taken. Re-blog is allowed for Active Rain members on the Active Rain platform when the content is taken in its entirety and credit be given to Loreena Yeo and 3:16 team REALTY.

Posted by Loreena Yeo - Broker|Realtor(R) of www.Frisco-TX-Homes.com (214) 783-2210 on 12/15/2008 04:49 PM

Comments (22)

Short Sales & Foreclosures Driving Real Estate Prices in the Real Estate Market Channel

frisco short sales, frisco foreclosures, frisco tx homes for sale

Originally posted at: faithfully frisco tx homes for sale: Business Decisions of Short Sales & Foreclosures Create Artificial Real Estate Values

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22 Comments on Business Decisions of Short Sales & Foreclosures Create Artificial Real Estate Values

DEC

Loreena, Thanks for the post. A very good explanation of today's market dynamics.

Thank you for the post this has been helpful information.

You identified the foreclosures and short sales as the cause of the regular home owner not being able to sell.

Very good post. I was just considering this very thought this past weekend.

Buyers are getting ready to write a contract.

This ia townhome community. Looking at the comps and 3/4 of the homes that have gone under contract in the past 6 months are short sales or banked owned properties.

It used to be if you identified a comp as a foreclosure or preforeclosure you could make an adjustment. Now with the majority of the comps being some type of distress sale, the values are skewed.

Loreena, The average seller doesn't have much of a chance in this market. REOs and short sales are selling at incredibly low prices. This market is going to get a lot worse before it starts to level out some.

Lenn - I think it's not fair to expect the "regular" sellers to price or accept prices like a bank/ lender can. He too then should be on a "short sale" situation perhaps.

JoAnna - Yes, the prices are deeply affected by the foreclosures and short sales. But at the same time, we could argue that the normal seller is not in dire situation. It's a catch-22.

Great point Loreena that you reach a tipping point with distressed properties and then they affect the neighborhood or market area.

It is an unfortunate fact that in areas where there are a lot of short sales and foreclosures it drags down the rest of the local Real Estate values. Unfortunately it is going to get worse before it gets better. There are a lot more coming down the road.

DEC

Loreena, You make the point that the distress sales have created artificial market values. But take it a step further. If these are the properties that are selling, wouldn't the market value of a community or neighborhood be real?

What a buyer is willing to pay and what a seller is willing to sell for creates the market value, doesn't it?

Its a hard pill to swallow for our regular sellers. I know I don't like to be the one who has to administer the pill, but oftentimes, I must.

Thanks for your very thought-provoking post!

"Banks are not in the business of holding and owning real estate" You could have fooled me. I have had 5 contracts on one property in the past 6 months and cannot get a response from the bank. The terms of the current contract required a bank response by December 10th or the buyer could walk. Fortunately, this buyer seems to be waiting but I have lost others through this and each contract is for a lower buying price. I appreciate that there is a system in place that the banks have to follow but this property has been in front of them many times and the price is what they wanted on a previous contract, has cash financing and early closing. My nerves are stretched from trying to reassure the anxious seller (who does not want to go into foreclosure) and the buyer's agent while communicating daily with the bank and I am still receiving requests to view the property because it cannot be made 'pending' until the contract is accepted. Aaaaargh!!!

Great post. This is truely a frustrating market for everyone. The regular seller just has to stand strong and hopefully they don't have to sell quickly.

Hang in there Janet, this is exaaclty why I don't want to deal with foreclosures and short sales.

Great post. This is truely a frustrating market for everyone. The regular seller just has to stand strong and hopefully they don't have to sell quickly.

Hang in there Janet, this is exaaclty why I don't want to deal with foreclosures and short sales.

That is an interesting thought that some of the lenders are not "weighing the hardship as much" in deciding whether to allow a short sale. This is progress, as I believe that all along the chain of events there were fees being collected that helped support the emerging price bubbles. Would it not be fair to credit some of this back to deed holders if needed? After all, the sudden and unexpected price collapse was not something the deedholders or anyone else could control and was not their fault. And keep in mind that it is only the deedholder who actually put up his own money -- everyone else was using someone else's money. Is it now fair to ask the deedholder to be the only one to take a hit?

The problem as you mentioned is no longer that banks are selling below market value, its that the banks are in some areas setting the market value. We used to just ignore forclosures and in many cases underwriters would question why an appraiser would use a foreclosure as a comparable when it was viewed as an "artificial" sales price. Once there are a few in the neighborhood, you can no longer ignore them and they start becoming the "real" market value with a regular seller at a higher price being the "artificial" price.

Its unfortunate, but market value is what people are willing to pay... and if people are buying homes at the foreclosure/short sale price and not bidding those up to what a regular seller is offer it is now the new value.

Another unfortunate issue is that people do make offers based on expectations/predictions and not current worth. It was the same on the way up, with people in bidding wars and offering inflated prices for homes based on speculation and not underlying fundamentals. Why else did we get to homes increasing by 120% when incomes were only rising 5-10%?? People stopped buying on reason and bought on emotion and speculation that prices would only go up. Now people are not buying or making low ball offers on fear and speculation that prices will only go down.

In my market we have buyers willing to pay what sellers are willing to sell for, but the lenders are coming in with low appraisals based on the inclusion of distressed property sales. We have very few short sales and foreclosures in my market area, but the lenders are choosing to include them in their appraisals resulting in a lower mortgage than expected. The buyers and sellers try to close this gap by lowering the sales price and coming up with cash, but sometimes the gap is just too great. How crazy is it when buyers want to buy and sellers want to sell, but the mortgage companies choose ot appraise properties so that sales can't go through. All this does is perpetuate the downward spiral of prices and increase the number of short-sales and foreclosures.

if there is only 1 or 2 foreclosures in a sea of "regular" sales, you can ignore them as comps, but in your market, they ARE the market. in your case, the "regular" seller is the one you can ignore. they are unrealistic and will never sell. who in their right mind would ever pay 20% extra when they don't have too?

if you share your opinion with buyers, you'll lose their respect. your opinion is one only a real estate agent or a "regular" seller could possibly believe.... and what's worse, if your prediction of more pain for 12 to 18 months, that means prices are still declining, and your "regular sellers" price today will be 30% or 40% too expensive in 12 months. so they had better price realistically if they actually want to sell. and if they don't have to, they need to pull their home off the market and wait at least 2 years, and probably 5, to get their price.

Great time for investors and renters.

BTW, if you've got any dead short-sale deals, I'd like to talk to you about them.

It is a sad fact that institutional sales now are the market. In most areas you cannot treat them as an anomaly anymore. I got into real estate in 1985 just before the crash of the late 1980's and though the crashes are somewhat different in nature the results are very much the same. Sellers and agents who do not recognize where the market is will only chase the market down. The best thing we as agents can do is be honest about the state of the market and advise "regular" sellers of where they will need to price their home in order for it to sell, because institutional sellers driving down prices is no different from speculative purchasers, sub-prime mortgages, and no-doc loans inflating prices. The market is what the market is.

As agents we could help stabilize our markets to a certain degree. When agents list "short sales" without knowing what the bank will take we all suffer. Willing buyers are removed from the market place for months at a time and often the bank comes back at a higher price than the seller negotiated. Selling agents have willing buyers tie up their time with properties that will likely never close, and listing agents are barraged with calls from agents wanting to know when the bank is going to respond. If listing agents would advise their sellers to keep the property off the market until the bank approves a price for a"short sale", fewer homes would flood the market until their was a real asking price, and active buyers would seek out properties actually on the market.

As a buyer's rep I have had a short sale under contract since late September, all cash, close as quick as we can, with little response from the bank. My client died 10 days ago of heart failure, the home she was selling was set to close this week and she had no idea where she was going to move. Though her death was most likely related to a genetic heart defect I can't help but wonder if all the stress of the past 2 months didn't help to kill her. I won't be encouraging buyers to make offers on a short sale unless I know the agent has received information from the bank with their bottom line price. At the very least as agents we must prepare our buyers for a very long wait if the bank is yet to approve a price. My experience is that regardless of what you tell your buyer they are still going to call you very frustrated at the lack of response to their offer. Of course the listing agents are dealing with 9-5 salaried bureaucrats with no vested interest in the properties with hundreds if not thousands of files on their desk. Good luck with the short sales!

DEC

Pretty good explanation of what is going on in most markets; however, I would argue that the reduced prices people are paying for foreclosures and short sale properties do not create artificial values. Although we as real estate practitioners usually look to comparable sale data to determine value, the true value of something is what someone else is willing to pay for it. We should be pointing out to our sellers that these types of transactions will affect their ability to sell their property at the price they want on their timeline. Foreclosures and short sales are becoming a larger part of our markets and cannot be ignored. We need to help our clients adjust to these changes by helping them manage their expectations.

I must say that these are ARTIFICIAL values until we have many of these transactions that go on to affect market.

I still think that it's rather unfair to homeowners and regular sellers because of the business decisions to let these properties go at unreal properties. No typical sellers can take a 20K hit like a bank can - just because it cost them at least that much to foreclosure.

It's just a sad situation.

DEC

Great post, but we've been living this scenario for over a year here in the Sacramento area, there is still a lot yet to come with the adjustable rate mortgages now starting to hit. And with the feds devaluing the dollar like they are and major inflation on the horizon I wonder if we will recover from this, it could be 10 years or so...

Welcome to my world-Jill

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