Recent reports indicate that there has been a sharp drop in the sale of foreclosed homes. The Wall Street Journal reported that listings of foreclosed properties have fallen in 17 of the last 19 months through July, according to a research by Zelman & Associates. These listings are down 47% from their October 2009 peak and by 23% in the last year. This has come as a surprise given that there was an expectation that the market would be flooded by foreclosed homes after the recent state of the economy. On the other hand, there has been an increase in the amount of homes sold in short sales as banks agree to let home owners sell their homes for less than they owe on them. The answer to why this is the case, probably lies with banks who have increasingly shifted to the trend.
Previously there had been many complaints that banks were fraudulently foreclosing on property, which led many states to take action that would protect consumers from unfair foreclosure practices. Since then, the foreclosures process has been very slow particularly in judicial states where courts are overwhelmed by the volume of cases of homes going through foreclosure, and banks have struggled to properly document their ownership of the mortgages. With foreclosure processing taking much longer than desired, many lenders are offering a short sale early on in the process to save themselves the time and money lost in the grueling process that comes with foreclosing a home. Although lenders still take a loss in a short sale, they are able to mitigate their losses by taking this option over foreclosure. According to a recent article by the Wall Street Journal, typically homes that sell in the short sale process incur a 10% loss as opposed to the 30% loss incurred by those that go into foreclosure, not to mention the substantial time savings by cutting losses much faster.
Another reason why banks are choosing short sales is the liability associated with a foreclosure. With many foreclosure homes being left abandoned, it is difficult for banks to secure and maintain the homes. In some cases the banks are not able to sell these homes quickly and they face problems like vandalism and even squatters. Unlike foreclosures which become the banks property, short sales never technically enters the banks inventory as an REO. Short sales are therefore a more attractive option to lenders with an already large foreclosure inventory.
As for buyers looking for a good deal, foreclosures have been a great option as banks look to quickly rid themselves of the properties. In short sales, the process of banks approving lower prices has been lengthy and has not always translated to the great deals buyers hope for. However, many agree that short sales are better for the housing market as a whole compared to foreclosures which tend to drag down the value of other homes in the vicinity.
Michael Hobbs, PahRoo Appraisal & Consultancy
Twitter @Pahroo
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