Short Sales Increase As Sign that Real Estate Market May Be Improving

Some real estate indicators are showing that short sales are picking up as banks try to avoid foreclosures.

The transactions, known as short sales, typically change hands at a discount of about 20 percent to homes not in financial distress, compared with a 40 percent price cut for bank-owned homes, according to RealtyTrac Inc. Short sales jumped 19 percent in the second quarter from the prior three months while foreclosure sales were flat, the data seller said.

"Banks have become much more supportive of short sales," said Peltier, whose Minneapolis-based company is a unit of Warren Buffett's Berkshire Hathaway Inc. "That's better for the lenders, who have smaller losses on a short sale, and it's going to be better for homeowners, who won't have as much psychological distress as a foreclosure."

Distressed sales brokered by HomeServices used to be 60 percent foreclosures and 40 percent short sales, Peltier said in an interview at Bloomberg headquarters in New York. Now, that ratio has flipped, according to the CEO, whose company is second in size to NRT LLC, a unit of Realogy Corp. in Parsippany that has about 700 offices under the Coldwell Banker brand.

"There's a huge backlog of homes in default that the banks want to get rid of," said Thomas Popik, research director for Campbell Surveys in Washington, D.C. "They don't want to be homeowners."

Almost a third of all home transactions in August were foreclosures or short sales, according to the National Association of Realtors. While short sales were flat compared with a year earlier, the trade group's count only includes deals completed with a broker, and short sales often are handled directly with lenders.

Banks are not only approving more short sales, they're doing it in less time. In the second quarter, short-sale homes, also known as pre-foreclosures, sold an average of 245 days after default, down from 256 days in the previous period, according to Irvine, Calif.-based RealtyTrac. That reversed three straight quarters of increases.

The time frame remains a lot longer than traditional sales. In a normal transaction, a buyer bids on a home and gets a decision from its owners within days, if not hours. Getting a bank response to a short-sale offer can take two months or more.

"No matter how streamlined a short sale may be, it's always going to be a frustrating experience," Popik said. "Too many people are involved — investors, servicers, owners, real estate brokers, mortgage insurance companies."

Half of troubled mortgages have so-called second liens, such as home equity lines of credit, according to the Treasury Department, so there may be two mortgage holders with a stake in a short sale. If the property has mortgage insurance, that company may be involved in the negotiations as well.

Because short sales typically are occupied soon after the deal, neighboring properties take less of a hit in values, according to Popik. Prices for distressed homes often are used by appraisers to gauge surrounding values, even if the nearby homes aren't in default. Also, owners who voluntarily give up their homes tend to leave them in better shape than people who are evicted, reducing costs for banks, he said.

You take the good news where you can get it. Short sales are preferred over foreclosures since the banks avoid having to take ownership of real estate. It means the banks take a loss, but it's less of a loss than it would take if the property goes into foreclosure and the bank has to sell it at an even greater loss.

For buyers, the short sales are a gold mine since they can get a property at a reasonable price compared to other properties, and banks avoid the headaches of foreclosure. Sellers are more likely to leave the property in better shape and aren't being forced from the property. However, it takes a mindset change by the banks to accept a 20% loss rather than a 40% or more loss if allowed to go into foreclosure. Neighboring properties also benefit from the short sales since they don't adversely affect comparable pricing nearly as much as foreclosed properties - and they don't have the chance to become an eyesore as foreclosed properties often do.

Yet, the short sale process is far more lengthy due to the complicated arrangements involved, including dealing with secondary mortgages or other liens against the property. Streamlining that process could alleviate the problems and increase the chances that a bank would take a short sale over pushing a foreclosure process that benefits no one.