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Are Short Sales Driving Prices Down?

Short sales: Recipe for success or disaster?

I receive Real Estate magazine in my mailbox each month. This is a magazine that is part of my real estate association membership, and always has some pertinent articles in it.

The articles this week were all about short sales. It’s hard to turn without hearing the term “short sale” these days.

The cover story, “Short sale, Tall Order?” refers to the fact that it’s a challenging transaction (this is an understatement). But the message is that the short sales can be “a major component of economic recovery.”

I seem to be alone in my opinion, but I think short sales are causing more harm than good. A short sale is a tough sale — hard for buyers, hard for agents, a long agonizing process — so the only way to entice a buyer to take part in such an uncertain purchase is to offer an amazing price.

If your neighbor suddenly decides to sell their home as a short sale, by definition they will sell it under market value — but after it closes, it will define the new market value. In effect, lowering the value of your home, next door.

It’s the domino effect, and the reason that I think short sales are hurting the market. Are there better options?

If the house goes through the foreclosure process, it could become bank-owned — or it could become investor-owned. If an investor buys your neighbor’s house at the foreclosure auction, then you got lucky: They will fix it up, stage it, and sell it for top dollar.

On the other hand, if the bank takes it back, they will typically do nothing, the photos will be uncomplimentary, and the home will sell for a rock-bottom price (but still more than a short sale in most cases).

It’s no secret that a home that shows well will sell for more money — so why are the banks reluctant to spend a bit on paint and carpet and professional photography in order to see a return that will more than justify the expense?

Maybe the banks are starting to see the light, because they are doing a few cosmetic upgrades occasionally. But here’s a recent example that is more in keeping with their profile: a beautiful 6,000 square foot estate came on the market as a bank-owned property. The agent comments for showings included the following advice: “Broken glass in master bathroom, please use caution.”

Wouldn’t you think taking a broom and dustpan to the glass would be almost less trouble than typing that sentence? And certainly more in keeping with “show condition.”

Short sales are often worse, as far as show condition goes. This is not a seller motivated to achieve top dollar; this is an understandably depressed seller. I showed one short sale home to buyers in Walnut Creek where we were literally stepping over dirty underwear left on the teen-age son’s floor. And that was par for the course in this house.

The rest of the world seems to think that short sales are the answer — but I think they are part of the problem. I would like to see the homes on the market shown to their full potential. Let’s get top dollar on every sale. That would be my idea of a road to recovery.

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Orville Boyd Jenkins June 29, 2011 at 08:12 PM
I agree that the banks are cheap and are undercutting their own best interests, and general market interests by failing to clean & freshen their REOs & short sales for proper buyer appeal. But staging & pricing are 2 different things A 'short sale' in itself is a different matter. "Short sale" does NOT mean "under market" as you suggest. It only means "less than what is owed on the mortgage." Why are there so many mortgages higher than the market value now? Well, yes, the market dropped, but why and from what level? From the level of inflated pricing, and often where people were givien mortgages for full value or more than 100% value even at the tiem! The original loan was OVER Market. And how hard the short sale is to process is a different matter from what the actual price is. But here is the other side. Many of the houses needing short sales are not being sold under market. They are overpriced mortgages that are now being corrected, adjusted to the actual market value. Exploitative mortages in an artificially inflated spiraling market a few years ago did not establish market value. They destroyed it, making the borrowers victims of the aggressive and exploitative loans. If you want something to sell, what do you do? You lower the price. If there is no demand, you create demand by lowering prices and raising incentives. "Short sales" are a natural market adjustment. Short sales sell. Over priced house sit. An unsold house makes NO ONE any money.
Orville Boyd Jenkins June 29, 2011 at 08:25 PM
I note that the article appears to confuse Short Sale with REO. After the bank forecloses on a house (becoming Real Estate Owned, or REO) the price will be even lower. Usually when it is a short sale, it is sold by the owner-borrower, with a lower price than thecurrent mortgage balance, approved by the bank. I agre that the best outcome is for an investor to buythe hosue, either at the Short sale stagge, at the forclosure auction or as an REO direct from the bank. Investors are the primary force improving neighborhoods and helping first-time buyers or credit-challenged buyers get into a like-new home, whkile the bansk make it harde and harder to borrow money. As investors improve homes and neighbohoods, and raise home values, overall market prices improve while houses still sell at an affordable, comparably low price level. And more houses sell faster through their multi-channel aggressive marketing. You don't usually sell a house very fast by just listing it on the MLS and sitting, hoping someone will call on it.
Lauren Holloway August 03, 2011 at 01:13 AM
My point is that short sales, because they take forever and require patience, actually have to entice buyers with lower prices than real market value.

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