Do short sales really have a good chance of selling in today’s market? An article published in the Arizona Republic cited a 5% success rate for these properties.
Short Sales Have A Number of Hurdles
There are a number of reasons why a short sale transaction may never actually succeed in selling. For instance, the bank isn’t interested in negotiating or even approving any sale, the Trustee’s Sale can’t be delayed before the actual property forecloses, the appraisal is much higher than the offer price though the offer price is actually on market, the lender is too rigid and won’t correct significant property issues (termite, structural, etc.), the lender fails to renegotiate consideration when an item is discovered that materially lowers the value of the home) that come up during inspections, or the process takes too long with so much uncertainty to cause the Buyer to cancel and look for another property.
Short Sale Pricing – Not So Fast!
The reality for home buyers is that the list price for a short sale is not necessarily what anyone will get the property for. Most buyers justifiably believe that the list price is the going price for a short sale property when the price may have no realistic bearing on what may be approved for sale.
Unlike foreclosed property sales or normal homeowner transactions (where the homeowner is not pursuing a short sale), initial pricing for short sale listings is set by the Realtor and can represent an arbitrary value as determined by their Comparable Market Analysis and the timing of the actual date of foreclosure.
As some lenders like to see a good-faith effort to maximize the attained value of the property, the initial pricing strategy could be to price higher and migrate lower depending on showing traffic and interest. Another strategy comes into play when there isn’t a lot of time in regards to a future Trustee’s Sale. In this approach, Realtors will usually lower the price more and more as the actual date of foreclosure gets nearer. An additional approach may be to drive a rapid short sale process by lowering the property so much that multiple offers are received almost instantly. The best is signed off by the seller and forwarded. Other offers may or may not be submitted.
Most often, the bank often has nothing to do with the list price of the property. In fact, many banks will not even talk about pricing a short sale until they receive a “Short Sale Package” to their desk. At this point, the lender will begin to process the property for potential short sale. The rare exception is where the lender has provided an upfront approved short sale price for prospective home buyers.
The bottom line here is that buyers don’t know what the actual price they are getting a property for will be until the lender or lenders have actually approved the short sale. And this is only done when the property has already been marketed to generate an offer and the lender(s) have actually finally responded. Understandably, this can be frustrating and uncertain at the least.
But Are Short Sales Really Saleable?
The answer really is that in the current market climate, the answer is a qualified yes. That’s not to say that all will be successful as the explanations mentioned above do happen all the time. But, short sales are certainly more successful than the 5% figure called out in the article.
If one looks at closed transactions, then we can see a different story here:
- For all of 2008, short sales made up 1.5% of closed transactions for an estimated 862 transactions. This would lend support to the 5% success rate.
However, approximately 750 of these occurred since October 1st. Given the total short sales currently on the market, absorption (the percentage of all active short sale properties currently under contract) is approximately 12.3% currently. This is close to the absorption across the Phoenix real estate market of 11.7% for all other transaction types.
Now, these figures don’t represent the actual success rate for a short sale transaction as this is a number very difficult to discern. Generally, listings are running at a 39% success rate (from listing to actual close). Given the data above, it would appear that short sales’ success rate is tracking somewhat close to other property transaction types. Even if we assume that these types of transactions present more problems than other property deals, the data points to a significantly greater success rate than mentioned in the article.
More specific for our market, the definitions used in the local ARMLS system have been reengineered so that historical comparisons are more difficult to make. As well, the growth in short sale properties has only taken place in the last 12-18 months so comparisons in earlier years is not possible.
But What Happens to the Properties That Don’t Sell?
The unique and unfortunate reality with short sales is that the properties that don’t sell via this process will likely become tomorrow’s foreclosed properties. The owners for these properties are indicating that they are experiencing financial hardship and are unable to pay their obligations. As such, it is largely inevitable that these properties will come to the market as foreclosed properties in the future. And their eventual sale price values will affect valuations and pricing for properties and communities around them.
Summary
Short sales are saleable though their success rate may be lower than other property transaction types. However, though the percentage that are selling may be lower than other properties transactions given the inherent difficulties involved in these transactions, they are significantly higher than previously believed and do present a valid option for a struggling homeowner to undertake when unable to make their debt commitments and are forced to give up the property.
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