Home > Foreclosures > Busincess 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.

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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