Real Estate & Mortgage Insights

Short Sales Gain Traction with Banks and Buyers

As the U.S. housing market continues the long process of correction, banks are starting to look more favorably on short sales, according to recent data from Irvine, Calif.-based RealtyTrac.

Until recently, short sales - when banks allow homeowners to sell homes for less than they owe on the mortgage - have not been popular with lenders, who hoped to recoup more money from foreclosure sales. Yet, as foreclosures continue to plague the market, there may be more incentive to simply dispose of those properties before they become bank-owned.

During the fourth quarter of 2011, pre-foreclosure sales (most often made up of short sales) rose 15 percent over the same time in 2010 to a total of 88,303 homes, although they were down 5 percent from the previous quarter. Pre-foreclosure sales made up 10 percent of all fourth quarter sales, and 9 percent of all 2011 sales.

"We continued to see a shift toward pre-foreclosure sales, or short sales, and away from REO [real estate-owned] sales in the fourth quarter," said Brandon Moore, chief executive officer of RealtyTrac in a press release. "Nationally, pre-foreclosure sales increased 15 percent from a year ago while REO sales decreased 12 percent. Pre-foreclosure sales outnumbered REO sales in several bellwether markets, including Los Angeles, Miami and Phoenix, where REO sales had outnumbered pre-foreclosure sales a year ago. That trend will likely show up in more local markets in 2012 as lenders recognize short sales as a better option for many of their non-performing loans."

These short sale-led increases were concentrated in several states. Michigan saw the largest jump in pre-foreclosure sales with a 103 percent increase from the fourth quarter of 2010. Georgia,s pre-foreclosure sales jumped 59 percent, Arizona,s grew 48 percent, Washington,s rose 36 percent and Nevada saw such transactions climb 29 percent. Other states that saw more than 20 percent increases were Oregon, Illinois, Ohio, California, and Texas.

Even as lenders okay struggling homeowners to sell these properties in greater numbers, it is still taking a long time to get them through the entire process. In the fourth quarter, pre-foreclosure sales took an average of 208 days to sell from the first stages of foreclosure. And while that is down from the third quarter,s 318 days, it is up significantly from the average sale of 237 days from the fourth quarter of 2010.

The average price for short sales has fallen as well, along with home prices across the market. During the fourth quarter, pre-foreclosures carried an average price tag of $184,221, a drop of 3 percent from the previous quarter and an 11 percent decline from the previous year. The discounts to buyers remain sweet though, as pre-foreclosures prices averaged 21 percent below the average prices for traditional sales not involving foreclosure.

It certainly makes sense that banks would step up approval of these short sales, as they face greater stockpiles of foreclosures after the ,robo-signing, mess clogged up the pipelines.

"Sales of foreclosures in the fourth quarter continued to be slowed by questions surrounding proper foreclosure paperwork and procedures," Moore added. "Even so, foreclosures accounted for nearly one in every four sales during the quarter and for the entire year. We expect to see foreclosure-related sales increase in 2012."

With all those distressed properties to dispense of, short sales will be a more and more popular avenue to get those soured loans off the books.

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