Why it's so hard to sell a house: REOs and short sales

Posted by: Peter Coy on November 13, 2008

Campbell.jpg
If you are trying to sell a house, this chart might make it hard for you to sleep tonight. It shows what you’re up against. The figures come from a Nov. 1-8 nationwide survey of real estate agents conducted by Campbell Communications and sponsored by the publication Inside Mortgage Finance. More than 2,500 agents participated.

As you can see, 29% of all sales in September and October were REO—real estate owned. That means the previous owners lost the houses in foreclosure and the current owners—usually banks—were unloading them. Another 12% were short sales. That means the current owners were selling them for less than the money owed on the mortgage(s).

In other words, about 4 in 10 sales were by people who were highly motivated to get rid of the properties even if they couldn’t get very high prices. That helps explain why ordinary sellers are having such a hard time finding buyers. The chart calls them “non-distressed,” but a lot of them are feeling quite distressed anyway, thank you.

The survey also found that total sales fell 19% from September to October as economic and financial conditions worsened. It’s bad out there.

Reader Comments

VBW

November 23, 2008 5:09 AM

It's ironic that this graph presented the lowest numbered short sale column in middle rather than first position (where graphs usually reflect lowest to highest). Why? Because to my mind short sales are the true in-between fix, and yet they are the most overlooked stabilizing factor in today's market:

Here's what I find to be the case:

1) It is increasingly possible to sale them at true, demonstrated FMV (not easy but possible), thereby preventing 'cram down' of prices bargain hunters of REO purchases and/or banks desperate to get the property off of their books.

2) Contrary to popular belief, it is possible to do so without the need for one to go into default just to gain the lenders cooperation.

3) In most cases, it remains a better option than other last resorts such as foreclosure, bankruptcy or both, even with the impact of a settled debt against one's credit (which too can be avoided under the right approach).

4) It prevents having additional properties added to the inventory of vacant REO properties.

5) Properties are most often in better condition as the owner still has vested interest and are 'incentivized' to put forth the best deal to gain the cooperation of buyers and banks.

6) There is less 'blight' from unkempt, abandoned or vandalized properties (at the hands of vindictive owners no less).

I could go on and on with the reasons. I just wonder why the same thoughts have not caught on with everyone else in the industry?

DAW

November 12, 2009 4:16 PM

"It's bad out there". Bad where? In the Dallas market it is NOT bad. In the Arizona market or the California market, it IS bad. There is a big difference. I read articles all the time that make blanket statements about the housing market on the whole and you just can't do that. It doesn't make any more sense to do that than it does to say "it's raining in America" just because certain parts of Kentucky, Oregon and Louisiana got rain today. The housing market is steady and continues to improve in the Dallas market according to MLS data produced by the Realtor Associations in that market. I think it would be good to report that. It's a historical fact that every recession is partly mental or even brought on by people believing that there is a recession so they stop spending. Let's not say "it's bad out there" to those who are in strong markets.

I agree completely with VBW about the short sale graph. Although short sales are sold at less than payoff, it doesn't necessarily mean the sales price is going to be less than fair market. The whole point of a short sale is that the FMV has fallen below what is owed on it. Short sales should not be viewed in the same light as a foreclosure.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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