I’ve heard some REALTORS & media say that REO/foreclosure sales are driving values down nationwide. I would argue it’s actually the short-sellers that are doing this, and it’s something we need to take immediate and decisive action to stop. Here’s why:

Let’s take a fictional seller, Bob. Bob bought his house using 100% financing, and he paid $500k for it. Now it’s worth $400k based on comps in the neighborhood. The banks have all priced their listings, say, at $395k to be on the lower end of the neighborhood price range (which tends to be their strategy).

Here’s the issue – since Bob is already taking a loss on the property (and often it’s the bank eating it), when he tries to sell it as a short-sale, Bob has no real motivation to list it at the current market price of $400k. And since it’s so hard to get REALTORS to make offers on short-sales, he’ll probably have to list it at $350k or even lower just to get someone to make an offer. Bob might even list it at $300k just to get out of the mortgage payments, after all, what does he care if the bank takes a $100k loss vs. $200k loss?

And so the vicious cycle begins. Since the banks try to price their properties at the low end of the comps, and do BPO’s every 60 to 90 days, Bob’s $350k listing all of a sudden means the banks lower their prices to $345k to be just below the short-seller.

But I could make an argument that the short-sale listings aren’t even “real” listings because it’s very unlikely they’ll sell… unlikely that the bank will even accept the price at which Bob has listed his property (let alone a lower offer).

Do you agree that short-sales are driving values down at a precipitous pace? And if so, what should be done?

One agent I discussed this with had a great suggestion – have the MLS’ require the bank to sign off on a listing when it’s a short-sale. This would at least provide some amount of verification that the listing is reasonable from the bank’s perspective.

Other suggestions? I’d love to hear your thoughts. I think short sales are a major issue nationwide and I’d love to see VAR and even NAR take a leadership role on this issue that’s affecting all of us.