Opinion: Short-Sales are killing our market… and what to do about it

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.

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9 Responses to Opinion: Short-Sales are killing our market… and what to do about it

  1. Hey Daniel,
    Thank you for highlighting this problem.

    Technically there is some motivation for the seller to sell $50,000 lower vs $100,000 lower. When a bank forgives a mortgage payment (takes the loss) there is supposed to be a 1099 given to the seller for the loan forgiveness. This is called a Phantom Tax (since they are taxed on money they don’t receive directly.)

    I could be wrong, and please correct me (Scott) but I believe that NAR was actually backing legislation to REMOVE this tax. Read about it here
    Pitfalls of Mortgage Cancellation Tax Relief Act, H.R. 3648
    and here is how NAR applauded this effort:
    Realtors® Applaud House Passage of Mortgage Cancellation Tax Relief

    Is it just me… Or is this just us shooting ourselves in the foot?

    If we REMOVE the one thing that might keep them from dumping the house another $50,000 lower… might that mess things up for everyone else?

    Yes I feel bad for that 1% (or less) that is losing their home, but what about the 99% that lose $50,000 in home value because of that 1%? And now we are going to make it EASIER for them to dump homes on the market?

    Frankly, give me a break.

    Frank- Broker FranklyRealty.com

  2. Brian Block says:

    Frank, my understanding is that legislation passed removing the tax for mortgage loan forgiveness due to short sales. Thus, sellers no longer receive those 1099s after the sale.

    However, a bank can still go after the seller and obtain an unsecured note for the difference. Most banks don’t go this route, because they know that the chances of collecting are just a smidgeon above zilch.

  3. Jermon Sims says:

    I think REO’s and shortsales are correcting this infated market, clearing the way for one day again, RISING HOME PRICES. There are some people that deserve those shortsales, and some that deserve those foreclosures, but the bottom line is that there is a lot of money to be made in this busted market, if you are savvy, you should love this, if your not you think this is BAD !! I am laughing all the way to the bank. Remember at every BOOM and every BUST someone goes to their knees and someone get rich, I suggest you stop whinning and get RICH !!!!…………..Jermon

  4. Julie Emery says:

    My experience may be atypical, but while I’ve found short sales difficult, they’re certainly not impossible. And, I think it would be idiotic to try and get lender approval up front. It’s hard enough to get them to talk to you with an offer in hand. They’re all swamped! This is painful, no way around it. But I don’t think a requirement for lender approval up front will help at all!

  5. I don’t think it has anything to do with whining. I think it has to do with the system being flawed and a need for corrective measures. I also think that it has to do with those who were careless with their finances and investors just cutting their losses and walking away screwing it up for the rest of us.

    And yes, legislation has passed – it’s called the “Mortgage Debt Forgiveness Act” which removes the “Phantom Tax” and those 1099s after the sale.

  6. I don’t consider this whining. While I do agree that the market is correcting and short sale and foreclosure inventory is growing, I’m still suspicious as to whether most short sales ever get to settlement. There’s a big difference between listing unapproved short sales and getting them sold. In the eyes of our clients a 20 or 30 day wait (or longer) for short sale approval is ridiculous. If lenders aren’t approving short sales with a market based sales price up front is the property really for sale, or are we all spinning our wheels when showing them?

  7. The short sale ususally comes into play when a recently purchased property bought during the boom is for sale in todays market and the appraised value is less than purchased for most people would wait to sell at a later time but what if you were relocating and needed the sale to help with the move. Your choose is a short sale getting the lender to accept less. This can be a long process for the buyer and commonly does not work out.

  8. Todd Condron says:

    Actually, this logic is dead wrong, and extremely backwards.

    There is no sale of property where the price will be more accurate, in accordance with market conditions, than a short sale. Because, unless the short sale is a cash deal, the short sale is the only sale of property where both the Seller and Purchaser will be required to have an appraisal of the Propety done by a licensed appraiser and/or real estate agent in order to sell and meet pricing guidelines.

    The Bank who ultimately will approve or disapprove the sale will require an appraisal to be done, and the bank that is providing a loan to the purchaser will have one done as well, and you can rest assured that these banks will not allow the property to be priced either too high, or too low.

    On the other hand, with bank sales, the banks are merely looking to “dump” the properties based upon a certain percentage of what they are owed on the Note that was defaulted. They couldn’t care less about market value, because any excess on the sale price above what they are owed will go to pay junior liens, or back to the foreclosed owner.

    Make no mistake about it…REO/Bank Sales are killing the prices and diluting the market. Short Sales are actually a good thing for everyone involved. They save a foreclosure from happening and they are priced upon market value (or the bank will not approve the sale/price and will counter).

  9. Todd, thanks for your thoughts.

    In fact, I would absolutely agree with your statement “Actually, this logic is dead wrong, and extremely backwards” if I had said what you thought I said. But, I didn’t.

    Notice that in my posting I only refer to the *listing* prices of short sales, not the *selling* prices. It’s the listing prices that are fictional, yet the banks use them as real comps on their REO BPOs. Therein lies the true issue. You’re right, the bank would only approve a short sale based on a real valuation. But that bolsters my point that listing agents are doing a disservice to the market by putting listings up with fictional prices that the banks would never approve.


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