How Do Short Sales and Foreclosures Affect the Price of My Home?

 

 

 

 

How do Short Sales and Foreclosures affect the price of my home?

 

 

 

 

 

 

                    

This week in the pending ratios I have included the numbers for bank owned (BO) and 3^rd Party (most often short sale) listings that are in the market this week.   As you can see short sale properties, those properties where the value of the home is not enough to cover the mortgage balance,  make up a larger number (almost 25%) of the listings available and foreclosures or bank owned properties a smaller number (4.9%).  This has an effect on the market in a couple of ways. 

First of all, when choosing a price for your property, you cannot rely on the prices of a short sale listing because most often the bank has not agreed to the price at which it is listed. This means the price is not necessarily the price that the home will sell for.  In fact the price listed in a short sale is often unrealistically low in order to attract buyers and a bidding war. 

Real estate agents have traditionally used listed properties as a factor in home pricing.  We still do but short sales present a unique challenge in a declining market where a third party (the bank) must agree to an offered price in order close the sale.  Matters are further complicated by the fact that the bank usually won’t agree to a price until after an offer is made, and then they are known for taking their own sweet time.  But I digress.  Bottom line is that agents and sellers must be careful when including short sales in a market analysis because they may unnecessarily bring the value of the subject property down. 

Foreclosures, often referred to as bank owned or REO’s (real estate owned) present a different challenge.  These are real prices and banks have a different perspective on real estate they own than a typical seller does.  A bank is not in the business of owning real estate and has no desire to do so.  Banks usually cannot afford to carry foreclosed properties on their books because they count against the balance of funds they can loan to consumers.  A bank must keep an amount in reserve that it may not loan out and vacant foreclosed houses don’t count as part of that reserve.  A seller typically wants to net as much money as he can and may or may not have the motivation to liquidate at any cost as a bank often does.  The net effect of these conflicting motivations is that foreclosed properties are causing prices to come down.

No matter the motivation, a seller must consider asking prices on foreclosed properties when deciding on a price for his home that will attract a buyer.  If he doesn’t he will find himself in the available  – translated “unsold” — column of the above pending-ratio chart instead of the pending column where he wants to be. 

Some worry that those properties in the short sale column will eventually become foreclosures and I know some real estate agents that are basing their business plan on that prospect, but the reality is that some of the short sales will be successful and not fall into foreclosure.  If you happen to be one of the folks who need to sell but owe more than your home is worth a short sale can be an option, and can sometimes be a means to avoid foreclosure.  BE CAREFUL!  They are tricky and you need a specialist who knows how to get you through the maze. 

Next Week:  Taking advantage of a buyer’s market.