Traditionally there have been Seven Wonders of the World, but perhaps it’s time to add an eighth: lenders have now begun to embrace the idea of pre-foreclosures short sales, which mean big discounts for homebuyers and investors who favor distressed properties.
The latest quarterly figures from RealtyTrac show that almost 110,000 short sales were completed during the first quarter; a 25 percent increase from a year ago. These are remarkable statistics given that every short sale results in a loss on lender books.
Why are there so many pre-foreclosures and will the trend continue?
To answer this question, you have to look at the players who make such transactions work:
We have a lot of short sales today for the simple reason that the alternative is foreclosure and foreclosure is even worse for lenders. With a short sale a lender has a done deal and although there’s a loss at least the amount of red ink is plainly known.
With a foreclosure the process can drag on years and the end result can cost lenders many times the expense of a short sale. In the end there could be a foreclosure auction which results in a sure loss when a low bid is accepted. Or — even worse for the lender — the property may not sell at auction. In that case the lender becomes the owner and faces both a loss on the property as well as new costs for taxes, maintenance, legal fees and insurance until the home is finally sold.
Homebuyers & Investors
Pre-foreclosures are attractive to buyers and investors because they sell at significant discounts — RealtyTrac says the typical short sale results in a 21 percent discount when compared with properties not in foreclosure. Also important, a short sale property is often in good condition because it has consistently been occupied by the owners, meaning the home has not been exposed to vandalism or vacancy.
From the borrower’s position, a short sale will mean the loss of the property but at least there’s some dignity, the family possessions will not wind up on the sidewalk. Also, borrowers who participate in short sales may be able to get a moving allowance — as much as $30,000 in some cases.
While we’re seeing a large number of short sales today, it’s hard to imagine that lenders will have any incentive to continue with such transactions once foreclosure levels return to historic norms. Think of today’s short sale levels as a blip in the marketplace, a small and brief window of opportunity that will close as soon as lenders can make it happen.
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