Monday, February 27th, 2012 at 9:07am

Do Short Sales Net Banks 24% More Than Foreclosures?

Posted by Ron Ballard

Despite the “professional” statisticians analyzing the distressed property markets, one independent brokerage decided to gather the facts themselves. They concluded that in 2011 bank owned foreclosure properties sold for 24% less than short sales.

McGeough Lamacchia Realty, with offices in Massachusetts and New Hampshire, apparently got fed up with all the talk about losses in the market and decided to gather their own facts. Their results are reported at http://bit.ly/A1M8XT .

They concluded that the average REO price for 2011 in five major distressed markets was 24% lower than the average short sale price, which was actually an improvement from 26% in 2010. (Southern California though was 23% in 2011, compared to 22% in 2010.)

Good statisticians will tell you that comparisons of arithmetic averages of bulk data is not particularly helpful; however, I appreciate this brokerage’s efforts at taking analysis into their own hands. These stark difference between short sale and REO prices intuitively have strong statistical significance.

I’m constantly dealing with transactions for which the bank servicer’s behavior make no sense whatsoever — if they were the actual holder of the note. Rather than giving a two day extension to close a deal for which there was some third party delay in the buyer’s loan funding, they go ahead and complete the foreclosure sale. This delays liquidation of the note for typically a minimum of six more months as a REO. Moreover, the amount received consistently appears to be less in my observations and the McGeough Lamacchia seat-of-the-pants study bears out my anecdotal experiences.

When these properties go to auction, the minimum bids rarely seem to correlate to the property value or the short sale offer. I see two extremes. The minimum bid is often LESS than the previously agreed net short sale proceeds. Thereby, essentially assuring a higher loss.

In other cases, the minimum bid is ridiculously high. I’m dealing with a property for which a neighborhood comparable REO is pending for $86,000. The neighboring comparable houses have been selling in the low to mid-$100,000’s. So what was the minimum bid? $247,250!! There are properties on the other side of town for that value, but nothing even close to $200,000 in this comparable market neighborhood.

What are you seeing? What will it take to restore rational behaviour to loan servicing? Do you think there’s conflicts for servicers versus the note holders? Or do you think this brokerage’s analysis just isn’t right? I’d like to hear your comments below.

3 Responses to “Do Short Sales Net Banks 24% More Than Foreclosures?”

  1. miketowers says:

    I studied this on a smaller scale- by checking my short sales the bank did NOT approve, and later foreclosed on. EVERY one of them (except for one) would have sold for MORE as a short sale than they eventually did as a foreclosure. I recorded my listings on video with amount differences but didn’t finalize it to put on Youtube, maybe I should do that. Some examples:
    6011 Apple Street – I had sold as a short sale for $125,000. The bank wouldn’t approve short sale and foreclosed, sold at trustee’s sale for $101,000 to a flipper, who is going to sell it to the same buyer and make a profit. The net to the bank with the short sale would have been $10,000 MORE to the bank!
    9212 Banana Street – I had sold as a short sale for $95,000. Bank refused and foreclosed. No one bought it so they sent it to an REO agent. Immediately listed it but couldn’t sell it. Waited awhile then relisted it. Sold it 14 months after my listing expired, at $78,000. So the bank lost a year and a half and $20,000 difference, not including the property taxes over that time and whatever repairs they needed to do to finally sell it.
    The banks are CLEARLY losing money playing difficult with these short sales.

  2. Ron Ballard says:

    miketowers,

    Thanks for your direct examples. I see that a lot.

  3. Jim Cotton says:

    Is there any way to find out what short sales have happened recently in NorCal and what the numbers were?

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