Banks, eager to eliminate troubled mortgages through short sales rather than
riskier foreclosures, are slashing prices. Average price of a short-sale home:
$175,461, the lowest in at least seven years.
Preforeclosure sales – commonly called short sales – are quickly becoming
lenders' preferred method to clear their backlog of delinquent home loans.
Banks are slashing the asking prices of homes with delinquent loans to their
lowest levels in at least seven years, making it easier for homeowners to get
out from under troubled mortgages and more appealing for homebuyers to snap up
properties at a discount. The number of short sales could top foreclosure sales
as early as this quarter.
"Lenders are more aggressive about short sales, and they're more realistic
about the price they need to set to get them sold," says Daren Blomquist, vice
president at RealtyTrac, an online marketplace for foreclosure properties
based in Irvine, Calif.
Lenders sold off 109,521 residential properties through short sales in the
first quarter, according to a RealtyTrac report released Thursday. That's up 25
percent from the same period a year ago. Lenders unloaded 123,788 properties
through foreclosure sales in the first quarter, down 15 percent from a year
ago.
One reason for the move is that conventional foreclosures have become more
risky, Mr. Blomquist adds.
Foreclosing on a property is a long and costly process, which forces people
out of their homes and has become more difficult for lenders. Regulators are
scrutinizing foreclosures more closely because many lenders were found to be
using shortcuts that flouted the rules of the process.
In a short sale, by contrast, the lender and delinquent homeowner agree to
sell the home at a reduced price below the value of the mortgage. By forgiving
part of the loan up front (a loss that's usually unavoidable even in
foreclosure), lenders can dispose of troubled mortgages more quickly. Homeowners
get out from under debt with less damage to their credit rating than if they had
gone through a foreclosure.
Of course, short sales are also more complex than foreclosures, because the
bank and homeowner have to find and negotiate with a willing buyer. That may
explain why banks have lowered the average price they're willing to take on a
short sale.
Nationally, the average price of a home in a short sale was $175,461 in the
first quarter, down 4 percent from the fourth quarter and down 10 percent from
the first quarter of 2011, according to RealtyTrac. That's a record low for the
seven years that the company has been tracking the price. In 2006, at the peak
of the real estate boom, the average short sale home sold for $293,595 (click
on the chart above left).
Expect the dealmaking to continue. With more than a million homes expected to
enter the foreclosure process, it will take more than three years of short sales
and foreclosure sales to work down the inventory of distressed mortgages to
historic norms, Blomquist says.
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