Do Banks Really Prefer Foreclosures?

Recent news from RealtyTrac brought some excitement to the real estate community (mainly, brokers and agents) and confusion to homeowners. According to RealtyTrac, banks are a lot more eager these days to take their chances at the auction block rather than work with homeowners on short sales. Auction deals accounted for 2.5 percent of all U.S. sales in October, almost doubling from a year earlier. Short sales, however, comprised 5.3 percent of purchases, falling from 11 percent.

Many real estate agents took the news as yet another sign of improving market, as well as a harbinger of more REOs being released into the hands of listing-deprived real estate professionals.

For homeowners still hoping that things will magically work out or at least they will be able to do a successful short sale, the fact that banks are more aggressive with foreclosures is plainly bad news. However, just like almost any situation, this one is not just black and white.

So, here are a few shades of grey for your consideration.

1. How long the investor-palooza is going to last? Probably not forever. RealtyTrac has stressed that hedge funds and private equity firms acquire “the lion’s share of homes at auctions.” Since the majority of potential home buyers are still unable to get financed, home prices will continue increasing only if investors keep buying properties at the same or higher rate. As good deals becoming harder to come by, investing fever will have to stop.

2. Short sales are NOT dead! Short sales still comprised 5.3 percent of all purchases, whereas auction deals accounted for 2.5 percent of all sales. So there are twice as many short sales than auctions! Even though short sales are becoming less prevalent, they are far from extinct.

3. The possibility of a micro bubble. Let’s say that the market is over-confident and the investor-palooza ends. This will immediately result in stagnating prices and (very likely) a comeback of short sales.

4. Short sales are still easier to get than REOs. It’s still easier for a typical real estate agent to get some good data, go after a potential short sale candidate and end up with a listing than wait for a bank hand out (REO).

5. Location, location… Short sales are a lot more prevalent in states that prefer judicial foreclosure proceedings (Illinois, New York…) than non-judicial (California). If you look specifically at Chicago metropolitan area, there are thousands of Lis Pendens cases with LTV as high as 200%. Certain pockets in the country (not only judicial states) are never going to see prices returning to the pre-2008 level. So, some homeowners will have to sell and banks will have no choice but accept a short sale in order to minimize their losses.

6. Your short sale processor has never been more important! Since banks are pickier when it comes to approving short sales, you must be pickier when choosing your short sale processor. Skilled, experienced short sale processor can and will convince a lender to accept a short sale, while less experienced short sale specialist may ruin your deal.