The Hourglass Analogy and Government Incentives for Short Sales

 Originally Posted at the Art of Short Sales Blog

I came across this article in the Las Vegas Review-Journal today while doing some research on what is going on in the world of short sales and distressed properties. Obviously the article is localized to the economic situations in Las Vegas but I think there were some very interesting tidbits of information in here which pertain to investors across the country. First, there is the not-so-noteworthy news that there is a sharp increase in the number of short sales, which falls in line with the indications that banks are motivated now to try to get out of their positions as lien holders before the loans go to foreclosure.

Short sales, or homes sold for less than the mortgage balance, comprised 16 percent of October home sales, compared with 8 percent in the first quarter

Wow, 16%! That is a really incredible number. One out of every six homes sold around Las Vegas is a short sale! Camacho said she probably has as many short sales in escrow as real estate-owned, or bank-owned, homes.

"Short sales are no longer merely a niche market -- they are becoming the market," the distressed-property expert said. "Of course, the number of pending short sales is much higher, but many of those won't be approved. Still, that's a substantial shift. That's double the percentage of short sales."

REOs still dominate the market, with 64 percent of sales, but that's down from 81 percent earlier in the year. The median foreclosure price was $125,000. Regular third-party home sales account for 20 percent of sales, with a median price of $186,000, Camacho reported.

While short sales have become an increasingly favorable option to foreclosure, they must be approved by the lender for hardship reasons and usually take longer to complete.

Neil Schwartz, REO specialist with Coldwell Banker Premier Realty in Las Vegas, likened the short-sale process to an hourglass. At the top of the hourglass are 8,647 short sales in escrow; at the bottom are 1,579 short sales that have closed in the past three months.

"What's keeping them from going from the top to the bottom is the banks. They control the narrowness of that hourglass," Schwartz said. "I'm seeing some opening, but a very small percentage are getting through."

I love the Hourglass analogy. Real estate investors are the ones loading the short sales into the top of the hour glass, and onerous bank process is that ugly bottleneck in the middle. Here is the thing to consider: there is federal regulation coming which will help to loosen that bottleneck. However, every process always has a bottleneck - you are only as strong as your weakest link If short sales truly do start to flow with less restriction, wouldn't it be a travesty if the investor became the bottleneck and limiting factor? Technology platforms can help you keep your processes managed so that you can avoid that and be your most effective. The more "sand" that passes through that hourglass, the more successful you are as an investor or real estate agent.

The difference between the $116,900 median price of an REO sale and the $150,000 median price of a short sale "speaks volumes" on what the banks should be doing, housing analyst Larry Murphy of Las Vegas-based SalesTraq said.

Foreclosure homes aren't properly maintained and lose value when they sit empty, he said. Banks also incur longer holding costs when they complete the foreclosure process.

"The only way we can avoid foreclosures next year is if the banks wise up," Murphy said. "The trend is increasing in short sales. I wouldn't be surprised in 2010 if the percentage of short sales equals or exceeds the REO percentage because it's the smart thing."

And here is a crystal-clear example of the benefit the short sale transaction can have. It prevents a home being foreclosed own and becoming real-estate owned which helps the homeowner on their credit. And; it helps the bank minimize their loss - exactly what loss mitigators strive to do.

David Brownell of Keller Williams Realty said private sellers are having more success negotiating short sales with their mortgage lenders.

One of the statistics that caught his attention in September was the 117 percent increase in short sale closings from a year ago. Second was the declining inventory. His figures show single-family home inventory falling from 21,349 in October 2008 to 10,956 in October of this year -- a drop of 49 percent.

He's seeing such things as "reverse foreclosures" whereby banks are undoing a recent foreclosure, putting the previous loan back in place and working out terms with the homeowners in an effort to seek alternative solutions to foreclosure.

California-based real estate consultant John Burns said he expects to see an increase in short sales with the Treasury department's recently announced $2,500 subsidy -- $1,000 to the servicer and $1,500 to the seller -- to encourage short sales as a way to clear excess inventory.

The fees are designed to help compensate the loan servicer for the extra effort and to give the seller incentive to cooperate and leave the home in good condition.

The treasury department announced long ago that they were going to provide incentives for lenders and servicers to encourage short sales but it hasn't happened yet. Do you think some government incentives will be successful in helping to "open up the bottleneck" on the proverbial hourglass?