False Hope in Short Sales?

Posted on February 23, 2008

Two startling statistics were released today on the state of the Tampa Bay real estate market: First, over 12% of all homes listed for sale on the market are facing foreclosure. Second, these pre-foreclosures are pinning their hopes on a solution that so far has a success rate of only 2%.

These are some of the findings of Home Encounter’s Short Sale Report, published today by the Tampa based Real Estate Consulting firm. “Households who are facing foreclosure are being told that a Short Sale is their way out. For 98% of them, that’s just not the case,” commented Peter Murphy, Home Encounter CEO. “Only 2% of all Short Sales attempted year-to-date have been successful

The Short Sale is being widely promoted as a way out of foreclosure for homeowners who owe more than their house is worth. The key is in getting your Lender to allow you to sell your house – for less than you owe – to a willing and able Buyer. When successful, the Seller can walk away from his home without going into foreclosure and the Buyer gets a great deal on a house. It’s not a perfect solution: There’s a negative impact on the Seller’s credit and the Seller has a tax liability on the forgiven portion of the loan. Still, for many homeowners who are behind on their payments, it’s a better option than foreclosure

There’s One Catch: Short Sales Rarely Work

Yet despite the promise of deliverance, for most people the Short Sale just doesn’t work. Home Encounter reported that despite representing 12.5% of all listings on the market in Hillsborough, Pasco and Pinellas counties, Short Sales accounted for only 100 of the 2,300 residential sales year to date, or 4.5%. 

“There are three stories here,” commented Chase Clark, Home Encounter president. “The first is the sheer number of homeowners who find themselves unable to afford their mortgage – over 5,000 of the 40,000 homes on the market. The second is that these homeowners are flooding the market with properties for sale at unsustainable prices. If we didn’t have Short Sales to contend with, the inventory of unsold homes would be fairly manageable and we wouldn’t be seeing the rate of decline in list prices that we’re seeing month over month. The third is that someone is filling these homeowners with the false hope that a Short Sale will be their salvation – It simply won’t be for most of them.”

That’s because according to Home Encounter’s findings, Short Sales aren’t that much different from anything else on the market. They’re priced the same as everything else that’s selling – $136/sq.ft, on average; they end up selling for only slightly below average – $125/sq.ft to be exact; and they sell a little faster than average – in 123 days as opposed to the normal 134 days. “The actual number of successful Short Sales year to date isn’t enough to be statistically significant, yet they’re being promoted as a panacea,” commented Murphy. “Unfortunately for everyone, that’s just not the case.”

For the 2% of Short Sales that have been successful, the benefits to the homeowner are huge. The homeowner avoids foreclosure and gets a fresh start. But for the unsuccessful Seller, they’re nothing more than a false hope. A Short Sale can take up to 6 months – that’s the time it takes for the property to be listed, to find a Buyer, to get the Bank to sign-off on the reduced offer as settlement for the amount owned, and to transfer ownership to the new Buyer. But in most cases, the Seller discovers after 3-6 months of waiting that the Bank isn’t going to accept his Short Sale application and he ends up being foreclosed on after all.

Failure is almost always the end result when a Seller goes into the Short Sale process without receiving some indication from the Bank of a price they will take in order to settle the debt. “Most Realtors will list a property as a Short Sale without having received any indication whatsoever that the house can actually be sold for the Short Sale price,” commented Clark. “Even if a Buyer offers full price, they can’t be confident that the Bank will sell them the property at that price. If the Bank rejects the offer, they’ve simply prolonged the inevitable. The Seller will still be foreclosed upon, the Realtors won’t get a penny for their work, and the Buyer doesn’t get the home they were hoping to buy. 9 times out of 10 it’s a losing proposition.”

Buyers Are Staying Away

This fact has not been lost on Buyers, who are staying away from Short Sales because they know that most of them are too good to be true. “2 out of every 10 listings coming on the market are Short Sales,” commented Murphy, “but most clients eliminate them automatically because they know they’ll have to wait 3-6 months for an answer from the Bank. Once they’ve waited there’s still a high likelihood that their offer will be rejected. The entire sales cycle – and the recovery of the market – is being slowed by what in many cases is nothing more than a pipe-dream.”

“Realtors owe it to their clients not to list a potential Short Sale without first getting a firm indication from the Bank that they will actually accept a reduced price for the house,” commented Clark. “Otherwise, the cycle of false hope and prolonged recovery will continue.

For a copy of the Home Encounter Short Sale Report, go to www.HomeEncounter.com/learn.php and click on “Short Sale Report.”

Peter Murphy is Co-Founder and Head Broker at Home Encounter, a Tampa-based real estate Consultancy with specialties in Residential & Rental Properties, Investment Real Estate, Property Management and Land & Commercial Properties. Murphy’s analysis of the Tampa Bay housing market is featured extensively in local media and in trade publications, including the St. Petersburg Times, the Tampa Tribune, the Tampa Bay Business Journal, the Lakeland Ledger, and the Orlando Sentinel. He has appeared on ABC Action News and Bay News 9 for his reporting on significant local developments in the real estate market. He is a regular contributor to Fox’s 970 WFLA news broadcasts and is a guest panelist on Fox 13s “Your Turn”, where he consults on local and national real estate market issues. Murphy has a B.S. in Economics from the University of South Florida and an MBA with an emphasis in Finance, Economics and Marketing from the University of South Florida School of Business. He resides in Tampa with his wife and child.