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Are Short Sales the Remedy for Home Values?

by Chicago Agent

Short sales, after their big increase in Q2, may be a backdoor solution to falling home values.

The past few months, media outlets have been awash with proposed remedies for falling home prices, but the latest solution comes from an unlikely source: short sales, home sales of distressed homes before they are repossessed and sold by banks.

Typically resulting in 20 percent discounts on sale prices, short sales rose 19 percent in the second quarter, a radical turnaround that would seem to suggest a new period of behavior from the nation’s banks.

Short sales primarily assist home values by avoiding foreclosure. Because short sale homes are occupied almost immediately after the deal, homes do not languish on the market – a process that decreases the value of not only the foreclosed home, but also the freshly appraised homes in the neighborhood.

“Anytime a short sale can be substituted for a foreclosure, it’s going to prop up prices and it’s going to cut losses because it’s going to sell for more,” said Thomas Popik, research director for Campbell Surveys in Washington.

Ron Peltier, the chairman and chief executive officer of HomeServices of America Inc., said the second quarter short sales represented a “dramatic shift” in bank behavior, which has hinged on secretive in its refusal to unload distressed properties.

“Banks have become much more supportive of short sales,” Peltier said. “That’s better for the lenders, who have smaller losses on a short sale, and it’s going to be better for homeowners, who won’t have as much psychological distress as a foreclosure.”

And foreclosures are the last thing banks want to think about, a likely reason that short sales have increased to such a degree. After all, if a home sells as a short sale, or, a “pre-foreclosure” sale, as it’s also called, it’s one less property that banks have to worry about.

As a result, the short sale process has quickened, but only marginally. In the second quarter, short sales took an average of 245 days, down from 256 days in the first quarter. Popik said short sales take longer because more factors are involved in the transaction.

“No matter how streamlined a short sale may be, it’s always going to be a frustrating experience,” Popik said. “Too many people are involved – investors, servicers, owners, real estate brokers, mortgage insurance companies.”

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