Short sales of properties not in foreclosure accounted for an estimated 22 percent of all U.S. residential sales in 2012 and increased 4 percent from 2011. Non-foreclosure short sales accelerated toward the end of the year, with the fourth quarter total the highest quarterly total of the year and up 17 percent from the fourth quarter of 2011.
At the same time, sales of properties in some stage of foreclosure or bank-owned (REO) decreased 6 percent from 2011 and fell 11 percent from 2010.
This dramatic shift in the way distress sales are changing hands has a number of causes but one is a real surprise: in a growing number of markets where supplies of REOs are slim and demand is strong, short sales are actually less expensive than foreclosures.
Pro Teck Valuation Services’ Home Value Forecast (HVF) finds that short sales are now less expensive than foreclosures (REOs) in a number of markets where distress sales inventories are tight and where investors, including large hedge funds, are creating strong demand for foreclosures. By the end of January, REO median prices rose above short sale median prices in the Boston, Las Vegas, Los Angeles, Phoenix, Orlando, Sacramento, Miami, Minneapolis, Tucson, San Francisco and Washington, DC metro markets. Short sale and REO prices were virtually identical in West Palm Beach, Orlando and Oklahoma City.
Before the housing bust, short sales typically sold at a discount of around 10 percent or so, which was about 10 percent less than the discounts enjoyed by the average REO. Around 2009, as foreclosures flooded markets in the “sand states,” the discounts for foreclosures and short sales both jumped 10 percent, to about 30 percent for foreclosures and 20 percent for short sales.
The 10 percent difference helped to keep REOs competitive with short sales because of the significantly greater investment necessary to rehabilitate a foreclosure and return it to rent-ready condition. In 2011, about 60 percent of owner-occupant purchasers undertook improvements averaging $11,100, totaling $4.2 billion, while investors spent even more per unit, an average of $15,600, for a total of $3.9 billion.
With REO prices rising above short sales prices, rehab costs are adding to the difference to make short sales a significantly better deal in markets where value-conscious investors dominate demand for distress sales.