I had a client ask me if the price goes up or down when a short sale becomes an REO. This is an excellent question. Also, a lot of people seem to think there is a relationship between the amount owed on a home and the list price. This can be true for a short sale, but is not part of the consideration for pricing an REO.
Pricing for an REO is a combination of an appraiser's opinion of the value, a real estate agent's comparable market analysis (CMA), and the bank's final decision based on these inputs. Therefore, pricing for an REO is essentially done solely on the basis of the market value. In a way, from a real estate agent's perspective, the bank is the ideal seller-client - because they listen to our assessment of a good list price to sell the property quickly. The property is generally priced competitively (lower than comps) because the bank wants their property to be the first to sell in the neighborhood. It is also priced lower if the condition of the property is poor. However, the bank is dependent on the real estate agent and appraiser to be its eyes and ears - the bank's asset manager does not come out to see the property. Therefore, the smart real estate agents recommend a very aggressive price and do generally see the payoff of a quick sale (less than 60 days).
For short sales, pricing gets a little more complicated. Originally, it seemed the pricing was based on the listing agent conferring with the bank on the amount that the bank agrees to forgive of the debt. Unfortunately, this usually resulted in prices that were above market value and the short sales weren't selling. Lately, it seems that the listing agents are pricing to be the lowest in the marketplace by far - the goal seems to be to get multiple offers in the door. Once an offer comes in, the agent is able to submit the short sale package to the bank and get the bank to start the process of pricing the property. It seems that the bank will sometimes come back with a higher price than the list price. However, maybe some banks are changing their procedures and agreeing to lower prices now based on an evaluation of their bottom line loss after a short sale vs. a foreclosure/REO. Foreclosure is very expensive for the bank. It seems that the second trust lender frequently completely loses out with a short sale.
So, the answer to the initial question is really - it can vary. Sometimes the short sale is priced almost ridiculously low so the market value of the bank sale is a higher price. Sometimes the short sale is priced based on the amount of the remaining debt so the market value of the bank sale is a lower price.
Sunday, April 6, 2008
Pricing of REOs vs. Short Sales
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I've been reading a lot of economics articles about second-trust lenders losing out completely. I'm surprised that banks aren't also showing up as having major troubles in the news, since the majority of second-trust loans were through banks rather than mortgage companies.
ReplyDeleteShawn - that's a keen observation. Second trust loans have become pretty much obsolete in the current market b/c they have become so risky for banks. The rates are incredibly high for second trusts, so it comes out much cheaper to do PMI. The fact that PMI became deductible since 2007 only supports this further.
ReplyDeleteI don't know enough about banks vs mortgage companies to address it. However, I would guess that they either had better PR engines or had stricter lending standards (and therefore had a much lower rate of foreclosure).