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Short Sales on Their Way Out?

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By Marc Gould

short_sale_sign(1)Short sales and foreclosures played a starring role during the Great Recession. According to National Association of REALTORS® statistics, in the summer of 2009, distressed sales made up just under 50 percent of all transactions as reported by REALTORS®. Fast forward to last fall, and that number dropped to only 14 percent. When separated out, short sales alone fell from around 20 percent of all transactions to just 5 percent in the same time period. It looks like short sale’s starring role is moving to more of a ‘bit part.’ What have been the driving factors in this decline?

Short sales are becoming less common for many reasons. For one, many markets are now well into recovery mode. Home values are rising and sellers who were underwater only a year ago have a bit more breathing room today. With fewer homeowners in financial distress—and the worst of the cleanup from the housing bubble behind us—banks and courts are finally processing through their backlogs of distressed properties. And employment growth means more homeowners can afford to stay in their homes and make their mortgage payments.

In addition, short sales are becoming less favorable for sellers. For the last few years, the Mortgage Forgiveness Debt Relief Act of 2007, which protects sellers from having to pay tax on unpaid or forgiven debt, has made short sales a viable option for many underwater homeowners. However, the Act was sunset at the end of 2013. As of this writing, Congress is only beginning to stir on dealing with expiring tax credits for 2014. While the Act could retroactively return, nothing is certain. Unless you are a seller in California where the rule continues due to state regulation, a short sale in 2014 could significantly impact your tax obligation, making it less attractive.

Buyer interest in distressed properties has also cooled. According to the 2013 NAR Profile of Home Buyers and Sellers, less than half of buyers surveyed even considered purchasing a home in foreclosure, down sharply from recent years. This may be due to the decline in foreclosed homes available on the market, buyers not being able to find the home that meets their needs, or the perceived hassle of the purchase process, among other factors.

Finally, lenders themselves are also less interested in short sales. As market values increase, there is less need for lender/borrower negotiated sales. Added to that, the return of third-party purchasers (institutional investors or cash buyers purchasing at foreclosure auctions) is shifting the pendulum back toward traditional foreclosure auction and REO. A new trend in several communities is the emergence of well-financed national players buying foreclosed houses en masse that they are rehabbing and renting out. Research firms that track distressed market data are recognizing foreclosure auction sales to third parties as a long-term trend and are starting to break out this segment of the market for their reports.

Are you and your agents on top of the latest market trends? Does your office have the tools to move ahead in 2014? Check out the many resources available through the Real Estate Buyer Agent Council. REBAC’s educational courses and other resources help its members stay knowledgeable about changes in the distressed sales market and keep ahead of other trends that have an impact on their buyer clients.

Marc Gould is vice president, Business Specialties, for the National Association of REALTORS® and executive director of REBAC. A wholly-owned subsidiary of the National Association of REALTORS® (NAR), The Real Estate Buyer’s Agent Council (REBAC) is the world’s largest association of real estate professionals focusing specifically on representing the real estate buyer. With more than 30,000 active members, REBAC awards the Accredited Buyer’s Representative (ABR®) designation to REALTORS® who work directly with buyer-clients. To learn more, visit REBAC.net.

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