The latest statistics suggest that short sales are on the rise and foreclosures are on the decline. According to research from Moody's Investors Service, in August 2009, short sales accounted for 8% of bank distressed property sales. As of mid 2011, short sales have jumped to more than 25%. Meanwhile, the time it took for a borrower to go to foreclosure grew from an average 14 months in early 2009 to 24 months in mid 2011.
Why are short sales on the rise and foreclosures on the decline?
- Foreclosing Has Become a Challenge: Banks began stopping the foreclosure process in October 2010 in order to correct forged documents and mishandled foreclosure paperwork as part of the robo-signing scandal. Since then, new regulations from federal agencies and still ongoing negotiations between the state Attorney Generals have made foreclosing on property difficult.
- Short Sales Save Banks Money: Banks saved an average of 10% by opting to sell through a short sale over taking the property to foreclosure. Factors such as shorter time frames, reduced legal costs as well as short sale buyers paying more than foreclosure buyers all contributed to the savings.
Short sales are still not a quick sale process however. The average time to complete a short sale transaction remains around 12 months. But for banks, this is far better than the alternative.
For borrowers, short sales can be a terrific alternative to foreclosure. The damage to a borrower's FICO credit score is far less with a short sale (50 to 200 point drop) compared to a foreclosure (as much as 400 point plunge.) Borrowers can usually buy a new home within 1 to 2 years after a short sale whereas it can be a 5 to 6 year purchasing moratorium after a foreclosure. Plus, many borrowers claim that knowing that they will be selling their property through a short sale is far less stressful than the uncertainty of letting it go to foreclosure. (Although some borrowers would disagree and have opted to live for free as long as they can, trading the uncertainty of foreclosure with the money saving technique of not paying their mortgage.)
Do you think short sales are on the rise?
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