The State of Distressed Sales

*By Keith Loria
Demand for distressed properties is driving up prices for the first time in nearly two years, according to foreclosure data released by RealtyTrac in August.
The Irvine-based listing firm revealed that the 224,429 foreclosure-related sales in the second quarter was down 12 percent from the first three months of the year, and was down 22 percent from the second quarter of 2011. That’s the first annual decrease in 15 months.

“There is a limited supply of available foreclosure inventory to choose from in many markets,” said Daren Blomquist, vice president of RealtyTrac, in a company release. “Given the shortage of supply and the seasonally strong buyer demand in the second quarter, it’s no surprise the average foreclosure-related sales price increased on both a quarterly and an annual basis.”

The average foreclosure sales price for the nation rose seven percent to $170,040 from the second quarter of 2011, the biggest annual increase since 2006. The pool of real estate sales across America that involved distressed property rose four points in the second quarter to 23 percent from one year earlier, even as sales of bank-owned and pre-foreclosure homes sank dramatically.

These numbers, real estate experts believe, provide solid statistical evidence of what real estate agents, buyers and investors have been talking about for months.

“There’s virtually no supply in a lot of markets right now,” Michael Krein, president of the National REO Brokers Association, said in a press release. “What we’re finding nationally is that 50 percent of all purchasers are investors because they can outbid the owner occupant buyers. Investors are bidding up anywhere from 5 to 25 percent over the list prices.”

Government-controlled mortgage guarantors Fannie Mae and Freddie Mac have been slow to unload foreclosed homes, which has limited the number of properties available for private-equity firms, hedge funds and pension systems to purchase.

The shortage is happening, experts say, because fewer bank-owned homes are coming to market as lenders comply with terms of a $25 billion February settlement with state and federal regulators to resolve allegations with the five-largest home lenders over faulty practices.

RealtyTrac’s report showed that the gap between short sale prices and prices obtained by banks selling seized properties decreased to the smallest amount in almost five years.

Banks increasingly approve transactions for less than the amount owed on the mortgage, known as a short sale, or modify loans for borrowers struggling to keep up payments, including by reducing the principle owed.

“The shift we’ve been seeing in the last few quarters that continued in the second quarter is short sales catching up with bank-owned sales,” Blomquist said.

The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, adjusted its guidelines for short sales last week to expedite the process and permit the transactions for borrowers who are up to date on mortgage payments if they demonstrate a “hardship.” The guidelines take effect on Nov. 1.

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