Short Sales- Here to Stay Although I Wish They Would Go Away

Short sales are up 209% for the first quarter of 2009 over the first quarter of 2008.  Expect 2010 to continue to improve upon this trend. It seems that lenders are realizing (finally) that they can get more money for a property if they just sell it short rather than go through the difficult and potentially litigious process of foreclosure or even modification.  Whether or not I like these types of transactions, they are here to stay.  

The biggest issue I have with short sales right now is how banks are attempting to value the assets that they have collateralizing their loans.  Banks sometimes hire third party companies to help them find agents who are authorized to value property or perform what is called a "BPO" or Broker Price Opinion. These BPOs are usually performed by agents who are inexperienced and work on volume. BPOs are valued generally at about $50 per property. So, the agents who are getting orders to offer an opinion of value are being incentivized to get as many BPOs done as possible with little accountability for accuracy.  Bank ordered appraisers really are not any better- they are usually from out of town with little knowledge at all of the true value the many micro-markets of Sarasota.  I have seen BPOs and bank ordered appraisals off by as much as 35% of the property value.  As the banks continue to try and recoup as much cash as they can from this real estate meltdown, they need to realize that they need to pay top tier agents or LOCAL appraisers to learn the correct value of the asset in question. Since most BPOs are MIA (made as instructed) one can usually expect the value to near listing price. If something is not done about these valuation practices, banks will continue to sell properties for less than they are worth OR deals will die because values come in too high, leading banks on as to the value of the property. 

The solution to this problem is simple- the first thing we need to do revise or repeal the HVCC.  The HVCC is a vile piece of over regulatory legislation that encourages unprofessionalism in valuing property (this is a wholly other rant that will take place later).  If you are buying or selling property that involves financing, you need to know about this.  The second thing we need to do is to hire more professional valuers of property.  As NAR lobbies to correct this issue, consumers need to be aware that ALL transactions, not just short sales will continue to be affected by banks incorrectly valuing real estate.  

As short sales continue to increase in frequency I believe that the current system incentivizes negligence and will continue to destabilize property values. As you are gauging your willingness to participate in a short sale transaction, you should be very aware that the numbers that bank is working off are most likely inaccurate.