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April 20th, 2010 9:28 AM by David W. Welch
As of this morning, Orlando Realtors have 10,747 contracts pending. When a contract is pending, that means the buyer and seller have come to terms in writing. There are always contingencies such as inspections and financing, and in the case of distressed properties "third party approval." It is the financing and third party approval contingencies creating the bottleneck in the process. There are currently 6,539 short sales and another 2,305 REO's with contract pending, and virtually all of these are at some stage of third party approval. While the REO's typically do not get held up for approval, the short sales can take months. Financing is also taking longer to obtain in many cases, but it is still very possible to close within 30 days. With cash deals accounting for roughly 50% of all the sales, financing contingencies are not having nearly the impact of the third party approvals.
Having said that, a few things have changed very recently that could give the banks an incentive to start pushing through these approvals. First, The Fed stopped purchasing mortgage backed securities. There was some concern that interest rates would start going up, but we have not seen that happen. Private investors have picked up some of the slack and the high percentage of cash deals have kept demand down for mortgage funds I suppose. The other impact I believe we will see is banks having to take back the non-performing assets. I believe this may force the issue of approving short sales if these have to be accounted for on their books. The other big change is the new short sale guidelines that went into effect April 5th for all the TARP banks. These banks will have an incentive to move short sales through their process more quickly.
It is too early to tell what impact these two policy changes will have on short sales, but if they work we could see two very different scenarios play out. First, if banks start approving the existing pending short sales we could see thousands of additional closing with such a high number of pending transactions. Since the short sales tend to have a higher price than the REO's, this could also cause our median price to surge giving the impression of rising prices. The other possibility is that we may find that many of the pending short sale buyers have already bought something else and walked away from the deal. Many of these contracts only allow the lender 30-90 days for approval. If that time period has expired, the buyer may have found another property. If this plays out, we could see a big rise in the inventory of homes for sale and possibly foreclosures. This could also have the effect of keeping our prices low for quite a time to come.
Realistically, I believe we will see a fairly high percentage of the short sales close. In many cases these homes are still better deals than the "normal" sales. REO's are frequently going to investors with cash, which is crowding out the home buyer. If I were taking a guess, I would say 2/3 of the short sales would close putting the remain 2,000 or so back into the market. Of course, this is all assuming the banks get these approvals pushed through. I would love to hear what is happening in other areas. Are you seeing more short sales getting approved?
David Welch Real Estate Optimist, Orlando Real Estate