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Perhaps the greatest advantage of a short sale to beleaguered homeowner facing default and foreclosure is the opportunity to move on with life and put the bad debt behind them as quickly as possible. That advantage is shrinking as short sales take longer to sell than foreclosures.

Short Sales Are Growing Longer

Perhaps the greatest advantage of a short sale to beleaguered homeowner facing default and foreclosure is the opportunity to move on with life and put the bad debt behind them as quickly as possible.

Typically, short sales take longer than normal homes or foreclosures to sell because of the time required for the parties-lender, buyer, seller-to respond. “In the past waiting 6-18 months was common…now I find the process taking about 3-4 months if you are aggressively on top of everything,” reports a Realtor specializing in short sales.

Improved short sale management systems and lenders more willing to settle for a short sale than foreclose helped the transition have speeded up the process. By comparison, as processing times and backlogged inventories continued to plague foreclosure markets last year, especially in the nation’s 23 judicial states, 2012 was proclaimed the “year of the short sale” and short sale inventories zoomed.

However, now there are so many short sales on the market that they are selling slower than foreclosures that have made through processing and “normal” sales. Demand is considerably less for short sales among investors, especially the institutional investors who are having a major impact on some markets, and as a result they are selling at a discount about equal or even greater than foreclosures.

Last year short sales of homes that had never entered the foreclosure process accounted for 22 percent of all US homes sales, more than all REOs and sales of pre-foreclosure properties combined, according to RealtyTrac.

As volumes of short sales grew, so did their discounts from normal prices and their time on market. Last month, the median time on the market for all single family homes was 74 days in February, up from 71 in January according to the National Association of Realtors. Short sales had a median of 101 days on market, up from 94 in January. Foreclosures (REOs) were on the market for a median of 52 days, up from 47 days in January.

In December, when demand was lower, the differences were even more pronounced. Short sales had the longest days on market with a median of 117 days. Foreclosures were on the market for a median of 45 days (60 days last year), while the median days on the market for non-distressed properties was 74 days (106 days last year).

The discount below market price is another to measure of short sales’ declining status in the market place. Last month, short sales sold at a 15 percent average discount, just a little above foreclosures, which had an average 18 percent discount. In December, foreclosures sold on the average at a 17 percent discount while short sale properties sold at a 16 percent average discount. Both types of distress sales enjoy less of a discount than normal due to the inventory shortage, but the fact that both have been selling at virtually the same discount is more remarkable. However, short sales typically go for 10 percent less than foreclosures. (See Short Sale and Foreclosure Discounts Converge).

These are national medians and averages, and conditions in local markets will vary greatly depending on foreclosure inventories, negative equity, state laws governing foreclosures and demand. Perhaps answer to the problem short sales are having lies with the changing nature of demand for distressed properties-e.g. bulk purchases of foreclosures, especially pre-foreclosures, by institutional investors. Reports of single sales of thousands of properties are common, especially in the markets where hedge funds are most active. (See Hedge Funds are Fueling Foreclosure Inflation).

It’s interesting to note that among RealtyTrac’s ten best markets for short sales-markets where short sale discounts are most attractive, where inventories have increased the most and where short sales are taking the longest to sell-are four or five where hedge funds are known to be active.

Are short sales still the shortest solution? For starters, compare NAR’s 74 day median time on market for February with RealtyTrac’s national average of 414 days to process a foreclosure and NAR’s 52 days to sell them. So in most places, short sales are still the less painful option. In a few states, however, it could be a close call. DC, Maryland, Georgia, Tennessee, Virginia, Texas and Wyoming all process foreclosures in less than 50 days, and homes in those states could be changing hands from defaulting homeowners to new owners in less than 100 days.

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