Do Short Sales Benefit Local Communities?

Short sales are a prevalent strategy in this economy due to the high unemployment rates, high amount of rate increases for option adjustable rate mortgages, and dropping property value. Many people look at short sales as problematic in a community. The rationale is that since the investors need to buy at a discount, this discount is dropping property values. The purpose of this article is to show that short sales are a benefits to local communities and that the government should be encouraging banks to work with investors in order to help the housing market recover.

The most frequent question a homeowner asks me is “Why would a bank be willing to discount a house?” The answer is because banks are not in the business of owning property nor are they in the business of holding onto non-performing assets.

When an asset is performing, they are allowed to lend 7-9 times its value and collect interest on that amount. When the asset is not performing, they cannot loan out eight times the amount loaned. Therefore, a bank is motivated to rid itself of a non-performing asset even if it means taking an immediate, short term loss.
Plus, the foreclosure process is expensive to the lenders. There are legal costs and holding costs in place. According to the FDIC, losses for lenders on foreclosures range from 20 – 60%, or an average of $50,000 or more per foreclosure!

Are Short Sales good or bad for the local economy? Short sales will have an initial impact on home values in a subdivision. Most short sales are discounted, and if a significant amount of short sales occur in a neighborhood, then the property values will drop. But if the investor makes repairs and resells, the property values will begin to increase again. Unlike a foreclosure, which can sit vacant for several months if not years, a short sale will generally be purchased, rehabbed, and sold quickly, which, overall, is a benefit for the subdivision.

Avoiding foreclosures is a benefit to the community. A 2005 case study titled “The Municipal Cost of Foreclosures” by William Apgar, stated that homes in foreclosure that become vacant provide sites for crime or other neighborhood problems. One foreclosure can impose up to $34,000 in direct costs on local government agencies, including inspections, court actions, police & fire department efforts, potential demolition, unpaid water, sewage, and trash removal. Finally, the report states that one foreclosure can result in as much as an additional $220,000 in reduced property value and home equity for nearby homes! Therefore, local communities and local governments strongly encourage the banks to work with investors to achieve short sales for the benefit of the overall community.

In summary, the worst detriment to any neighborhood is an influx of foreclosures. Crime rates will increase and property values will decrease. Shorts sales are an improvement. While there will be a temporary detriment to the values of properties, over the course of a couple of months, the subdivision will be able to recover.