There’s a Reason for Differences in Price By Oscar Wei, senior research analyst & Robert Kleinhenz, Ph.D. deputy chief economist
Dec 10, 2010
Housing prices vary from city to city, but even within your neighborhood or community, there may be distressed and non-distressed sub-markets with significant price differences. To illustrate, the overall median sale price of a detached existing home has been just over $300,000 throughout 2010. By comparison, the median price of a conventional non-distressed sale was about a third higher at roughly $400,000. At the other extreme, REO properties sold by banks were about a third lower than the overall median at roughly $200,000. Short sales, however, were not so steeply discounted. With a median price of roughly $270,000 over the past year, short sales were priced about 10 percent below the overall median and about 25 percent higher than REOs. What explains these differences in prices?
REO properties are sold substantially below market price because they are typically smaller in size, generally not well-maintained, and may have title clearance issues that are not desirable to home buyers. Also, since banks and lenders are not in the business of property management, they try to get rid of the inventory faster by reducing prices to below market level.
Short sales are usually priced somewhere between REO sales and market sales. These are properties owned by “underwater borrowers” who cannot pay off the mortgage balance. To avoid incurring hefty costs from a foreclosure proceeding, lenders agree to discount the loan balance. With lenders willing to concede, short sale properties are priced below market value but above what they would have sold in foreclosure status, so lenders could minimize the financial loss that would have incurred otherwise.
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