- - Thursday, May 10, 2012

Distressed properties have been one of the biggest problems in the real estate market since 2006. They put a drag on the process of buying and selling, they pull down property values, and they even can affect the image of a neighborhood.

Today I’d like to focus on how short sales, in particular, are bogging down the market because they take so long to close. In the District, for example, just 49 percent of short-sale contracts from November have gone to settlement, compared to 98 percent of “clean” contracts.

There are two kinds of “distressed” properties: foreclosures and short sales. A foreclosed home already has been through the foreclosure process and is owned by a bank. The bank contracts with a Realtor to list the home and find a buyer.

Short sales, sometimes also called “pre-foreclosures,” are for homes still in the homeowner’s possession, but because the owner has fallen behind on mortgage payments, the lender sometimes is willing to release the property for less than the actual loan balance.

According to data from RealtyTrac, distressed properties in the U.S. sell for 20 percent to 30 percent less than homes that are not in distress. This is a major reason for the drop in home prices in recent years.

Prices are not the only issue, however. Short sales, in particular, are a challenge for buyers, sellers, Realtors, lenders and settlement agents. Just look at the data for the region’s largest housing market, Fairfax County.

Of the 617 “clean” contracts (those that were not foreclosures or short sales) from November 2011, 615 had been through the settlement process on May 1. And 100 percent of the foreclosures already have settled.

Yet, after six months, just 71 percent of short-sale contracts in Fairfax have closed. And the percentages are even lower in other jurisdictions.

“The whole market, and the data about months supply and days on market, is stronger than it appears,” said David Rathgeber, the broker of Your Friend in Real Estate. “It’s the short sales that are skewing the data.

“Most buyers are not even looking at them,” he said. “So a more accurate way of looking at the market is to just exclude short sales, because it really is a completely different market.”

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