Foreclosures and short sales make up nearly 30 percent of all Twin Cities home sales

A new report by the Minneapolis Area Association of Realtors reveals that foreclosures and short sales accounted for 27.6 percent of all closed sales in the first quarter of 2008. During the first quarter of 2007, these types of sales made up only 9.3 percent of the total market share.

Short sales are when the homeowner makes a deal with the lender to sell the home for less than the outstanding balance of the loan, either as a means to avoid foreclosure or because an unstable market has caused homeowners to be underwater in negative equity. Like when used cars became “pre-owned vehicles,” Realtors like to call these new and popular sales “lender-mitigated sales.” Currently, the sellers are required to pay the taxes on the outstanding balance of the original loan as if the bank gave them a gift for tens of thousands of dollars.

MAAR says the increase in lender-mediated sales skews the median home price and makes it look as though the average Twin Cities home will be hit with precipitous drop of 9.7 percent this year. The researchers claim that the actual price decline of non-lender-mediated sales (regular old home sales) is only 3.9 percent this year.

While that might be true at first blush, there’s a handy bit of information missing in this study. For one thing, it doesn’t break out the number of non-lender-mitigated sales that have to include deep seller concessions in a deflated market. Seller concessions, money given to the buyer for closing costs and repairs in part of the sale, can make up six percent of the total sale price. And the final sale price recorded is the amount before the seller concessions.

Jeff Allen, a research manager for MAAR, says the organization doesn’t have any prepared data on what percentage of total sales include seller concessions. “Seller’s concessions are an issue which we are researching as we speak,” he told MinMon. “But I won’t have anything I can share with you today.”

TJ Larson, a Realtor with Edina Realty, says almost all of his sales these days include seller concessions. “In this market, I would say in most cases buyers ask for seller-paid closing costs. The difference now is that buyers look at it as part of the discount in addition to reduced sales prices. A few years ago, a seller would be willing to pay a buyer’s closing costs as long as the buyers were willing to raise the purchase price to compensate. The balance of power has shifted and now buyers are controlling the ball, at least most of the time, on that one.”

In other words, sellers are being hit with an additional three- to six-percent loss as buyers have the leverage to make more demands. So while it’s better news for sellers who aren’t in dire straits that the decline in non-foreclosed home values this year is closer to four percent than ten, they should also plan to add another four percent or so to that loss for concessions.