We looked at several short sales, and ended up buying a bank-owned.

Initially we weren't interested in looking at either, and once our realtor told us that she recommended putting in additional offers while waiting on approval from the bank, we knew short sales were more trouble than we were looking to deal with.

Not that the foreclosures were our second choice, but buying from the bank ended up being much less of a hassle than the "normal" sale property we had offered on earlier, which was just as ill-maintained and had the added issue of sellers who were still trying to recoup what they had overpaid several years ago.

That's really interesting, Mary. Thanks!

I felt that the most interesting statistic that you included in your post was that "10% of listings but 30% of sales" were foreclosures. This can possibly be attributed to a few things. First, the "stigma" of a home being a foreclosure seems to be passing. In fact it may be viewed not as a bad thing anymore as it is a sign that you got a deal. As short sales are taking forever now, an REO property can be a much quicker transaction to close as well.

First, this blog is always full of very good, accurate information and anybody in the market or who has an interest in this industry in Maryland would be well served to read the blog regularly.
Second, I agree with Real Estate Attorney # 1 that he bank-owned (REO) properties are a much better way to go in the present market. I have seen many short sales drag on over 6 months before closing, if they close at all.
With the REO properties, the bank has already incurred all of the expenses of the foreclosure and eviction processes(and sometimes the Bankruptcy process as well) and every day they carry the property is more money out of their pocket. As a result, they want to cut the best deal they can and get rid of the property.
Very often, a buyer can negotiate a great deal, with seller contribution towards the buyer's closing costs. Often, if the buyer chooses to close with the seller's title company, the seller will also pay for the Owner's Policy of Title Insurance. This can save the buyer hundreds (or thousands) of dollars.
Make sure to work with a real estate agent who has experience in dealing with bank-owned properties as these deals are a different kind of animal than a "normal' transaction.
Keep up the good work

Home sales are down over 25% from today's report. The banks continue to limit the supply of REO's on the market. Foreclosures continue to rise. This is suppose to be the "peak" buying season. It looks VERY bad for the coming months in the fall and winter. A double dip in real estate is already in the works. Be prepared to lose more equity in your home (if you still have it). I would not be buying a home regardless of where interest rates are right now. My advice would be to wait until the winter (dead season) to buy as there will be less buyers in the market and inventory levels will continue to rise. REO's are the best way to go.

@Frank Rizzo I see the argument time and again about banks "limiting" the volume of foreclosures on the market, but I don't believe that it's an accurate assumption. Take Maryland as an example: The foreclosure process itself takes a minimum of 6 months, and quite often well over a year (I have seen clients spend more than 2 years in a home without paying a penny on the mortgage). Once the home is foreclosed, it can very well take the bank as much as 6 months to actually get the property into a situation where they can sell it. Some banks will immediately list a property on the market once it has been foreclosed, while others will wait until they have gotten the title cleared, the home repaired, winterized, bills up to date, etc. It really all depends on what the bank's policy is on when they are willing to start marketing the property for sale. Having worked with banks directly to list and sell their foreclosures, I have yet to see a situation where a bank is holding a property off of the market without a specific purpose. I have seen banks hold off because they are trying to meet certain gain/loss figures, but I highly doubt it's all part of a larger effort on their part to prop up the market.

Just a comment on Frank Rizzo's post - wherein he states. "I would not be buying a home regardless of where interest rates are right now." The fact is interest rates do make a difference and can affect a home's affordability as much as price. The difference between a 4.0% and a 4.75% mortgage on a $200K house adds up to about $30,000 over the life of the loan, and increases the monthly payment by $83 per month. If you are buying house solely for investment purposes, then maybe you would be well advised to follow Mr. Rizzo's guide. However, if you are looking to buy a home to live in for more than a couple of years, then you would be well advised to take advantage of the current, historically low interest rates, and historically high inventories of existing homes for sale. Plus, many sellers are willing to negotiate on price, because the inventories are so high. Staying out of what is truly the best buyer's market in decades, means that buyers are betting that all of these factors will remain in alignment in perpetuity and that the buyers market will go on and on, which is the same faulty reasoning that buyers embraced during the boom years in thinking that prices would continue to rise forever.

Plus, the alternative to buying a home is to continue to lease or rent living quarters. As far as I know, renters can't accumulate any equity in their residence, regardless of whether the housing market is up or down. Smart buyers are getting good deals and lowering their housing costs, but not by standing on the sidelines, expecting things to get worse, all the while hoping that the market will improve.

@Jody- why is Realtor speak so easy to sniff out? Ok - we'll follow your advise, you first. We are right behind you, promise.

Jonathon, to some extent you agree with my assessment. The banks could foreclose on the property in 90 days. Why wait 6 months to 2 years? To me, that is intentional. If the banks wanted to get these loans off their books, they would speed up the process. Instead, they are waiting and delaying the process. If that does not fall under the category of limiting the supply of foreclosures, then I don't know what you would call it?

Jody, I never said not to buy a home. What I said is that I would wait until the winter. It is a fact that the winter is the dead season for home purchases, no? Summer is the peak buying season. If we are at a 15 year low from today's report (peak buying season), how do you think that report will look when there are even less buyers in the market? When there are less buyers in the market, prices will have to fall. I am not a Realtor so I have no hidden agenda here. I will say that I thought rates would be higher after the Fed stopped buying mortgages. I was wrong on that one. In fact, I think now we will see mortgage rates in the 3's in the winter when the Fed starts buying Treasuries. So while mortgage rates are very low right now, they could still possibly go even lower in the winter. From what I have seen, mortgage rates typically go down around the holidays. The only problem is that low rates have mainly benefited refinances and not purchases. Purchase applications continue to decline, while refinance applications have risen. To me, this signals a double dip in housing. Sure, I could be wrong again. In fact, I hope I am wrong. I would love to see home prices stabilize and more buyers come to the market. I just don't see it happening. I just don't see the real estate market getting any better until foreclosures are finished working through the system. As long as foreclosures continue to increase, it will not get any better. When there is a sustainable decrease in foreclosures, then I will say a bottom is on the horizon. Until then, I would be very cautious in buying a home unless the price is too good to pass up. Typically, you won't get that with a non-distress sale. REO's are really the only way to go. Most people aren't able to afford taking a huge loss on the sale of their home.

So according to Jonathan, the shadow inventory that is approximately equal to the regular inventory is not the product of intentional design, it is the product of bureaucratic incompetence.

RE: Jody, renters also can't accumulate negative equity and the same affordability argument you make for interest rates will be downward pressure when rates do rise from their record lows. I've run the numbers and a 1% move in rates is equivalent to about a 10% move in price. If homes aren't selling at 4% mortgage rates, what do you think they'll be doing at 6% mortgage rates?

The banks are neither delaying the foreclosure process nor holding back a huge hidden shadow inventory of foreclosed properties. The banks rate their attorneys on how efficiently they carry out each part of the default process including the foreclosure, any related bankruptcy matters, then the eviction, and ultimately on the REO sale. They want to foreclose and get rid of these properties.

Every day the banks carry a property, they are paying property taxes which alone can be easily be $5,000/year on a $300,000 assessed property. They are paying for the HOA/Condo fees from the foreclosure sale date forward which can be thousands more dollars per year. They are paying for any water liens or municipal liens. They are paying for people to winterize the houses, to de-winterize the houses, to cut the grass, etc.. The longer the property sits, the greater the chance of vandalism which would make the property even tougher to sell at a far lower price. On many of these single transactions in metro Baltimore/DC, the bank will lose over $100,000 by the end of the process. They want to sell them as there is no reason not to, but there are few qualified buyers.

Despite the low interest rates, loan underwriting has become so strict that very few people qualify for a mortgage for a primary residence, much less for an investment property. Refi? Who that can qualify for a loan still has any equity or vice versa?

We're in a vicious circle right now where the housing market is holding back the overall economy but the overall economic conditions don't allow for good developments in the housing sector.

All of that said, if you need to live somewhere for a few years and you are creditworthy, you would be well advised to take advantage of the historically low interest rates and lower prices available now and buy a home. Owning always beats renting.

@Frank Rizzo In theory? sure 90-100 days at an absolute minimum in the state of Maryland if this were a perfect world for the bank. In reality? Forget about it. There are a ton of different things that need to happen in a very specific order in order for a judicial foreclosure to occur, and almost every single step can be contested or scrutinized in such a way to delay the foreclosure process. You asked why wait 6 months-2 years? Well, let's say there are 20 steps in a foreclosure process where paperwork needs to be filed/filled out or communication needs to be relayed from one party to another. If all of that happens ASAHP, A foreclosure could happen in 90 days (say 100 days to factor in weekends when offices are closed and things get delayed because of it.). Now what happens when everyone involved in passing this paperwork needs a few days in order to get to that task because they have a high work load? What happens when the bank agrees to give the homeowner time to try and short sale the home? What happens when the owner files for bankruptcy, freezing a foreclosure sale? The homeowner can also contest the sale if there was ANY variation from proper protocol in the sale itself, forcing the sale to drag out for weeks.

Even after the foreclosure, what is the bank to do when they find the owner is still living there? Now the bank has to wait for the owner to voluntarily move out, or be forced to evict them. Do you know what you need in order to get the police to schedule an eviction time/date? A substitute trustee deed of sale. It can take up to 6 weeks to get that back once it's been requested. The cops are going to require it in order to prove the bank actually owns the house, and THEN they will schedule an eviction date, which the bank may have to then wait another month or two (I've seen banks forced to wait up to 18 months to get an eviction date scheduled with the county police).

The other thing to bear in mind (One West Bank aside) is that at the end of the day, the bank does not WANT to foreclose on a home, but they NEED to try and protect their shareholders/investors financial interest. If you delay a foreclosure to allow a short sale, are you saving money by not paying the fees involved in foreclosure and because the homeowner has not damaged the property when they moved out? Perhaps. I've always been of the opinion that banks make terrible property owners, and they know that.

I know that it may seem intentional that banks are holding back on these foreclosures, but the foreclosure process has become complicated in Maryland, to the point where there are thousands of variables that can drag the process out, and it's not because the bank wants it to be that way.

@Josh Dowlut
1) I don't believe in Shadow inventory. The term infers that there are properties which could be placed on the market that are held back intentionally in order to regulate the amount of foreclosures on the market. Can it take 6 months from date of foreclosure to listing? Yes. Is there a reason that happens? Yes. Eviction, Repairs, obtaining Substitute Trustee Deed, Resolving Other Leins and Liabilities on the property (True Story, it once took me 6 weeks just to get the payoff information from a lawyers office on an HOA lien because they required proof of ownership and we didn't have the deed back yet. There's nothing that can be done to make that happen faster in a situation like that.), Etc. Etc Etc are all reasons it can take longer.

2) I meant to make no claim on the size of future or pending inventory vs. current inventory. If I did, I apologize.

3) It's certainly not a product of intentional design, there's no secret corporate or government plot to limit the number of foreclosures on the market at one time,but it's not fair to call it bureaucratic incompetence. Bureaucratic design, yes, but for the most part I think the long time frames for a foreclosure in Maryland are a good thing, for two reasons. First, the longer time frames and rigid guidelines reduce the risk of error (corporate incompetence), and provide time to possibly create a foreclosure alternative. Second, it allows the homeowner a better opportunity to save their money and prepare for the massacre their credit score is about to see. If someone has managed to live rent free for a year or more, they've probably had a chance to bank a decent chunk of change.

Why does this matter to me, you may ask? The answer is simple. If you take someone who is financially stressed and quickly throw them on the streets as soon as they can no longer afford the mortgage, they run a higher risk of becoming a burden on local welfare programs than someone who has lived in their home rent free for a year or more and has had an opportunity to save their money and prepare for their own personal credit crisis.

Just do a Google search "Banks delaying foreclosures" and you will see what is going on. The premise is that if banks put all of these foreclosures on the market, home prices would fall much further. If home prices fall further due to increased REO inventory, the banks will lose more money. As I said earlier, this varies by state and lender. Maryland is still in the top 10 in foreclosures.

You can debate whether or not it is intentional, but you cannot debate that as recently as June the national average from first missed payment to finalized foreclosure was 438 days. Add more time to bring to market. The term shadow inventory makes no attempt to discern intent, it only means that there are a ton of properties that are in the pipeline and will be swelling the supply as new foreclosure inventory. Statistically speaking, once someone falls behind by 90 days they are almost guaranteed to go into foreclosure. It is no longer a question of if, but when. The total amount of those properties today is approximately equal to the total amount of homes openly, actively listed for sale today.

Your argument of whether this is good or not depends on your perspective. From an efficient markets standpoint, it is bad and it is preventing/slowing home prices from falling to naturally (sans 4% interest rates) affordable prices. Acknowledging that the housing market is anything but free and has become centrally planned class warfare between those who work for their money and those whose money works for them, it's a good thing, and exploiting loopholes such as those in the Protecting Tenants at Foreclosure Act to push the figure from 438 days to 700+ days is a great thing.

I don't really understand what is happening in the housing market (does anyone?), but I must say this back and forth is really interesting. I'm glad to see the discussion and learn what I can. Thanks guys.

I am currently trying to purchase a potential short sale but the Owner has been delaying the signing and subsequent offer to the bank. Is there any way to let the bank know this offer exists? Would they intervene to avoid the foreclosure process?

Jeff, didn't the owner put the home on the market in hopes of a short sale? That's very strange.

The answer -- would the bank intervene -- might depend on the bank in question. Any short-sale experts out there have an answer for Jeff?

@Jeff There is no way to let the bank know the offer exists without the owner signing and sending it to the bank. You must bear in mind that until it becomes a bank owned property (REO) The owner/debtor is still in posession of the property and he is not obligated to sell it unless he chooses. If he is unwilling or unable to sign the short sale offer then you are forced to either wait it out, find another property, or wait until the property is foreclosed on and then buy it directly from the bank. Even if the bank were to be made aware of your current offer, they could not move forward with it if the current owner is not amenable.

That makes perfect sense, Jonathan. Thanks for weighing in.