Survey: Is a Flood of Short Sales Coming Soon?

January 11, 2021

By Real Estate Bees 

– Economic damage caused by the Covid-19 pandemic in the United States is having a significant impact on homeowners. According to Freddie Mac, the number of mortgage loan borrowers in forbearance (behind in their payments and negotiating with the lender) has increased from .09% in 2019 to 5.6% in November of 2020.

Real estate professionals can’t help but compare the current situation to the housing recession of 2008. The earlier recession, sometimes called the Great Recession, had an industry-altering effect on the real estate profession.

What Happened Last Time?

The Great Recession caused a record number of mortgage borrowers to default on their loans. This caused a corresponding record number of short sales of residential properties. A short sale is when a mortgage lender is willing to allow a sale of the collateral property for less than the remaining loan balance.

“Short sale is one of the solutions to avoid foreclosure. For a homeowner it’s usually a last resort, and for a buyer it’s an opportunity to purchase a home with a discount.” — explains Bob Vieira, a short sale processing expert.

Real Estate Bees surveyed over 5,000 active real estate agents to learn their opinions on the subject. In the survey, realtors were asked about the possibility of a pandemic induced recession, its impact on short sales, how short sales have affected their business, and how they can prepare for the upcoming economic challenges and opportunities caused by the pandemic.

Will the History Repeat Itself?

Overall, the results of the Real Estate Bees’ survey show a profession that is attuned to the economic health of the country. For example, economists had been predicting that a recession was inevitable even before the pandemic struck. Most of the real estate agents surveyed reflect this thinking, with only 15.6% believing that a recession will not happen.

One point that realtors made in the survey was the importance of knowing your market. They are aware that real estate markets in some areas will remain stronger than others in a Covid induced recession. Again, this mirrors the opinion of most economists.

The National Bureau of Economic Research (NBER) has pointed out that because of social distancing requirements, manufacturing jobs have taken a harder hit than businesses whose employees can work from home. Regions with a concentration of manufacturing jobs will be heavily affected. This could translate to more short sales in those markets.

56.6% of agents who were surveyed do not believe that short sales will grow to as many as there were during the Great Recession. They point out that compared to 2008, the interest rates are lower, there is much less housing inventory, investment property sales activity is higher, and government intervention has been much faster.

Their opinion is validated by the fact that today’s percentage of loans in forbearance of 5.6% is one third of the 17.6% of loans in forbearance in 2008 (Mortgage Bankers Association).

The increased number of agents who perform short sales are an indication of the long-term impact of short sales on the typical Realtor’s business. 63.4% of those surveyed stated that they now assist with short sales either regularly or periodically. Only 11.5% say that they have never encountered a short sale.

61.5% of those surveyed believe that there are increased opportunities in handling short sales transactions. Most of those agents, 40.4%, believe that knowing how to handle a short sale can be an advantage over competitors who avoid them.

21.1% said that since these properties are desired by investors there have been more opportunities for quicker sales.

Although short sale properties can be put under contract more quickly, the Real Estate Bees survey reports that short sales are more time consuming and difficult to close than traditional sales. 80.8% of the agents believe that this is the case. However, several realtors commented that once they built a pipeline of short sales they eventually began closing them regularly.

Crisis Prevention Measures for Real Estate Businesses

Successful realtors in the survey encouraged others to be proactive and incorporate short sales into their usual real estate marketing strategies. They discussed the need to make past clients aware of their expertise in handling distressed property sales in case those skills are needed.

Training and education were consistently mentioned as being the key to success in an increasing short sale market. As already stated, agents with training believe that they have an advantage over those who do not.

Several firm managers who were surveyed noted that successful completion of industry and trade association classes give agents additional professional designations. These include the NAR Short Sales and Foreclosure Resource (SFR) certification and the Certified Distressed Property Expert (CDPE) designation.

They suggested that once they have these certifications, realtors should include them in marketing to their past clients. These credentials should also be highlighted in targeted social media advertising.

Short sales require negotiating with the mortgage lender. Survey respondents recommended using people for this task who specialize in short sale negotiations. Some of them use outside negotiators like attorneys. Others have a person in-house who handles all lender negotiations for the firm.

The need to streamline the process came up over and over. 28.8% of those surveyed plan to incorporate a streamlined short sale process into their operations to help their business withstand a possible change in the economy. Since short sales take longer than a traditional sale, agents need to standardize their procedures as much as possible.

Realtors, particularly the firm managers who were surveyed, repeatedly stressed the importance of staying in touch with your database during a recession.

One lead generation strategy the survey suggested is to find homes that may be in forbearance and reach out to the owners. They mentioned that the NAR Realtors Property Resource (RPR) is a valuable tool for this kind of research.

Other ways to find short sale prospects with underwater homes that were discussed included networking with other real estate professionals like attorneys, mortgage lenders and brokers, and CPAs.

Some good ideas were shared about how to generally prepare for an upcoming recession. Most of them are simply good business practices.

Realtors were advised to perform a financial review of their practice. Activities and expenses should be examined for their profitability. The most effective practices should be emphasized and the least effective ones should be reduced or eliminated.

Those surveyed encouraged realtors to cut waste from their expenses. They suggested that realtors save as much as they can for a rainy day. This applies to their personal spending as well as their business.

Diversification came up frequently in comments by realtors in the survey. In addition to short sales, realtors were advised to look for other additional revenue streams. Some particular avenues that were mentioned were investment property sales and assistance with 1031 exchanges.

Some realtors pointed out their own success in investing in real estate as a part of their business.

Throughout the discussion on both short sales and preparation for a recession, realtors continually mentioned the need to improve one’s technology and social media presence. They believe that if business slows down, the time should be used to learn and improve in those areas.

The Real Estate Bees survey provides a comprehensive look at the real estate industry during the pandemic economy. Although realtors do not believe that short sales will match the 2008 levels, they will likely increase considerably in coming months.