Is there a price difference between REO properties, short sales, and arms-length transactions?

What sort of a price difference is there between bank-owned properties (REO), short sales, and arms-length transactions in the market? For an example, let’s take a look at a trend graph of all sales in Rancho Cordova below, where blue dots are REO sales, green dots are Short Sales and red dots are typical arms-length sales (per Sacramento MLS).

Each neighborhood, niche, and location will differ in results, but generally speaking, like the data above seems to show for Rancho Cordova sales over the past 2 years, buyers tend to pay more for houses that are non-distressed transactions (notice how the red dots on the graph above tend to be located toward the top and NOT the bottom). When it comes to REO properties, it looks like the price level is a bit higher overall than short sales, though there are quite a few short sales on the upper-end of the market too. In fact, both Rancho Cordova and Sacramento County saw a 7% increase in short sales last year in comparison to the year before, so clearly there is a greater acceptance for short sales in the marketplace.

One important observation is that most of the sales at the bottom of the market are bank-owned. Why is that? Investors typically gobble up the lowest end of the market with all-cash offers because fixer-type properties at the lowest level will not qualify for conventional or government financing. This means first-time buyers utilizing conventional or FHA financing will usually need to look to a price level above the “all cash” market. In light of this segmentation, imagine scraping off the bottom layer of all-cash foreclosures. What would you find? You’d still see many REO properties, but you’d certainly see a good amount of Short Sales too. 

Overall, in my experience as a Sacramento-area real estate appraiser it seems the market price tier goes: 1) Arms-length sale; 2) REO; 3) Short Sale. This is common sense really, but it’s another thing to prove that by crunching numbers, making trend graphs, and observing data in the marketplace. But there are certainly cases and stories and sub-markets that might show a different order for whatever reason - especially depending on the supply of housing inventory and particulars of a given property. Interestingly enough, sometimes there is little to no difference between non-distressed sales and REO sales. For example, what does it do to pricing differences when 90% of all sales in a market are either bank-owned or short sales? In a case like this, since the market is clearly saturated with distressed sales, it’s probably a safe bet to assume foreclosure-pricing is indeed the market and will set the pace for what buyers expect to pay for properties (see a previous post on Patterson having 96.5% of all sales as distressed). In a case like this, there may be no verifiable difference between REO and non-distressed sales.

Let me know if you have questions or insight. Comments are welcome.

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