Foreclosure vs. short sale for developments: which is better?

Some tough lessons have been learned in South Florida’s troubled real estate market as once-distressed assets return to being productive properties.

One thing that’s coming into focus for banks: It costs less to approve a short sale for a development than to go through the foreclosure process, according to data compiled by Condo Vultures Realty. (See slide show above for some examples of large properties that have gone one of those routes and the outcomes.)

Peter Zalewski, a principal with the Bal Harbour-based real estate consultancy of Condo Vultures, expects lenders to move toward more short sales this year. They get a comparable price without the costs of holding on to a property as it goes through foreclosure, he said. “It just makes more financial sense.”

Still, short sales have drawbacks for brokers, who prefer the quick REO sale versus the months of uncertainty that comes with a short sale, said Melissa Rubin, broker and vice president at Platinum Properties International. (REO refers to “Real Estate Owned” by the bank because the property did not successfully sell at a foreclosure auction.)

The biggest plus with an REO property, she said, is that once the bank takes over, it can list the property, get an offer, accept it and close, all in 90 days. 

Lenders have several factors to consider. Lani Kahn Drody, president and broker of Lowell International Realty, said a lender may set a price based the last appraisal it has on its books. If that appraisal is dated, the property won’t sell and it will sit until a new appraisal is completed, resetting the price to reflect today’s market.

Another consideration for lenders is during what quarter they want to recognize the loss on their books. Or, when regulators force them to recognize that loss, Drody said.

Sometimes it’s referred to as “extend and pretend,” she said, which involves banks dragging out the process with the hopes that the market will rebound so they won’t lose as much money.

Meanwhile, all the inaction cost banks money to maintain the property. “Large institutions, they have so much in their portfolios that there’s money left on the table,” Drody said.