Short sales, once a rare event in local real estate market, today are nearly as prevalent as foreclosures as lenders seek to avoid adding to their foreclosure inventories and troubled homeowners opt for a faster way out of default. (See Banks and Investors Learn to Love Short Sales).

Historically, foreclosures have been discounted 10 percent or more.  Now, as short sales become more popular, the difference between and short-sale discounts and foreclosure discounts is shrinking, according to the latest LPS Home Price Index.

In April 2007, as the housing bubble burst, foreclosures sold at a 19 percent discount and short sales sold at a discount of 10 percent.  As the volumes of both forms of distressed sales have increased, so have the discounts, but short sale discounts have increased more.  Today foreclosures sell at a 29 percent average discount and short sales at an average discount of 23 percent, a difference of only 6 percent.   The National Association of Realtors reports the difference is even less.  NAR reports foreclosures are discounted 18.8 percent as of March 2012 while short sales have been selling at a 15.8 percent discount.

The shrinking discount may make short sales more attractive to buyers than foreclosures.  In general, home sellers undergoing short sales are motivated to do so to protect their credit to the extent possible and they tend to maintain better condition of their properties than borrowers undergoing foreclosure.  Foreclosures also may be vacant for long periods of time.  Today’s average processing timeline for foreclosures is about a year, and substantially higher in some judicial states.  With a short sale, the property may not be vacated at all during the sales process.

LPS suggests that the task of managing the large number of distressed properties in the market today is immense, which may, in some cases, contribute to suboptimal pricing of some distressed properties.  Since 2007, discounts for both foreclosures and short sales have increased, but short-sale discounts increased a bit faster.