South Philly Real Estate Blog

Distressed Sales Offer Opportunities for Buyers

You can’t always judge a home buying opportunity by its cover. 

 

Distressed properties, those with owners whose mortgages are higher than the value of the house or who are being foreclosed upon, may not be pretty, but they could be just right for the right buyer.

 

As many as four out of 10 home sales today involve distressed properties.

 

The term distressed can mean homes that are in some stage of the foreclosure process. It can also refer to short sales, where the home is sold for less than what the seller owes on the mortgage.

 

While there are buying opportunities in foreclosures and short sales, the process can be very complex.

 

Because distressed property owners are often burdened with debt, many of these homes are abandoned or in disrepair. The key to buying a distressed property is working with professionals – beginning with a Realtor who understands where to find distressed properties and how to navigate the purchase. 

 

You’ll also need a good home inspector and perhaps a real estate lawyer to work through the legal tangle that can occur when owners have walked away from their property or have sunk into unbearable debt.

 

The foreclosure process includes three different stages – pre-foreclosure, auctions and bank-owned or (real estate-owned – REO).

 

Pre-foreclosures are homes where a Notice of Default is publicly filed and the property owners are in default on their mortgage. Based on the state, owners have between three weeks to a year to remedy their problem.

 

Foreclosure auctions are known as the second state of foreclosure. A sheriff or trustee sale notice is publicly filed and the foreclosing lender “hosts” an auction. The foreclosure sale begins with a minimum bid that includes the loan balance, any accrued interest, plus attorney’s fees and any costs associated with the foreclosure process. Successful bidders receive the property in “as is” condition, which may include someone still living in the property. There may also be liens against the property. 

 

REO properties are the result of unsuccessful auction sales. Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Then the property reverts to the bank. 

 

In this stage, the bank will handle the eviction, if necessary, and may do some repairs. It will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. 

 

At this point, Realtorswho know the foreclosure process are crucial in not only identifying opportunities for buyers, but also in attending to all of the baggage that comes with such properties. 

 

Realtors can help guide potential buyers through the process – from identifying the right property to negotiating the transaction.

 

When the unthinkable happens, selling a distressed home can help the owner alleviate an unfortunate financial situation. The community also benefits as the new owners assume responsibility for the home’s upkeep.

Keeping Your Pains and Gains Straight

With some recent media reports about real estate losses, housing slumps and home price declines, it can be easy to lose perspective so it’s time for a reality check. 

When you look closely at who’s experiencing real estate gains and losses, the overall picture comes into focus.  Short-term fluctuations don’t have as much impact on owners and investors who bought with a long-term perspective.

Over the past three decades, home values have risen an average of 6 percent annually. Of course, all real estate is local, and markets vary by region. In some markets, people who bought homes within the past year or two have seen the value of their investment go down. But real estate is not a quick-in, quick-out investment.

According to statistics from the National Association of Realtors^Ò, a buyer who purchased a median-priced home five years ago has seen an average home value gain of $54,000 during that time; in Las Vegas, the gain averages $150,000, and in Miami, the same buyer would have averaged a $200,000 gain.

Real estate market conditions are like the weather forecast – the local conditions are much more meaningful than national data.

Even so, some homeowners who have seen gains over the long term may perceive losses because of short-term market fluctuations. For example, buyers in Anaheim, Calif., saw an average median price increase of 13 percent between 2004 and 2006. In 2007, prices there have declined 0.6 percent – a bit lower than last year, but still leaving a healthy gain from three years ago.

In most cases, consumers and homeowners who are in it for the long-term will come out well ahead.

The long-term value of housing as an investment is compounded by the power of leveraging. A $10,000 used for a down payment on a median-price U.S. home at a typical home price appreciation of 5 percent will return $110,000 after 10 years. The same $10,000 invested in the stock market appreciating at 10 percent annually will return $23,600.

No wonder the Federal Reserve shows consistent year-after-year results of the staggering difference in net worth between homeowners and renters. In a recent study, the average homeowner had $184,400 in net worth versus only $4,000 for the average renter.

 

History also provides its own type of perspective. In hindsight, times of crisis often turn out to be times of opportunity. With over 4 million net new jobs added in the past two years – a timeframe during which the volume of home sales have steadily fallen – a significant pent-up demand has developed. As a result, home sales and prices are forecast to rise in 2008 compared to 2007.  

In many areas, this may be the best time in years to buy a home.  Smart and serious investors look at the long term. Those investing in a home and keeping it for a typical holding period of six to 10 years will likely see their investment pay off financially. At the same time, they will enjoy all of the non-tangible benefits of homeownership.

So although some homeowners may be experiencing short-term pain, those with a long-term perspective will more than likely see overall gains.