Posted by: docktohome | December 7, 2010

Distressed Sales & Market Value

Many investors in real estate today acquire properties through a short sale or foreclosure.  These circumstances allow both investors and retail buyers to purchase properties under market value.  But how do these types of transactions affect the real estate market??  There is a positive side that comes from purchasing a short sale and a foreclosure but there are negative consequences that must also be considered.  Since there are many so called creative real estate investors out there today, why can’t we come up with another solution to this mortgage downfall?

Benefits

The most basic benefit of acquiring these types of deals is that you are purchasing real estate on the market, which is better than not making the purchase at all.  Another benefit is that the buyer is getting the property typically below market value, or even at a deep discount.  For a homeowner who has decided to do a short sale on their home they have avoided a foreclosure and the bank has agreed to take less then what is owed.  So far this seems like a reasonable solution, the homeowner walks away and the investor gets a great deal.  Now if a homeowner or investor is unable to negotiate a short sale the home will go into foreclosure.  In this case the homeowner has lost their home but the investor can still purchase these properties at a discount.  This scenario isn’t all roses as the homeowner has lost their home but on the buyers side they are still getting real estate at a discount.  Off the top it seems that these situations (short sales or foreclosures) provide an upside whether it be for the investor, homeowner, or both.

Disadvantages

So what are the disadvantages of doing a short sale?? Imagine you are a homeowner who has maintained current payments and do not have a loan larger than the value of your home, you decide you would like to sell your home.  As a homeowner you have kept the home in good condition and there is almost no deferred maintenance so you feel that your home is worth at least fair market value.  You hire a realtor to list your property, but as they pull up comps they find that other homes in the area have sold, are in contract, or are for sale at a price much lower than the value of your home.  Why is this? Because a large percentage of these homes were sold in a short sale and/or are in foreclosure.  The low prices that are offered by a short sale or foreclosure affect the values that can be placed on a traditional sale while also hindering the ability of market prices to bounce back.  As an investor the low prices are enticing but I think we should consider what affect these types of purchases have on the recovering of real estate prices.

The national average according to an April 2010 article on the Business Insider online says that 29% of all sales are distressed sales.  This percentage varies greatly among different areas in the country.  Here is one graph that accompanied the article and depicts some areas of the country where distressed sales make up almost 65% of all sales.

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Responses

  1. I find this interesting however, in my opinion, the creative real estate investors who have liquid assets and are able to purchase foreclosures / short sales are actually helping the economy. If these investors did not exist, the value of the housing market would decline until a new equilibrium of supply and demand was met. The only solution to this problem I could think of would be if the government got involved and bought the distressed homes, then rented them out, and eventually sold them when the economy is fully recovered but considering the large percentage of distressed homes as well as the large deficit already faced by the government this would not be a practical solution. In a socialist country finding a solution for the common good would be more practical however in the our capitalist country each individual is pursuing their maximum profit and when it comes down to it, cash is king.

  2. Adam, first of all thanks for taking the time to read and comment on my blog I really appreciate it.

    I agree with you that those who have the ability to purchase should regardless of what way they decide to do it, that being said I think it should be kept in mind the value that these homes are being purchased for. A creative solution to a shorrt sale would be to exchange the under-water property with someone that needs a big tax break, meaning they are willing to take a loss on monthly income because they have to much income.

    The absolute worst idea would be to get the government involved, they would make the housing market even worse. Just imagine having to pay the government for one more thing in your life. No thanks!

  3. I like your idea regarding the transition of a proprietor who is upside down to a wealthy person who could absorb the negative draws from tax breaks however it is not realistic. It is illogical to assume someone who is making that level of income would buy a property for more than its current market price, even if the difference was filed for in a tax write off. If this was the case, tax revenue would decline and would only negatively impact the country. The government is, more than likely, the only viable source that would be able to boost the recovery of the housing market. Government intervention, through the Federal Reserve, has been known to be effective in guiding the nation out of a recession.

  4. Have you crossed this bridge personally or known someone who has tried this approach? I feel it is illogical to come to a conclusion that something cannot be done until I have tried it myself. As far as tax revenues are concerned this would be no different then someone taking a loss for a bad stock they had purchased, or moving to job that produced less income… For me I feel that trying to reduce your amount of taxable income is a good thing, the less you pay in the taxes the more you put into the economy and more specifically your money is going where you think it belongs and not the government.

    If your concerned about tax revenues then you should be aware that 47% of Americans don’t pay at all! The top 5% pays more then the other 95% combined…. I don’t know about you but these are distrubing figures. I want to be very wealthy but I dont want to pay for everyone else while half of the population isn’t contributing…. So I will try tax breaks like these all day long


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