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Distressed Homes: Do or Don’t?

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Posted On: 07/08/2015

QUESTION:

We’re interested in buying a foreclosure or short sale but there seem to be fewer and fewer of these properties. Are distressed properties still a good investment?

ANSWER:

Some are; some aren’t. No one is buying all distressed properties, they’re just buying a specific property here and there so the investment value of a particular property can only be established by looking at such things as the sale price, the need for repairs, the local sale and rental markets, etc.

The National Association of Realtors says that, nationwide, distressed sales are a smaller part of the market, just 10 percent of all existing home transactions in April versus 15 percent a year ago. Discounts still are available; the NAR says in April foreclosures typically sold with 20 percent off, while short-sale buyers were getting 140percent discounts.

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It’s worth noting that there’s a cascade of discounts generally associated with distressed properties.

First, short sales tend to have the smallest discounts because they’re typically occupied. This is important because with vacancies there can be maintenance and vandalism problems. In a sense, short sales are likely – but not always – to be in better shape than foreclosures.

Second, there are likely to be bigger discounts when a home is foreclosed and sold at auction. Part of the pricing issue here is the assumption that if the property could have been sold with a short sale that would have happened.

Third, if a property is foreclosed, put up for auction and does not sell then the lender takes possession and the property and it becomes “real estate owned” by the lender. REOs are often available at deep discount because the lender doesn’t really want to be in the real estate business, and the property could not be sold at auction.

Lastly, it should be mentioned that three factors can produce the largest REO discounts:

• The longer a lender has an REO the more likely the discount. Why? The lender does not want to pay for maintenance, security, insurance and taxes.

• Weak local markets mean bigger discounts. Because a local market is weak, what choices does a lender have other than to sell at a discount? Of course, weak markets may also suggest substantial risks.

• Volume counts. It’s possible to buy REOs in bulk. At one real estate conference I was offered 70-percent discounts if I bought at least 100 units at a time. The question, of course, is whether the properties were worth buying even with such huge price reductions.

If you have an interest in short sales, foreclosures and REOs speak with local brokers, settlement attorneys and contractors. Ask about such things as sale and rental trends and whether a specific distressed property might really be a diamond in the rough.

© CTW Features

Email peter@ctwfeatures.com. Due to volume, not all questions may be answered.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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