Five
years ago the real estate market in most of the country was awash with REO’s (“Real
Estate Owned” by banks after foreclosure) and short sales. Lenders were anxious to get these properties
off their books, and they were willing to accept offers from qualified buyers
that reflected their level of motivation.
That was then. Today the flood of
foreclosed properties that entered the market after the real estate market
crash of 2008-2009 or so has long been absorbed into the market. In today’s market, the inventory of resale
homes—“distressed” or otherwise—is low in most regions of the country. That is certainly the case in the Charlotte
metropolitan area.
I
still encounter buyers—even investors—who perceive that an REO (a “foreclosure”)
or a short sale must be a bargain. I
also still encounter buyers who insist on making offers well below the listing
price of a home, regardless of what comparable homes have recently sold
for. Both of these perceptions are
incorrect in most cases. Of course, each
property presents a unique case and should be approached that way. But the notion that “foreclosures” are good
deals for the buyer/investor by their very nature is generally incorrect in
this current “seller’s market,” characterized by low inventory.
Despite
popular belief, banks are generally not stupid.
They also have some understanding of the current market, and they also
know that inventories or low. For that
reason, they are quite unlikely to price their REO properties below market
value. And if they price their homes at
market value, then REO properties in this market are no greater a value than
any other resale home.
The
thing that can make an REO or a short sale something into which the
buyer/investor is more likely to build equity quickly is condition. It is possible to
buy an REO that is in poor condition, and pay a price that reflects the poor
condition. Then rehab or update the home
more cost- effectively than most people might and thereby build equity more
quickly. But if you truly pay market
value for an REO in poor condition, you may not be getting the bargain you
think you are getting—unless you keep the cost of renovations firmly under
control. The equity you build comes from
cost-effective renovations, not the purchase price you paid. It is quite
conceivable to pay a “discounted” price for an REO (or any other property) based
on condition, but spend more than the discount for renovations. In such a case, the buyer will have ultimately
spent more than market value for the home and have no equity in it at all. This is not a game for the faint-hearted or
ill informed.
Very
similar considerations apply to short sales.
Remember that a short sale by definition is a home on which the amount
of the mortgage exceeds its market value, and the seller is therefore asking
the lender to accept less than it is owned on the mortgage to enable the seller
to sell the home. As market values have
risen in the last several years, there are fewer and fewer short sales. If market values are up, why would a bank be
willing to accept less than the full amount it is owed unless the market value
of the home truly is significantly lower than the mortgage amount
outstanding? The market is no longer
flooded with distress sales competing for a small pool of cash buyers.
The
best practice in reviewing REO’s and short sales is to research recent
comparable sales—do your homework. There
can be no assumptions that these properties automatically present value. They really do not anymore—no more so than
any other resale property. As our
company motto goes: “Solid analysis identifies great opportunities.”
We
would be happy to answer your questions and help you identify the next great
opportunity. It’s what we do all day,
every day. Feel free to contact us at
(980)875-0950 or by visiting www.EricDorerRealEstate.com.
