Affects Of Forclosure On Value

[Peggy Wright]

I recently had an interesting conversation with some collegues on the effects of forclosure on a house. A couple of appraisers said that just because a house went into forclosure, that it in will not neccessarily affect price. Yet, if you do a sales history search and a current sales grid while following a forclosure, they rarely sell for what other homes sell for, even if in similar condition to the comparables.

So, the homes that are in forclosure command a lower price (I believe this is because the public tends to shy away from houses with a bank owned sign, and the bank needs to deal). Now an investor buys the property, needs paint and carpet, perhaps, gets it spiffy, puts a non - bank owned sign in the yard and it sells for market rate. Yet many mortgage companies are coming up with seasoning issues to defray the "flipping schemes". How do we best analyze and document how a forclosure can legitimately sell for a lower price 6 months or less before it sells for market price with new paint and carpet- with no scheming involved?

 

[Mountain Man]

Now an investor buys the property, needs paint and carpet, perhaps, gets it spiffy,

Don’t forget about the profit that investors expect, other wise why mess with it?

How do we best analyze and document how a forclosure can legitimately sell for a lower price 6 months or less before it sells for market price with new paint and carpet- with no scheming involved?

Well, it usually take a lot more than just paint and carpet. I have never bought a foreclosure that need such easy, simple work. First of all, you’ll have 3 tons of trash to haul off (that’s our average amount) , THEN you get to start work. :mrgreen: I provide them a copy of the foreclosure deed, before and after pictures, and a list of the repairs and cost.... including my profit. I've never had a lender or UW question the deal, after they saw what we have done, when good hard facts are given.

 

[Jeff Horton]

Originally posted by Peggy Wright@Apr 13 2003, 09:18 PM
A couple of appraisers said that just because a house went into foreclosure, that it in will not necessarily affect price. Yet, if you do a sales history search and a current sales grid while following a foreclosure, they rarely sell for what other homes sell for, even if in similar condition to the comparables.

In my area is matters! I think the main reason is we have a 1 year Right of Redemption. I don't know if that is normal in other states. The previous owner can within 1 year buy the house back from the new owner. If any improvements have been made they have to pay for those plus interest (I think).

I have only heard of this happening one time and that was on a very high end property that a local big time contractor lost. But I think it scares most buyers and the investors are the only ones that are usually willing to buy it.

As for you question I think we just tell what happened, what we know about the deal. As was said, there is normally a lot of work that went into the house that justifies the higher sales price.

 

[Peggy Wright]

Thanks for your replies. I understand the amount of work etc. as I buy and renovate forclosures also. What we are experiencing here, is a lot of NEW houses in the $80-$150 range going into forclosure in the 2-3 year after being built because of the 2/1 buydown the builders are doing to get them in, and the fact that their taxes come in the second year at about a $150.00/mo increase. So what happens, is in year two interest payments and taxes go up. Then in year three interest goes up again. People are paying about $300-400 more per month in year 3, and they loose the house. AND for the most part, they just walk away, no damage, nothing. BUT the houses still go significantly lower than market, I think, just because they are in forclosure. I believe the public perception is that if someone walked away, there must be something wrong. I have had friends ask me about this very issue. Why would they buy a forclosed house? The pipes could all be busted! (and they could).

Also, what about the effect of multipe forclosures in one subdivision. I went to appraise a house last week and when I turned the corner for a comp, there were 4 HUD forclosures on one block of about 16 houses. Do I wait and see what they end up selling for, before determining that it is a negative on a neighborhood?

Please keep in mind, Indiana leads the nation in forclosures. We have a lot of track builders who are the cause for it. People are getting into new pretty houses that they simply can not afford because they see how low that first year's payment is, and most are not disclosing the taxes in arrears thing. BTW, typical taxes on a new, $80 - 120K house.........$2000/year!

Thanks

Peggy

 

[Dee Dee]

Hi Peggy,

If I found 25% of the homes on a particular street were foreclosure sales, I wouldn't touch 'em with a ten foot pole either. Not because they're foreclosures, but because it would indicate that the neighborhood is on a downward trend....hardly a good investment risk if the bottom of the market has not yet arrived. You're talking about entire neighborhoods that were built based on a false sense of affordability by naive buyers that will now need to be replaced by new owners who can make payments with traditional financing.
I suspect that in the near future lenders are going to be stuck with a second round of foreclosures, ones that were bought by naive investors who failed to recognize a market adjustment (downward) in certain neighborhoods. It isn't a 'bargain' if the bottom hasn't been reached yet.

 

[Pamela Crowley (Florida)]

Good post Dee Dee!!!

Forecasting Opinions - I do agree with you but really wish I had a crystal ball to know for sure.

 

[Dale Smalley]

It really depends on the market and the condition. Some markets are so hot that the properties are sold above the listing. And some are solely REO markets. Where you have a mix of home buyers and investors it usally comes down to condition. If the home just needs some minor repair there is no real effect on value but when the repairs are so extensive that only an investor will touch it you also need to consider what profit they need to make the deal work for them. On those it runs about 40% in total off the repaired value.

 

[wyecoyote]

Peggy,

REO sales it depends on the market. I know of at least two areas that 50% of all sales are REO sales FSBO's and MLS sales directly compete with the REO sales. These markets come down to the condition of the house and there is typically not adverse impact for the REO property. Other markets you can see a tremendous difference for an REO property vs a FSBO vs a MLS sale. The one thing that really gets me though is when you do the REO sales they want to know what the market value of the property is and do not want you to compare it to non REO properties. I did one the other day where I could see that the REO properties sold anywhere from 10% to 20% below market value after figuring in the overall condition of the properties.

Ryan

 

[Dee Dee]

Originally posted by Ryan Nyberg@Apr 14 2003, 10:38 AM
The one thing that really gets me though is when you do the REO sales they want to know what the market value of the property is and do not want you to compare it to non REO properties. I did one the other day where I could see that the REO properties sold anywhere from 10% to 20% below market value after figuring in the overall condition of the properties.

I have my own theory on that observation.
I think it's because the lenders are catching on to a common 'investor' practice that could cause them problems in the future, so they're hedging their risk.
My observation is that a large number of the REO purchases are made by investment 'flippers' who have secured loans based on the property being owner occupied, when in fact they often have no intention of living there and/or making the payments for any length of time. Many of us who have to appraise these REO resale flips get the story about how the owner has had sudden health problems or job relocations given as their motivation to sell shortly after buying the property. Yeah.....right. <_< .
Here's the hitch....if the market slows down or starts going backward, or if the investor isn't savvy enough to realize the costs that can add up in a rehab, then they may have to sell quick to avoid mortgage payments that cut into their profit margin.
By requiring that only REO sales be used as comps, the lender is making sure that if the buyers 'flip' plans don't pan out, they (the lender) isn't securing a loan based on top-of-the-market values. There are no promises that the investor/buyer will put any serious elbow grease or money into updating the property, and if they don't those homes will be competing with the bottom of the market in that neighborhood, which is the other foreclosure properties.

 

[Peggy Wright]

Great responses!