Your home: Short Sales and Foreclosures

During the recession, buyers were excited about short sales and foreclosures. If I had a dollar for every first time home buyer who met with us and said, “I want to buy a short sale or a foreclosure,” I would be retired by now. And in most cases, it only took one day out actually looking at distressed properties for them to say “never mind,” because they realized how much work it was going to take to bring them up to good condition. Or sometimes just the long timelines associated with negotiating with an overwhelmed lender would do them in.

That said, on occasion we would find a diamond in the rough. A home whose owner had fallen into hard times but who had continued to maintain the home up until they were asked to leave. These homes were every buyer’s dream! A ton of instant equity and just some cosmetic requirements to turn them into a show stopper.

These so called “diamonds in the rough” are few and far between these days. And for a good reason. The distressed property market as diminished significantly. Just the other day, I shared with some clients that in 2011 almost 40 percent of the sellers that we worked with were in a negative equity position. Translation: They had to write a check at closing to sell their home. It was brutal. I have had selling clients of mine write $20,000 checks to sell a home so they could get to a job opportunity that they could not pass up. Just consider that for a minute. For generations, we have been told that real estate is one of the most sound investments. And it still is, for the long term. But for that 40 percent in 2011, it was hard to believe.

According to Keller Williams Realty International, in 2011 40 percent of all sales nationally were either a short sale or a foreclosure sale. Compare that to the end of 2014 with distressed properties only representing 9 percent of all sales nationally and you can see why those previously mentioned “diamonds” are hard to find these days. And the distressed properties that are for sale these days are generally in pretty bad shape. Take a look at the following chart to see how distressed sales are trending downward:

DIstressed-sales

During the recession, many Americans were affected by the failed economic conditions. Many of them lost their homes. And it seemed that many of them still maintained their homes. Conversely, today it seems that as the economy has improved dramatically, the distressed properties that are available for sale are in much worse shape. They are not for those with a weak stomach that is for sure.

Today’s distressed property market is dominated by investors for either a remodel or, in some cases, a tear down and rebuild. Professional investors more often have the skill set and the resources to tackle even the nastiest distressed property. During the recession, thanks to HGTV, it felt like everyone had decided to “flip this house” and it was a mess. I cannot tell you how many homes that we showed during that time that were what I call “lipstick on a pig.” Essentially the investor who purchased the home threw on some new paint and installed some cheap fixtures and tried to resell the home for a HUGE profit. I am so glad those days are over.

Thankfully the market purified itself thanks to the recovery, and there are really only a handful of flippers around that operate a successful business in our area with a consistently good product. For these select few, the demand today is certainly high for a properly remodeled home. And buyers are glad to pay a premium to get one.

Distressed properties will always be a part of our real estate market. They are not going away. If you would like more information about the benefits and challenges with distressed properties, feel free to email me with your questions.

Your Home: What’s the difference between a short sale and a foreclosure?

A short sale is when you sell your house at a price that is less than the balance owed on your mortgage. The bank that holds the mortgage must approve the home for a short sale and will ask for documentation explaining why the property should be allowed to sell “short.” Typically the seller still lives in the home when it is offered as a short sale. Therefore a buyer’s initial offer will be negotiated with the seller first and then must be approved by the bank. So, in a sense, you are negotiating with two parties at the same time. The bank, however, is the final authority. All terms and agreements are not final until the bank signs off. A typical short sale can take anywhere from 90 to 365 days to process. That’s right: a full year. It all depends on the lender. The short sale market is not for the impatient or those on a specific timeline.

Foreclosures

A foreclosure is when a lender forces the sale of a property in an effort to recover the balance of a home loan. In this situation, the homeowner has stopped making payments and is most often out of the home. This is a true bank-owned property. The bank will then order an appraisal and market the property at a price that will liquidate the asset. And to the bank, it is exactly that: an asset. There are no emotions involved at all. Most of the time, the asset manager or negotiator at the bank has never seen the home or and might not even know where Prairie Village, Kan., is. Therefore, the negotiations can be very cut and dry. A foreclosure can be processed and closed in as little as 30-45 days.

Both are more commonly known as “distressed properties” and are fortunately becoming less of a factor in today’s market. As a point of reference, in February 2009, distressed properties represented 49 percent of the national real estate market. As of December of 2012, only 24 percent of the national market was distressed properties, of which 50 percent were short sales and 50 percent foreclosures. The reduction in the distressed property inventory is a major contributing factor to the housing market recovery.

Even as the distressed property inventory declines, the HGTV generation is still clambering for them. Quite often my wife, Leah (our Lead Buyer’s Specialist), will meet new clients for the first time and they will immediately ask about short sales and foreclosures. There is a misconception out there right now that you commonly find these little “diamonds in the rough” for way less than market value and all they need is a little paint and some TLC. It is rare that a property like that is available.

Typically the home owners have been in financial difficulty for some time and most often property maintenance is the first expense that they eliminate from their budget. So the homes are usually in disrepair and some are uninhabitable. If you are an investor, a distressed property can be a great way to purchase an investment with immediate equity whether your intention is flipping the home or holding it as a rental. But if you are purchasing a home for your primary residence, the budget for improving a distressed property can be overwhelming.