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Distressed Properties: Discounts and Difficulties

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Most buyers want to make sure they get a 'good deal' when they purchase something. Purchasers of real estate are no different. That is why many decide to buy a distressed property (a foreclosure or a short sale). The National Association of Realtors (NAR) last week reported foreclosures, on average, sell at a 22% discount and short sales at a 17% discount. It sounds like a pretty good decision to buy a property at those levels of discount.

However, the purchaser must realize that there are added obstacles in these type of transactions. Many foreclosures are left in less than pristine condition by the previous owner and some have title issues that must be corrected before they can change hands. Many short sales have multiple loans that must be negotiated before an offer is accepted by all parties to the transaction. This can take months in many cases. Purchasing a non-distressed property will probably have a lot fewer pitfalls.

"Patience Equity"

Does that mean that you shouldn't consider a distressed property? Not necessarily. Just understand that there is an additional cost to purchasing a foreclosure or a short sale: the cost of time. For some, the 17 or 22 percent discount is well worth the extra time they must spend on the transaction. We like to call that savings your 'patience equity'. Patience equity will require you to be patient however. Realize going into the deal that there will be obstacles to overcome and make sure you give your real estate professional time to overcome these challenges. Again, patience equity will require your patience.

Bottom Line

Buying a distressed property could make sense for you as long as you realize you will need to be VERY patient with your real estate agent throughout the process. If you are, you will own a home that has considerable equity the day you move in.

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6 Responses to “Distressed Properties: Discounts and Difficulties”

  1. Joan March 25, 2011 at 8:42 am # Reply

    I wanted to ask you this at the Leading RE conference because so many people I know are pointing to the variance in sales prices of short sales vs. REOs as one of the reasons banks will be more willing to negotiate succcessful short sales (as they will capture more return): Does the data compare all properties that closed at the same time? I ask, because in a declining market, contract dates are going to have a real impact on this. If you look at all sales that closed in say, December, and the short sale contracted in June, and the REO in October (kind of typical time frames for SS vs. REO) a monthly market decline could account for at least some of the differential, couldn’t it? Does this make sense? When training my agents to prepare a BPO I ask that they look at contract dates as well as closing dates, and evaluate the days from contract to close, and possible impact of a continuing decline. Advice?

    • Steve Harney March 28, 2011 at 1:31 pm # Reply

      Hi Joan,
      It was great seeing you in Vegas. As far as your question:
      1.) If you are advising a client when doing a BPO, your thoughts make sense. However…
      2.) As far as the banks are concerned, we must realize that to foreclose on a house right now takes, on average, over a year. They can get a short sale on the market immediately. That more than compensates for the extra contract time for a short sale. As you mentioned, in a declining market, time definitely matters.
      Hope this helps.
      Steve

  2. ralph@foreclosure information July 31, 2011 at 6:39 am # Reply

    As someone who actually bought a flat from a mortgage company, I can attest that, while it needed a good clean, no obvious trashing was done. The previous owner had done a runner on his mortgage and now lives in Australia. The biggest annoyance was actually getting an old charge from the managing company off our account – stupid bank didn’t bother paying it and it sat there until we took possession as they did not declare it to our conveyances. Yes there are pitfalls but also advantages the previous owner left us some decent dining room furniture and up-lighters.

  3. obama loan modification October 13, 2011 at 6:23 am # Reply

    I think that distressed properties may be lucrative at the beginning for its attractive discount but later home improvements may impose twice the amount you saved in the discount. In that case repossessed property sold by a bank to meet the outstanding amount of the mortgage rate is much cheaper than the distressed properties.

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