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2011-05-09 13:38:50
How Distressed Properties Impact Neighboring Value

Last month we posted 2 BLOG articles with fantastic maps showing the shadow inventory by state and the percentage of distressed properties by state.  Today we want to discuss the impact of distressed properties to neighboring home's values.

Banks are finally getting their foreclosure paperwork in order. They will start bringing larger numbers of distressed properties to market over the next six months. We must realize that this influx of discounted inventory will have an impact on the values of neighboring homes. How large an impact?

According to RealtyTrac a foreclosure sells for 59% of the value of a similar non-distressed property. Therefore, this foreclosure inventory will affect values in two ways:

1) As Discounted Competition

Obviously, a segment of purchasers will prefer the discounted property based on price alone. Even if the distressed property is in need of substantial repair, the buyer is getting the property at a 41% discount. Price is determined by supply and demand. Distressed properties will eat up a portion of the demand for housing and that will put downward pressure on all values.

2) As Comparable Sales on Your Appraisal

Even after you put your house into contract, this distressed inventory can still impact your transaction. Unless your purchaser is paying all cash, there will be an appraisal of your property by the bank who is giving the mortgage to your buyer to complete the purchase. Because of the volume of distressed properties selling in almost every market, banks are instructing appraisers to use these discounted sales in determining values of non-distressed sales. We can argue the logic of this some other time. At this point, we must simply be aware that this is taking place.

Distressed properties are about to increase

We have been in the ‘eye of the storm’ regarding the shadow inventory of foreclosure properties for the last several months. Foreclosures have been delayed by court systems mandating that the banks have their paperwork in order. Just last week, Fannie Mae addressed this issue in a report:

“Our foreclosure rates remain high. However, foreclosure levels were lower than what they otherwise would have been in the first quarter of 2011 due to the delays caused by servicer foreclosure process deficiencies and the resulting foreclosure pause.”

In their First Quarter 2011 Financial Results Supplement, Freddie Mac, also addressed this issue last week:

“We expect the pace of our REO acquisitions to increase in the remainder of 2011, in part due to the resumption of foreclosure activity by servicers, as well as the transition of many seriously delinquent loans to REO.”

More foreclosures will be coming to the market throughout 2011.

Distressed properties impact prices of surrounding properties

Clear Capital discussed this point in their May 2011 Market Report. In the report they used two graphs to emphasize the connection. In the first graph, they charted the national saturation rate of foreclosures (REOs) from 2008 until the present.

In the second graph they charted national home prices during the same time period.

We can see that as the saturation rate of foreclosures increase, prices decrease.

Bottom Line

More foreclosures will be coming to market and they will have an impact on values. If you are considering selling, now might be the best time. You want to be sold and closed before these properties come to market and impact your price.  How will your neighborhood be affected? I invite you to contact me, your local real estate expert, to find out.  Please call or email me today - 801-858-3070 | colin@colinthomashomes.com

 
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