The Lure of Distressed Properties Could Prove Distressing to Investors

by 23 May 2012

(TheNicheReport) -- The American residential real estate market is still reeling from the bursting of the housing bubble. Frustrated applicants who have failed to either purchase a new home or refinance an existing mortgage are looking at lease agreements as their best options, and the rental market is heating up as a result.

The rental market is luring more would-be landlords and real estate investors with their sights set on the bargains that can be found in the inventories of distressed properties. Banks are thus far pleased with this turnaround. Short sales, foreclosed homes and properties assigned to real estate-owned (REO) portfolios are being snapped up by opportunistic investors. The market of distressed properties is heating up, thanks in great part to a change of heart by the banks. Investors, however, should approach this market with great caution.

Over the last few months, the distressed property frenzy reported by some financial institutions and realtors has failed to improve the value of real estate. In fact, many homes are being sold at discounts so deep that they have managed to take away value from the residential housing market. According to Housing Pulse, a survey conducted by real estate analytics firm Campbell/Inside Mortgage Finance, all categories of residential properties in the United States managed to lose value in March. Distressed properties, REO homes, foreclosures, and even regular homes on the market slipped in ranges from 0.3 percent to 1.7 percent.

The value erosion can be attributed to lowball purchase prices that buyers and sellers are agreeing to in haste. That’s just one deprecating factor. Another negative factor is unfolding in metropolitan areas like Phoenix, where investors are rushing to foreclosure auctions and blindingly bidding on properties that are truly distressed, and not just in the financial sense. Hurried investors are outbidding each other in a frenzy and often walking away with titles to homes that are in major states of disrepair. Right off the bat these investors are in a losing proposition, as they will likely be forced to invest more in home repairs than the home is really worth.

The auction bidding wars mentioned above do nothing to existing home values since they are not counted as comparables by appraisers. These are irrational upfront investments that will be hard to recoup even with favorable lease agreements. The worst part of this situation is that it might create disappointed investors who may let their new homes sit in disrepair for a long time.

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