Distressed Property Pushes Value Lower Everywhere
It simply stands to reason that distressed property sold at public auction would push California real estate prices lower. It will also have a negative effect in mortgage interest rates. Because more and more foreclosed properties are showing up this really is affecting values nationwide.
Now when the banks start unloading their “Shadow Inventory” we will really have problems. Right now it is estimated that 600,000 to 800,000 homes that have been foreclosed by banks are not on the market yet. These homes are called REO property. REO means Real Estate Owned by a bank or other financial institution.
Every single home buyer who finances their purchase needs an appraisal. The lender requires it and a wise consumer will demand it. Most foreclosed homes are sold as is without appraisal. Most will not allow an interior inspection of the home.
Now any reasonable home buyer can tell a distressed home from a well maintained home just by looking at it. But if a buyer can’t look at or inspect a home before buying he will not offer a reasonable price. So what happens is a lowball offer. This lowball offer affects all the surrounding homes in a several ways.
- First if I want to sell I am competing with lowball offers for homes no one has inspected nor appraised. That is simply not fair. It depresses my homes value and takes my equity. It might even go far enough to prevent my sale.
- If I am a distressed home owner myself and need to refinance it might depress my homes value and prevent me from saving my home from foreclosure. This makes for more foreclosures further depressing the market.
- If I am trying to refinance simply to take advantage of historically low interest rates I cann’t do it because this robs me of my equity needed for the refinance.
Right now builders, consumer advocates and outraged home owners are asking what can be done?
If this practice isn’t changed it will continue a downward spiral in values across the nation. Because California real estate is such a huge market it has a disproportionate effect on other markets.
It has been suggested that appraisers be allowed to consider if a home is distressed and then allow them to expand the distance between sales and / or expand the time frame used for comparative sales. This would allow some compensating factors into the appraisal. Because it isn’t fair to require any seller to allow walk thoughs of their property this expansion would allow more factors to be included into appraisals. Thus mitigating the foreclosures effects.
Given how this affects California real estate I think these are good ideas. What do you think? Please comment below.
Jim Johnson
I’m very indecisive about buying a foreclosed house. On one hand it seems like a great deal, but on the other hand, I feel nervous – like I should wait for a year to see how the market pans out. I really need some expert advice on the topic