Marjorie: I keep reading stories about all the distressed properties for sale in Orange County, and to be frank, I don’t fully understand what it means—for the seller, the buyer or the bank. —Madge
Madge: A “distressed sale” is typically a home or 1-4 unit that is either: upside down, which means it would have to be sold as a short sale (more is owed on the property than it’s worth), has received a notice of default (the owner has missed payments and the bank has given the homeowner notice they intend to foreclose) or the property has actually been foreclosed on and has gone back to the bank and is now listed as an REO or Real Estate Owned property.
Distressed sales have a negative impact on the neighborhood by lowering the average sale price of all similar properties. Foreclosures and short sales typically sell for 57 percent lower than standard or non-distressed sales.
Distressed sales also have a negative impact on the buyer because there are typically more things wrong with the property due to the inability of the distressed homeowner to keep up the standard maintenance of the property (fixing little problems before they become big, expensive problems).
This might include leaks in the plumbing, electrical switches/wiring that is outdated or broken, landscaping that gets neglected, appliances, furnaces, a/c units that don’t operate etc. Therefore, anyone buying the property would have to either have money set aside to fix these things or have the know-how to repair the defective items to meet the standards set forth by the Department of Building and Safety.
As good a deal as these homes might present on the surface, many home buyers using FHA financing are unable to purchase these discounted homes because as part of the requirements of their loan the home must meet certain basic requirements and many of these distressed sales simply don’t qualify for FHA financing.
Sellers are hit hard by having to sell as a distressed seller because their credit is ruined which might make renting an apartment difficult. All the money they have invested in the property is lost, so the money they were hoping to have when they sold, to buy again, simply won’t be there.
Further, unless they can get financial help from the lender even moving out might present a financial hardship or impossibility. Sellers who are in trouble are filled with shame, fear and uncertainty, which affects them and everyone they come in contact with.
It’s all too common for sellers in foreclosure to want to ignore the problem and hope it will go away. Some stick their heads in the sand. Which only makes the matter worse. As soon as you realize you can’t afford your payments that’s the time to act and engage a Realtor to see if you qualify for a loan modification, short sale or another option.
Banks, despite what most people think, are negatively affected because all the non-performing assets (houses where the owners aren’t paying their mortgages) they have on their books reduces their ability to borrow from the Federal Reserve. And what does that mean? It means they have less money available to them to lend to other customers, including new homeowners who want to get a loan to buy a house, even a distressed one!
Banks are in the business of lending money, not in the house buying/selling business. They only make money when they lend money so the last thing a bank wants back is your house.
Contact me for a chart explaining the future and financial impact the various types of distressed sales from short sales to foreclosures can have on both buyers and sellers.
Marjorie Tyson is a Realtor for Prudential California Realty. She can be reached at (310) 780-6698.
