Investors' interest in single-family distressed homes is increasing -- often with little attention to the potential risks
Manuel V. Sicre, chief financial officer, EMP Medical Services and Central Medical Equipment Rental
As published in Scotsman Guide's Residential Edition, May 2011.
The days of distressed-property investing are far from over. In most U.S. markets, foreclosure inventories are above average, and negative equity continues to undermine listing and sales prices. As this trend continues, upstart investors increasingly look to tap market lows in hopes of quick turnarounds and fast cash. Mortgage brokers not only can help finance these deals but also can assist rookie investors in making wise property-investment decisions.
Here's what you need to know and where to go from there.
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Once upon a time, distressed properties were by and large limited to neighborhoods with low median incomes, poor walkability and decrepit infrastructure. In today's economy, however, some of the best properties on the market meet the distressed-property definition.
Generally speaking, distressed properties fall into one of three categories:
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Foreclosures in process
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Bank-owned
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Negative equity (i.e., underwater)
A plethora of each type creates enormous opportunity for buyers who are willing to take some risk. This is especially true as the inventory of distressed properties continues to increase in the upper price ranges and in more-desirable neighborhoods.
The growth of the higher-end distressed-property market can be largely attributed to homeowners who knowingly overextended themselves financially. As widely discussed and debated in the past few years, many of these buyers used their homes to access cash that was then poorly spent. Often, they gained access to the additional cash despite having little equity in a home they couldn't truly afford in the first place.
Admittedly, low introductory interest rates and ill-advised mortgage products helped many of these buyers step out on a thin financial limb. When their introductory rate ended and they could not refinance, an untold number of homeowners either contributed to or exacerbated the real estate downturn, depending on when their troubles began.
As property prices decreased widely, troubles worsened and millions of homeowners found themselves with mounds of negative equity and steep bounds to escape. None of this is news to mortgage brokers and loan originators, but in many cases, the upside results are only now emerging. Then again, risk still looms, particularly for those homebuyers who don't truly understand the distressed-property market.
Ups and downs
Although their reduced sales prices, hidden value and huge inventory may sound appealing, distressed properties often represent false opportunities. Mortgage brokers can help lessen the risk for investors while also leading them to appropriate financing solutions.
For investors, the best-case scenario typically means buying a property that is in process of foreclosure, bank-owned or underwater; making some improvements; and selling it for quick profit. For many, the promise of fast riches will prove too hard to ignore. Often, however, reality takes an ugly turn.
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