TV and email ads shout about the profits to be made by investing in foreclosures. Students in my real estate investment classes routinely ask about the same thing. The appeal seems to be obvious, which is a desire to buy something for less than its market value, thereby assuring an instant profit. I know there is lots of interest in this topic, but I believe the opportunities in general are limited and poorly understood, but in the current market there may be an exception. Let me explain.
If you can buy a property below its current market value, that should make a great investment. The question to ask is if the purchase of a property in foreclosure or recently foreclosed is a purchase that is below the current fair market value. The sale of foreclosure properties takes place in the same market place as the sale of properties that are not the subject of foreclosures. Are the sellers of foreclosure properties willing to take less for their properties than other sellers? I think not. The prices of foreclosure properties may be low relatively to some past measure of the market, but they are not below today's market. They are today's market, or at least part of it.
It's my view that those who suggest you can make lots of money investing in foreclosed properties are generally full of hot air. Many are selling books and courses and they appeal to the desire for a bargain or an easy profit.
Let's be clear. You may be able to make money purchasing foreclosed properties, but the reason is not because you bought below the fair market value at the time you made the purchase. Ways to make money would be to make improvements and resell, or simply to hold until the market strengthened and then resell, or to rent the property and make a profit from operating it as a rental investment. You can do all these things with properties that are not foreclosures, too.
I said at the beginning there may be an exception in this market. Even though the sellers (banks) of foreclosed properties are like any other sellers in that they want to get the highest price possible, there is an important difference between a seller of a foreclosure and other sellers. Typically banks who sell foreclosed properties have to sell, while others may want to sell, but also have the option of pulling back from the market and waiting for a better selling environment. Faced with this need to sell, even if the market is soft, banks have to keep pushing prices lower until a buyer emerges. In an area where there are many foreclosed properties on the market, this can put enormous downward pressure on prices. While the sale prices will represent the fair market value at the time and under the depressed circumstances, they may well represent only a temporary market depression.
When this pressure is released, it's quite possible that there will be some rebound in prices simply due to fewer distressed sellers. In a more normal market that is not dominated by so many foreclosures, it's unlikely that the sale of a few foreclosed properties will create the temporary depression on prices as they have today. One encouraging sign in our market is that some foreclosed properties are receiving multiple bids and overbids. This is partially by design, because the sellers have intentionally priced them below what they expect to realize from the sale, in the hope of stimulating bidding interest.
What is encouraging is they have gotten the interest they hoped for. It would have been a discouraging sign to find that there was no interest in these homes, because that would require the prices be lowered still more to get buyers to part with their money.
Conclusions: Don't be fooled to think you are buying below the current market if you purchase a foreclosed property. However, in a market dominated by foreclosures, prices in general may be temporarily depressed, and would represent a buying opportunity for any property, not just those that are foreclosures.
Mr. Atkin is the owner/broker of Landmark Properties in Santa Rosa, CA. His firm is dedicated to the practice of "single agency," representing only one side to any transaction. The firm is active in the residential, commercial and investor markets. He has practiced real estate for 20 years, and prior to that worked in the fields of finance, banking and investments.
Written by Jack Atkin
November 25, 2008
- Realty Times
Posts