It’s rare to come across an article in the Real Estate section of any website or paper without at least some mention of distressed properties and how they relate to the current market.It's not uncommon for my buyer clients to ask- "Bill- Foreclosures and Short Sales In The Hamptons, Long Island, What's The Story?" We read about terms like “shadow inventory,” short sales and REO (real estate owned) properties. But what do they mean? Here are some basics on terms that often come up during REO property discussions.
“Shadow Inventory”
“Shadow inventory” refers to distressed homes that are either seriously delinquent on their loans, in the midst of the foreclosure process, or foreclosed homes owned by lenders (REO) that have yet to come on market for sale. This shadow inventory has been the cause of alarm for investors, market experts and economists alike for years now. The general concern was that when this inventory of “unknown” number actually hit the market for sale, it would flood the existing inventory and depress home prices and value.
Fortunately, there has been some positive data to come out in recent months showing that these numbers are on the decline. “The size of the shadow inventory continues to shrink from peak levels in terms of numbers of units and the dollars they represent,” according to Anand Nallathambi, CoreLogic’s president and CEO in a recent news release from earlier this month. The release cites processed data from October of 2012. Nallathambi continued, “We expect a gradual and progressive contraction in the shadow inventory in 2013 as investors continue to snap up foreclosed and REO properties and the broader recovery in housing market fundamentals takes hold.”
Does shadow inventory exist in The Hamptons and other parts of the East End of Long Island? Absolutely. In fact, New York State is still among the highest in the US in this category as of Q3 2012. So while CoreLogic’s most recent data could lead to further improvements in the housing market, shadow inventory is still something to be cognizant for me as a buyer’s agent. Even though these properties are not yet listed on the market, it’s very important to be aware of what the future holds. Doing so, I can better advise my buyer clients on current market conditions, and they can make more informed decisions.
The difference between bank owned, REO, and foreclosed properties
Semantics; there really is no difference! All are properties that have been foreclosed on and taken back by the lender that held the note (mortgage).
Foreclosed properties do exist in the Hamptons and can be excellent purchases, as long as buyers keep in mind that banks are looking to recoup as much money as possible. There are such things as overpriced foreclosures – especially in the Hamptons. A seasoned buyer’s agent will be able to do a value analysis to shed more light on each property’s asking price.
The term “short sale”
In lieu of foreclosing on a property (a more costly venture for the lender), the bank agrees to accept less than the outstanding mortgage balance for the home. These sales have become more common, as the banks have realized that homes can be sold closer to market value and at less overall cost than foreclosures. Purchasing short sales can be challenging, and I highly recommend the representation of an experienced buyer’s agent.
Before a buyer pursues a short sale, they should be advised that these are not typical transactions. A few things to keep in mind are:
- Although the bank holds the mortgage, the home owner holds the deed, so a buyer’s offer must be agreed upon by both parties on the selling side.
- The typical approval time from the bank is currently between 30 and 70 days, with additional time for closing.
- Short sales are generally sold “as-is” – even if needed repairs are found during inspection – and buyers are usually required to sign an addendum agreeing to such.
It’s so simple: A buyer’s agent works for the buyer!
With regard to the terms above, I will share with you what I share during my Buyer Counseling Sessions: Don’t get caught up in the notion that purchasing distressed properties is the only way to acquire a home at a great price. Far from it! Only a buyer’s agent is going to represent a buyer’s best interest, and that means finding the best value out there for every type of inventory available.
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