Real Estate News

Record-setting low for distressed home sales

Published: 01 Feb 2017

For the average property buyer, distressed property sales may represent a shrinking market, according to new data. CoreLogic recently reported on the state of distressed and cash sales as of October 2016. According to this source, the two sectors paralleled each other, since both distressed and cash sales shares were lower at that month than they had been exactly a year before.

Of these two brackets, distressed sales fell further, dropping 2.9 percent between the two Octobers. Of all the states reporting distressed sales, Maryland had the highest number, with these types of purchases accounting for a full 18.6 percent of the market.

Despite this, the number of distressed sales was lower in 42 of the total states. It was also noteworthy that the general sales rates for distressed homes was the lowest seen in nine years, with the share equaling 7.7 percent in the year before the U.S. recession.

Compared to this, cash sales also saw a slump, being down by almost as many percentage points (2.7) as the distressed sales were. The source also said that cash sales could return to their pre-recession state, when they accounted for around a quarter of home sales, by next year.

The state with the highest percentage of cash sales last October was Alabama, where these made up 47.5 percent of sales. In addition, North Dakota had just 2.7 percent of its sales due to distressed homes.

The greater significance of "distress"
When considering the possible future of distressed homes, it's important to think of what these actually represent in the grander scheme of things. U.S. News & World Report spoke to investor Mark Ferguson about the rationale behind the distressed market, and the economics that should drive such sales. From his perspective, the high cost of repairing or updating a distressed property could impact financing.

"Most banks will not lend on houses that need a lot of work," Ferguson said. "Those banks that do lend on those houses will almost never lend money for the repairs, just the purchase price."

Prior to that, Ferguson said that repairs expenses should account for 20 percent of the final home cost, leaving the buyer with a set idea of what the final payment will cost. The piece generally stated that the value of a property can depend on the type of "distress" associated with it.

Foreclosed properties, for example, can be unwise investments if there isn't enough information to go on at the time of sale. And although the current rate of distressed home sales may be notably low, this could change in response to other shifts in the housing market, so buyers can stay alert to ensure the best value.

Distinguishing features of the distressed home market
As is usually the case with distressed homes, the availability of mortgages can vary as well. There will likely need to be some assurance of quality to justify the purchase and assuage lenders. While a distressed property may be less expensive than another option, it could also require more time and effort before the sale.

The principle of pursuing distressed property seems to extend to commercial property sites as well. Douglas Durst of the Durst Organization recently told The Real Deal that distressed property is what makes successful purchases possible. This specifically allows the company to stay competitive, Durst said, since it increases the range of deals they are allowed to make.

The U.S. Census Bureau estimated that 2016 saw a 12.2 percent increase in the amount of new homes sold compared to 2015. This translated to an 563,000 homes in total.