I’ve been working with an investor who’s looking at properties around Mooresville for rental purposes. He’s focused on distressed properties with the idea that he can get a better value on those. In this case, distressed means that the property has gone into foreclosure and is likely owned by the previous lender, or it is a short sale, meaning the private owner still has title but can’t sell it at market price for enough to pay-off the mortgage balance. In the case of a short sale, the mortgage holder (lender) must approve any contract price.
We’ve been looking in the Mooresville area in the $120,000 to $180,000 price range. I ran some numbers for past sales for properties in that area and price range and came up with a few interesting statistics. For traditional sales, the average $/square foot sales price is around $85 and the Sale Price to List Price ratio is 96%. For distressed sales, the average $/square foot sales price is around $73 and the Sale Price to List Price ratio is 94%. In this comparison, $/square foot includes house and land.
So, what conclusions can you draw from this? Certainly you can see that distressed properties can be purchased for relatively lower prices than non-distressed properties. What you might not recognize until you actually see a distressed property is why this is so. Often these properties are left in poor condition by the previous owners. Considerable money will have to be spent to get them into acceptable condition. This is not to say that all distressed houses are in bad shape. If not, you can expect to pay closer to the non-distressed price. Another situation that’s often seen is that there may be some other characteristic that compared to other similar homes reduces the value of the property. It could be a location issue- something related to the neighborhood or lay of the land. I’ve seen houses that had back yards that were level for 15 feet then dropped 30 feet down a slope to the adjoining lot. This makes it less attractive to a large slice of the buying public. These value issues become obvious when you visit the property.
If we look at the market history of many distressed properties, we can see that the previous owner may have put the house on the market for an unreasonably high price due to their financial needs or just have the “I won’t give it away” attitude in spite of market conditions. The result is that they don’t get it sold for a long time, then start chasing the market with price reductions, but with reductions that are too little, too late. They then get their lender to agree to a short sale, or just get foreclosed on. It’s a sad but frequent story.
So if you’re in the market for a house, go ahead and look at the distressed houses in search of a great deal. There are great deals out there, but go in with your eyes open. Also understand that if it looks like it’s aggressively priced, you are not going to be the only buyer who sees this. You may need to move quickly to be the lucky buyer, otherwise, the good ones will be snapped up while you’re thinking about it.
If you’d like to see similar statistics for other areas and/or price ranges, let me know. I can run the numbers quickly for you.