Do Short Sales and REOs Affect Local Market Property Values?

You had better believe it! We all know that there are different values for distressed properties and a normal retail property. The problem is, that the distressed REO or Short Sale property does have an effect on your local and neighborhood housing values and appraisals. You can have a well kept up home that has been totally updated and you finally get a buyer, only to have the appraisal come in $25,000 too low. There is not much that you can do if you want or need to move and want to save the deal other than to lower the sale price.

But you say….. “I live in a nicer area and we are not affected by these distressed sales!” I’m sorry to say, but most likely, you are. Let me give you a snapshot of our local market in Michigan.

Now, Michigan has had it pretty rough, not only through this last recession and housing disaster, but for some time now. Our state has been known for automobiles and manufacturing which, due to world wide competition and increased productivity, has caused hundreds of thousands of jobs to be lost. Michigan has the dubious distinction of being the only state to have lost population in the last census. Lucky for us in South West Michigan, we have been more diversified and have not suffered as much as the rest of the state. While Michigan in general lost population, Kalamazoo County actually had an increase of about 3.92% between 2000 and 2009 according to Census estimates. Kalamazoo County has a few less than 250,000 residents with the two largest cities making up over 119,000 of them.

Yes! This is the good news, but there have still been many job losses as well as some gains in our area. When job losses cause a decrease in income and force home owners to relocate for work, foreclosures and short sales increase and affect the local housing market even more. In the last quarter of 2010, according to TrendVision and our local MLS, there have been an average of 1,851 single family properties on the market each month and an average of 188 sold each month. Of these sales, an average of 42 per month are REO or short sales. That is over 22% of the available comparable properties for the appraiser to use in establishing value. The low sold price was $5,000.00 and the high sold price was $475,000.00. Although the average price per sq. ft. of these distressed sales was $50, the $475,000 home sold for $74 per sq ft.

All price ranges and neighborhoods have been affected by these distressed sales. Although some distressed home owners allow deferred maintenance or even in anger or frustration, damage their homes when they move, many of these homes are well kept and are direct competition with the sale of your home!

This effect on home values is not going away any time soon. With the number of new workers entering the job market, our job growth is not expected to lower our unemployment by a substantial amount in the near future. I suspect that this trend will continue for distressed home sales and continue its effect on home values for the foreseeable future.

What is a home owner or investor to do? That is a great topic for our next blog…

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.