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The Real Value of a Distressed Property

Melissa Zavala
2 min read
The Real Value of a Distressed Property

I’m going to tell you a story, and I know it’s one that you are not going to want to hear. But, it’s the truth—plain and simple, and based on lots and lots of personal experience.

When the market began to decline in 2007, I was involved in approximately 40 short sale transactions. At that time, banks didn’t have large loss mitigation departments and short sales were still called short pay resolutions. There were few guidelines for what the banks would accept to mitigate their losses, and short sales took forever to negotiate. (If you think they take a long time to negotiate now, know that Rip Van Winkle’s nap was shorter than the average short sale negotiation in 2007.)

However, at that time, there were fewer guidelines because the short sale was not a commonplace transaction. As such, buyers could use such phrases as ‘distressed value’ in order to make a compelling argument for a lower purchase price.

Nowadays, the short sale is a common transaction, and all of the major lending institutions and most of the minor ones have whole departments and systems in play in order to process a short sale. These institutions send out Brokers and Realtors® to conduct Broker Price Opinions (BPOs); sometimes appraisers are also sent to the property in order to ascertain the value. To the bank, there is no such thing as a distressed value anymore. Banks and their investors just look for a percentage of the market value and a specific net amount in order to approve the short sales. No personal feelings get involved, and the choices made at these institutions are totally objective.

I’ve had the same experience with the REO listings. When taking these listings, the bank also sends an appraiser and requests a BPO. Little consideration is given to the fact that the property has been foreclosed. The only assessment being made is of the list price for local active listings, and the closed price of recently closed comparable properties. Banks do not see their own properties—now REOs—as distressed. They want to get top dollar to offset their loss.

It’s ironic, but just about the only person or group these days who is using the words ‘distressed value’ are the investor buyers. And, while it is true that many of these properties are inches away from the courthouse steps, it appears that the banks don’t quite have the same point of view.

It will be interesting to see what happens in 2011. Fitch Ratings just reported on the benefits of short sale versus foreclosure in the coming year. And, while the numbers seem to show that short sale is the best financial option for the banks, I’ll be curious to see if the banks agree or if they will continue to march to the beat of their own drums.

Photo: flickr creative commons by informatique

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