With the ongoing deluge of foreclosures and short sales, it has become more and more difficult to determine what the market value of homes are. The market value is the most probable range of values in which a typical buyer and a typical seller will agree to terms with in an at arms length transation.
Foreclosures and short sale transactions have a very limited effect on general market values.
This is because they traditionally represent such a small subset of all transactions. They are difficult to quantify because the sellers are often not typically motivated and are under financial pressure to sell. Additionally, disgruntled sellers often cause extensive property damage, which limites the pool of potential buyers to investors, contractors, and bargain hunters.
The rights purchased by prospective owners are several limited, which results in an extremely discounted price. The bank often holds several additional rights, which can cause delays and cause extremaly long waiting periods before a transaction can be consumated.
First time home buyers and families who have relocated and do not have the luxury of waiting for understaffed banks to approve transactions, will look elsewhere.
Markets have shifted dramatically with the Economy.
In many areas, foreclosures and short sales represent a dominant portion of the market. If the typical house being sold is under financial duress, and the typical buyer is looking to purchase these, it becomes extremely difficult to value property.
As a glut of properties come on to the market, as we have seen in the past year, than the opportunity to purchase great properties at discounted prices grows. It’s also easier to become lulled into thinking the next house is the next great deal and become stuck with a property which is almost impossible to sell or rent, even at a discount.
Make sure you have a long time horizon, understand the risks at play, and are strong financially. Great volatility yields high stakes and pressure, but greater returns.