Upside Down Real Estate 2: The Nightmare

Let’s put the whole situation about the upside down Real Estate into perspective. The outcome of the mortgage frenzy has had a devastating effect on the economy with entire neighborhoods collapsing. Here’s how the foreclosures will affect the entire neighborhood or the city and even the state. Look up and down your street. If you see a lot of “For Sale” signs it is time to worry. Even if you are not going through a foreclosure, the foreclosure will affect your property value. For example you live in a neighborhood that the average house is $100,000 and there are several housing in the neighborhood that have a value of $100,000 but they have been foreclosed on and the lender now owes the property.

An investor comes along and buys several properties for a little as $50,000 or less each. You need to refinance your home after being in your property for over 15 years and you owe $50,000 on your property and you know the value in the area is $100,000 so you think you have $50,000 worth of equity. You want to do a $20,000 cash-out refinance to do some repairs around your house. Well, your property must appraise for over $70,000 plus any closing cost. If the properties in surrounding neighborhoods have been selling for $50,000 within the last six months you are at risk to lose some or all of your equity. Equity is the difference between what you owe and the market value. So even if you are not in foreclosure the foreclosures in your neighbor will affect your property value. No one is untouched by this crisis. The Appraisers must indicate if the neighborhood is declining. This will change the terms of your loan for purchase or refinancing.

If a seller put their house on the market to sale the buyers think they can get a great deal. The media has given the buyers the illusion that they can offer $20,000 to $30,000 less than the listing price. The dilemma continues with insulting offers and nasty negotiations between the buyers and seller increasing the frustration in the housing market. Let’s be clear about the negotiation of Real Estate in this upside down market. The negotiation gap can be greater with the lender owned property versus property that is owned by a consumer.

Now let’s look at the investor’s plight. Yes, the investor is getting a great deal but if they plan to flip the property they may be in for a rude awaking. After the rehab has finished and the investor is ready to put the property back on the market the vale in the neighborhood has decline and the profit margin will decrease. The best approach is to buy the property, rent it out and wait for the crisis to turn the corner. Now is the time for the investors to get some good deals but their profits will be better later.