Foreclosures - Are you getting the best buy?
Posted Nov 6, 2007 @ 2:45 pm, Viewed by 434 Visitors, Read 443 Times.
Foreclosures: Several buyers have been asking me about the foreclosed (REO) homes and condominium opportunities in the marketplace. It seems that the more REO properties we have in the marketplace, the less attractive these opportunities are.
The logic seems crazy, I know. If it were only based on the simple economic fact that the more homes in the marketplace for sale... the more downward the price pressure on the existing inventory and therefore the pricing ...except in the case that most of these Foreclosure REO properties in the market are owned by many corporate institutions and secured with security instruments called "asset backed securities" or "mortgage backed securities".
In finance, a mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans. Residential mortgagors in the United States have the option to pay more than the required monthly payment (curtailment) or pay off the loan in its entirety (prepayment).
Because curtailment and prepayment affect the remaining loan principal, the monthly cash flow of a MBS is not known in advance, and therefore presents an additional risk to MBS investors.
So in a nutshell, with the several thousand homes coming into the marketplace no one company will have to shed these assets for "fire sale" prices for a while. The current "write downs" in the financial market have set up these institutions for profits in the future when these "assets" are sold.
Most of the players in the mortgage market are savvy investors and profit laden businesses and are looking at the long term strength of their companies and their long term stock prices. Buying a foreclosure might save you 3-7% (in prime market-areas) but with homeowners suffering, you might be able to buy at a 15% discount directly from an owner who is in a job transfer, moving down to a smaller property or leaving the area.
Added incentive is with California disclosure laws. An owner is required to disclose any defects in a 1-4 unit residential property. Where a bank would be exempt from such a requirement (trust sale, probate or foreclosure).
The logic seems crazy, I know. If it were only based on the simple economic fact that the more homes in the marketplace for sale... the more downward the price pressure on the existing inventory and therefore the pricing ...except in the case that most of these Foreclosure REO properties in the market are owned by many corporate institutions and secured with security instruments called "asset backed securities" or "mortgage backed securities".
In finance, a mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Payments are typically made monthly over the lifetime of the underlying loans. Residential mortgagors in the United States have the option to pay more than the required monthly payment (curtailment) or pay off the loan in its entirety (prepayment).
Because curtailment and prepayment affect the remaining loan principal, the monthly cash flow of a MBS is not known in advance, and therefore presents an additional risk to MBS investors.
So in a nutshell, with the several thousand homes coming into the marketplace no one company will have to shed these assets for "fire sale" prices for a while. The current "write downs" in the financial market have set up these institutions for profits in the future when these "assets" are sold.
Most of the players in the mortgage market are savvy investors and profit laden businesses and are looking at the long term strength of their companies and their long term stock prices. Buying a foreclosure might save you 3-7% (in prime market-areas) but with homeowners suffering, you might be able to buy at a 15% discount directly from an owner who is in a job transfer, moving down to a smaller property or leaving the area.
Added incentive is with California disclosure laws. An owner is required to disclose any defects in a 1-4 unit residential property. Where a bank would be exempt from such a requirement (trust sale, probate or foreclosure).
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