The real downside of foreclosures on the Outer Banks

Saw this cartoon today from Daryl Cagle and it really hit home for a few reasons.  First - Chief Brody (Roy Scheider) passed away yesterday.  Roy had some great roles throughout the years.  Besides playing Chief Brody in Jaws  - he played a cool dude in The French Connection.  Enough with the movie reviews and on to the subject at hand.

Some folks might be sitting back thinking that foreclosures really won't affect them.  They have a small mortgage or are financially secure enough to ride out the recent decline in the market. 

Here is a potential scenario of how a foreclosure property can adversely affect you.

• The house down the street goes into default and winds up at a foreclosure sale. 
• The only group that bids at the courthouse steps on the home is the bank holding the note.
• Once the bank takes ownership - they find that the house has been stripped of all furniture, appliances and anything not bolted down. 
• The bank turns around and places the house back on the market to sell through traditional means (Multiple Listing Service through a Realtor)
• The problem is - the bank is trying to sell their foreclosed Outer Banks Beach Home against a ton of competition - competition that is fully furnished with all of the bells and whistles that people want in their vacation rental machine.
• The bank does not want to be in the business of holding property so they start dropping the price in hopes of moving the home out of their inventory.
• House sells for well below the market value - this is now a comp used by appraisers.
• Now you decide that the carnage is over and you want to borrow some money out of your equity to add a master suite or build that great pool you always wanted.  The problem is the home down the street that was bought at well below market value is used as a comp to estimate the value of your home.  Now according to the appraiser - you have lost a large chunk of equity.  Maybe now you just have to wait on adding that pool.

One way to avoid this will be if buyers decide to purchase the foreclosures at the courthouse steps.  These purchases are not considered comps for the appraisers.  For now it seems the majority of sales are in fact being bought back by the banks.   More on the risks of buying foreclosures in a later post. 

Rates are great now - if you are thinking about getting some of your equity out for improvements - it might not be a bad time to start.  We still have conforming rates (under $417,000) under 6% and with the recent drop in prime rates - home equity loans are starting to become attractive again.  If I can be of any assistance, please don't hesitate to contact me at your convenience.

Comments

[bobxnc]

Of course the other downside side is for the owners who lost at least their investment if not their home. Lots of dreams crushed and families put on the streets. Not just here but around the country.
I keep hearing about investors snapping up fire sale priced properties in pre-foreclosure deals. Even with home prices declining its still a very expensive market and hard for a working family to move quickly enough to pick up a distressed home before a savvy investor jumps (with a mortgage broker or banker to spot for them).
How do we fix that problem?

[Ronnie Roach]

Bob,

Good point about the owners. Many of the homes going under are people who live here which is tough to witness.

As for those investors snapping up the deals - the carnage is much worse in places like Florida (wanna buy a condo?), California, Nevada and Michigan. Some are reporting properties selling 40 cents on the dollar. Even though things sometimes look slow here - we are nowhere near that kind of devastation.

The government released a program today to help delay the process - a thirty day break before the foreclosure process starts. Sounds good but in reality - it is not going to help very many. Banks are considering trying to lessen the blow but having a 90 day late on your mortgage will wreck your credit score.

If buyers purchased properties at the courthouse steps, it would not hurt the neighborhood for comps. On the other hand, the buyer really needs to spend money out of pocket just to know if they are really getting a good deal. As with everything in life - there are risks associated with a great deal.