Foreclosure Sales & Market Value
Lenders taking possession of foreclosed homes often sell the properties at prices below market value. Lenders do not want the burden of paying property taxes and maintenance fees for foreclosed homes and often sell properties within a short space of time to cash buyers at auctions. High numbers of foreclosure sales can negatively impact home prices in the surrounding area.
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Types of Market Value Estimates
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Financial institutions use a variety of different means to determine home prices when writing loans. Generally, banks use a full appraisal to determine the market value of a home being bought with a purchase mortgage. A full appraisal involves a state-certified home appraiser inspecting the interior and exterior of a property, using recent comparable sales to establish a market value. For refinance loans, banks often use tax assessor appraisals, based on exterior inspections or electronic appraisals, which are purely based upon recent sales of similarly sized homes
Benefits of Foreclosure Sales
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Lenders benefit from foreclosure sales because they can quickly offload properties before maintenance costs and other expenses become a significant factor. Lenders prefer to take a loss on the mortgage owed, rather than hold on to the property for an indefinite period of time. Buyers benefit from foreclosure sales because they enable them to buy properties that otherwise might exceed their financial means. Investors benefit from foreclosure sales because they can more easily make a return on their investments when they buy homes at below market value.
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Misconceptions
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Many people believe that the prices of foreclosed homes are a factor in the appraisals of surrounding houses. Most states have laws that require appraisers to discount home sales that occurred under duress. Sales such as foreclosures, deed exchanges between family members, and short sales, which are pre-foreclosure sales, are not used by assessor's looking for comparable home sales.
Effects
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A study buy economists at MIT in 2010, found that foreclosure sales had an indirect impact on home prices, and that, on average, every foreclosure decreased the values of homes within 250 feet by 1 percent. This study and other similar reports conclude that prospective buyers force home prices down when they discover that nearby properties sold for discount prices during foreclosure sales. Additionally, high numbers of poorly maintained foreclosed properties negatively impact the overall appeal of a neighborhood and cause home prices to fall.
Considerations
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In many parts of the U.S., banks have curtailed lending because of depreciating home prices. In some states such as Florida, people buying condominiums must make down payments of 30 or 40 percent. Over-construction and high numbers of foreclosures have driven prices down, and lenders want to protect themselves from the risk of properties losing further value. Tight lending guidelines have made it harder for people to buy homes in all parts of the U.S., and this, in turn, makes it harder for homeowners to sell and puts more people at risk of foreclosure.
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