Prior to the real estate market crash in 2008, determining the after-repair value of a home was much easier. That’s because a majority of homes on the retail market were what housing experts call normal sales. In other words, these houses were not in foreclosure or owned by a bank.
With the tidal wave of foreclosures that hit nearly every city in the United States, retail markets were overrun by short sale and bank-owned (REO) listings. Nowadays, distressed sellers can make up more than 70% of the housing stock in America’s hardest hit cities.
This is why, in the post-boom era, there’s an extra step required to accurately determining the estimated after repair value for the house you intend to flip. There are three sub-markets to consider:
- Normal sales (houses not in foreclosure or bank-owned)
- Short sales (homeowner owes more than the house is worth, therefore the bank must approve the sale)
- REO or bank-owned (home has been foreclosed on and is now owned by the lender)
In Phoenix, for example, normal sales average $100 a square foot, while short sale and REO properties sell for $72-$75 per square foot. Why the discrepancy? There are two reasons:
- Timing – A normal home seller can respond quickly to a purchase offer from an interested buyer, usually within 24-48 hours, and close quickly (15-30 days). Ironically, short sales are anything but short. Even though banks have drastically increased their staffs and improved systems since the crash it can still take 3-6 months to get a short sale approved. Buying a bank-owned house is no picnic either. While the process takes less time than a short sale because the lender actually owns the house, there are still lots of hoops for the buyer to jump through. Banks, and their Realtors, aren’t that responsive either. It’s not uncommon for 6-8 weeks to go by before the deal closes.
- Upgrades and Repairs – Normal home sellers typically make upgrades and improvements to their homes as time goes by. They are also willing to address issues that might come up during the buyer’s home inspection. On the other hand, short sale and REO properties are almost always “as-is” sales. The buyer can do an inspection but the seller won’t fix anything. The buyer must pay the repair costs.
The “terms of sale” (normal sale, short sale, or bank-owned) have a huge effect on the estimated after-repair value of a property. Statistics show homebuyers are willing to pay more if they don’t have to deal with a bank. How much more? In Phoenix, about 10-20%. For example, I purchased the property pictured to the right on Caribbean Lane in Surprise, Arizona as a short sale for $52 a square foot and resold it one month later for $77 a square foot.
So, in the post-boom era, in addition to looking for recent, comparable sales in the same area, you’ll also want to find normal sales to determine the estimated after-repair value of your property.