Foreclosures, Collections and Property Values

Posted on Wednesday January 25, 2017

With less than one month crossed off the calendar in 2017, the state of the Twin Cities real estate market appears to be strong.  Inventory is low, interest rates are slightly higher than recent months, but still near historic lows and median home prices have continued to steadily climb.  As we usher in a new administration, it should remind us that only eight short years ago the state of the market was quite different.  Lender mediated sales (foreclosures) dominated the marketplace, inventory was high, prices declined and the then-new administration offered incentives to home buyers to create demand aimed at clearing the distressed inventory from the market. If we’ve learned anything over the past 100 years, it’s that any market, and in particular the real estate market, is cyclical.

Currently, the Twin Cities real estate market is enjoying a welcomed period of prosperity, and a topic not often making headlines is foreclosures.  At some point in the future, this nasty word may again join the common vernacular of any real estate conversation, though it’s debatable to what degree and how soon. It is important, however, to reflect on the effect these so called ‘distressed’ properties have on Twin Cities communities so we can be more prepared for the next time we experience a declining market.

Foreclosures ultimately lead to one common denominator for any Twin Cities community: the negative impact they have on the property values of neighboring homes. A lot of this stems from the fact that these homes are vacant. First, although banks have improved in this area, many foreclosures have problems, or deferred maintenance. Inherently, this leads to a lower sales price as buyers factor this into their offer price. Second, banks are more motivated to sell than consumers since they have no emotional attachment to the home and have the financial backing to accept less; buyers know and will take advantage. Third, the vacant nature of these properties begets further property deterioration and potential criminal activity which adds more fuel to the fire.

Interestingly, not all the issues brought on by foreclosures are obvious. Take for instance, when a homeowner has stopped making mortgage payments, they are likely already or very soon will be delinquent in their association assessments as well. This can be particularly concerning if there are several foreclosures in one association for these reasons:
  1. This leads to a large number of uncollected dues, resulting in a shortage of operating funds and potentially causing an increase in dues for the remaining homeowners. If this happens, higher than typical association dues can be a deterrent for buyers, which causes them to either offer less on a home in that community or purchase a similar home with lower dues in a neighboring association.

  2. From a re-sale and marketability standpoint, when a potential buyer receives the disclosure packet and notices a high volume of accounts in collections, the buyer will likely question the association’s financial stability and whether he or she wants to be a part of the membership.

  3. Communities with multiple foreclosures often develop reputations that can be very difficult to overcome. Perception is often reality in real estate, so once this perception takes hold, it can be tough to shake. This leads to lower seller expectations, reduces the pool of buyers and affects how Realtors and Appraisers price and value properties. This, in turn, can lead to a new ‘normal’ (lower) price range for the affected community, which affects the value of every home in that community, including those not in foreclosure.

Lastly, another overlooked impression distressed properties can leave on an association maintained community is that they are attractive for investors to turn into rentals. A high number of rentals can impact the ability for buyers to obtain good financing, and renters often come with the negative connotation that they do not make good neighbors (even though some do and some don’t). The perception of a neighborhood having a high volume of rentals tends to attract more investors, not owner-occupants.

The next time we see a declining market, it likely won’t be as severe as we experienced from 2007 to 2011. Still, it pays to remember the lessons we learned so we can help our homeowners and associations weather the storm. It’s also important to remember that when owners in a community association neglect to keep up on their assessments, it impacts much more than just those homes. Mindfulness and further education on foreclosures and their effect on the housing market are helpful to every Minnesota homeowner.

This article was written by:
Scott Anderson and Tony Maurer
Coldwell Banker Burnet

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