Michelle Greene bought a foreclosed home in Covington for $30,100 late last year, and it’s worth $80,000 today.
Laura Schatz is thrilled to pay just $87,000 for a Pleasant Ridge fixer-upper, despite months of uncertainty on when the deal will close.
And Jeff Bardua of Independence is just glad to finally sell the house he’s been trying to unload for a year, even at a $42,000 loss.
Crazy deals like these are roiling the local housing market, turning the usually busy spring home-buying and selling season upside down.
“You could put a house on a credit card, some of them are coming in so cheaply,” says Rebecca Weber, a Realtor with Huff Realty.
Home prices in your neighborhood
Realtors say they’ve never seen the local market so bloated with distressed sales – with foreclosures, properties owned by the bank or homes in which the sellers are in line to take a loss. Some houses will go for as much as 40 percent discounts.
Median sale prices are at their lowest in years: Down 24 percent since 2006 to $106,000 in Southwest Ohio; off 6 percent to $126,000 in Northern Kentucky. So far this year, nearly one of every two homes sold in Southwest Ohio and one of every three in Northern Kentucky have been distressed sales.
Short term, distressed properties are dragging down all home prices. Longer term, they’re prolonging the housing market’s recovery and stalling an overall economic comeback.
“It’s probably going to take three to five years for things to get sorted out,” says John Glascock, economist and director of the University of Cincinnati’s Real Estate Center.
No one is willing to predict when the glut of distressed housing will be erased, giving the market the giant lift it needs.
“The good news is that this inventory is being gobbled up, and it has to sell off in order for the market to continue to stabilize,” says Pete Kopf, president of the Cincinnati Area Board of Realtors.
The bad news? “More foreclosures are coming,” Kopf says. “It’s just a matter of when.”
Neighborhood home sales data for 2006-10, exclusive to The Enquirer, show just how fragile the local market is: Over the past half decade, prices have fallen by double digits in most of 96 neighborhoods tracked.
“Obviously, when half of our sales are distressed sales, it’s going to drive prices down,” Kopf says.
Plummeting prices from the nation’s mortgage crisis have upended individuals and neighborhoods. More than 20 percent of mortgage holders in Ohio and nearly 9 percent in Kentucky now owe more on their homes than their properties are worth.
That imbalance, combined with high job losses, has led to the mounting inventory of distressed properties. They’re pulling down otherwise normal home listings, lowering overall sale prices in neighborhoods across the region.
Flipping opportunities – but only for credit-worthy
Today’s deep discounts are great deals for buyers who aren’t encumbered with properties they’re also struggling to sell. Even then, tightened lending rules meant to avoid another mortgage crisis mean only the most financially stable and credit-worthy buyers need apply.
Many of today’s buyers are investors interested in flipping a house for a quick profit or converting a property for rental income. They had largely stepped to the sidelines when home prices began falling and eating away at resale profits in the second half of 2006.
“I see deals coming in all day long that are going for below $20,000,” Weber says. “A lot of these are cash deals, which tells me that investors are definitely out there.”
Johnny Hodge, a Realtor with Re/max Affiliates, says he’s closed three all-cash deals ranging from $35,000 to $350,000 so far this year.
“Normally, I wouldn’t expect to do three deals in one year,” he says. “Those investors who have access to hard money are really taking advantage of the prices.”
The properties, however, often need extensive work to make them livable. Some have sat vacant for months or years. Others have been broken into by vandals or thieves who strip the home of valuable copper and appliances.
In Covington, Greene and her husband have become new landlords with the property they bought for $30,100 in October. Since then, they’ve spent $8,000 to install new central air, replace carpet, upgrade the kitchen and fix plumbing problems.
“We had it rented in four days to a family that signed a year-long lease,” Greene says. “It had just been sitting vacant before we bought it.”
The $700-a-month rental income more than pays the mortgage and typical upkeep for the house, which was just appraised at $80,000, she says.
“This might have been a one-in-a-million find for us,” Greene says. “We know not every property is going to go this way.”
The Greenes are hopeful, though. They’re scouring the market now for similar deals to add to their rental portfolio.
“Our goal is to have a few properties, and hopefully years from now these investments become money for our kids to go to college,” Greene says.
In recent weeks, Greene says, she’s encountered properties in which up to 14 investors were considering bids.
“It’s a very attractive time to get into the market,” she says. “(The deals) are going quickly.”
Negotiations for complicated short sale in Pleasant Ridge
In Pleasant Ridge, Schatz has been trying to negotiate a time-consuming and complicated “short sale” with Chase Bank for the home she wants to buy. Short sales occur when a lender agrees to accept less for a home than the seller owes.
Schatz says she’s not sure what the seller owes the bank, but her initial offer of $85,000 required the lender’s approval.
Just after receiving a counter offer from Chase this month for $87,000, Schatz learned that the house had been broken into and all of its copper piping removed.
“This is a common occurrence,” Weber says. “When there is a vacant house, no matter where its location, with a for-sale sign in the yard, it is always a target.”
Schatz says the damage could have been avoided.
“If the bank could move things more quickly, I could have already taken ownership of the house and prevented this from happening,” she says. “It’s been a good learning experience. The top concern for sure is not knowing how long this is going to take.”
Schatz hopes to use a Federal Housing Administration 203K loan to help cover most of the costs to rehab the home. The program was designed specifically to help home buyers repair distressed, single-family homes.
Schatz says she’d like to invest another $30,000 into the house, if only she can reach the closing table.
“Financially, this is the right time for me, and I feel stable enough to make the move,” she says. “I know it’s a buyer’s market, and I’m motivated to strike while the interest rates are low.”
For Bardua, keeping up with his monthly mortgage of $900 became out of the question after he lost his job last year. When his lender declined to rework his mortgage, he turned instead to pursue a short sale.
Although he still owed $132,000 for his home on five acres, he listed the house for $90,000.
In December, Bardua received an offer for $87,000 – roughly $45,000 less than what he owed.
Five months later, Bardua’s lender, Bank of America, accepted the buyer’s offer.
“It was a long haul,” he says. “It was a relief, but I still feel like my freedom is gone. I’ve worked for all these years to pay my mortgage, and then I got into a bind.”
At the closing, the bank paid Bardua $1,000 for agreeing to stay in his home while the lender considered the short sale.
Bardua said that during that time he was only able to afford paying half his monthly mortgage.
“The bank wanted to make sure the house was in good condition,” Bardua says.
Short sale can have negative impact on seller’s credit score
Nationally, the foreclosure crisis has led major lenders to do more to protect the houses they’re trying to unload.
Under the government’s Home Affordable Foreclosure Alternatives program, qualified sellers have 120 days to market and sell their home. If the bank accepts a buyer’s offer during those four months, the seller will receive $3,000 for the seller’s relocation.
Under this program, sellers are fully relieved of any obligation to repay the mortgage.
The short sale will, however, have a negative impact on a person’s credit score.
“It will hurt their credit, but not as much as a foreclosure,” says Holly Maloney, a Realtor for 3B Realty Group who specializes in short sales. “Homeowners may not be able to buy a home for two or three years after a short sale, as opposed to a foreclosure, which is much longer.”
Some lenders, including Bank of America, also have their own short-sale approval process. But not all lenders let sellers walk away completely debt-free.
In some instances, sellers may still be on the hook for the difference on their mortgage and what the bank received for the home.
In Ohio, lenders have the right to sue a borrower for a deficiency judgment when a property does not sell for an amount high enough to cover the loan balance.
Maloney says she is often able to negotiate away the deficiency and settle the account at closing.
“It all boils down to their financial picture and what their hardship is,” Maloney says. “The reality is, lenders don’t want the house back because they have a ton of pent-up inventory. And if the house goes to foreclosure, by the time they get the house it’s worth even less than they would have gotten on the short sale.”
‘The stabilization process will take another few years’
Just how long it will take for the region to move through its excess supply of distressed properties remains a major question.
“I think we’ve ridden out the storm, but the stabilization process will take another few years,” Kopf says.
The more immediate question is: “How much more distressed property – the so-called shadow inventory – is still lingering out there to come on the market in the second half of the year?” says Peter Chabris, a Realtor with Keller Williams Realty.
“Shadow inventory” represents the amount of distressed properties not yet listed on the market. It includes homes of borrowers who are 90 days or more delinquent on their mortgage payments and those undergoing the foreclosure process. It also includes real estate owned by lenders but not yet offered for sale.
At the end of last year, major lenders including Bank of America, JPMorgan Chase and GMAC put the brakes on filing foreclosures while they scanned over potentially flawed paperwork. That work has since resumed, and the foreclosures are moving ahead.
“Some of the banks indicated that they were signing up to 10,000 foreclosures a month, which begs the question, ‘What kind of backlog is out there?’ ” Weber says.
“It would be a disaster if they released all of that inventory at the same time.”
Nationally, it’s estimated that up to 1.8 million more homes could linger in the shadow inventory, according to CoreLogic, a Santa Ana, Calif.-based real-estate analytics firm.
In the first three months of this year, one of every 20 Ohio mortgage holders was in foreclosure in Ohio. In Kentucky, one in every 25 mortgage borrowers was facing the same fate, according to data from the Mortgage Bankers Association.
That data shows a market awash with repossessed homes.
“It will continue to take a realistic seller who is ready to price their home competitively to compete with what’s going on,” Kopf says.
Chabris says he expects sales to increase locally through July.
“I’m preparing my clients for what will most likely be a much slower second half of the year as buyer demand wanes and the next round of bank-owned properties begins to surface,” he says.