The irony here is that the real estate market is driven by consumers, not the banks. Itâ€™s basic supply and demand economics. When REOs first started coming on the market in floods, they were at the current market pricing or a tiny bit below.
Problem #1. No one was buying them. In fact, no one was buying much of anything. So banks lowered the prices until they started to sell.
Problem #2: There was far more inventory than available buyers, so the prices continued to fall. Not because the banks wanted to lower prices or because they were trying to dump properties at substantially discounted rates or because of the amount they were able to get reimbursed by various government agencies â€¦ but because thatâ€™s the price consumers were willing to pay.
Problem #3: As pointed out by Ron, many of these properties were significantly damaged and had to be discounted. Iâ€™ve seen some pretty nasty places over the past few years.
This is important: When a property is appraised for ANY reason, the financial factors behind the scenes are not a party to the appraised price or appraisal process. The condition of the subject house in relationship to other local comparative sales is what actually determines the price.
As an example, a person who has managed to pay off their house and owes nothing will get an appraisal at market value. Letâ€™s say that right next door is an identical short sale that is upside down by $250,000. The appraiser will appraise it for the same price as the home that is paid off. As a final argument, letâ€™s assume that a nasty REO came on the market right across the street â€“ the exact same model as the other two homes, yet trashed inside. The appraiser will use the values of the first two houses and then subtract for the condition of the REO. It will be therefore be priced LESS â€¦ not because of its status as an REO but because of its condition.
Letâ€™s say the base market price for all three homes is $300,000. The irony of the above situation is this:
â€¢ Because the first house is owned by a normal seller who has an inflated idea of their homesâ€™ worth, it will go on the market at $330,000. And sit there until the price drops to reality.
â€¢ Because the short sale listing agent needs to get an offer in a hurry, the short sale house will go on the market for $270,000. It will get multiple offers within a week â€“ most likely at over the asking price, and then sit there for 6 months, have its price adjusted up by the bank and finally sell for $292,000.
â€¢ Because the REO is trashed, it will go on the market for $285,000. It will languish a month or so until the bank lowers the price, at which point someone will come along and lowball the price. Because it will have been on the market over 60 days AND it is in poor condition, the bank will be motivated to get it out the door and will accept $260,000. At the end of the day, it will actually sell for a price that is commensurate to its condition because it will take at least $40,000 to get it back into good condition.
â€¢ In the meantime, the normal seller is griping and complaining about the effect of REOs on his price, not realizing that if he had set his price correctly at $295,000 out the gate, heâ€™d have sold a long time ago â€“ might have actually received multiple offers driving his price over the $300,000 benchmark. He would have sold BEFORE the short sale or the REO â€“ and his sold price would have set the benchmark for the other two â€“ NOT, as usually happens, the other way around.
In reality, none of them were priced right at the beginning, and it has NOTHING to do with the conditions youâ€™ve stated in your question.
In reality, this is very typical, and, when the day is done, itâ€™s not the banks ruining the market. Their properties are being trashed by owners angry with their situation who are deliberately either destroying equity or blatantly stealing (frequently entire kitchens) â€“ and not getting prosecuted for their theft.
So who IS ruining the market? How about normal sellers with artificially high expectations or short sales where the investors behind the loan are actually taking it in the shorts? Short sales hang out on the market for VERY long periods of time with pending prices that are, in many cases, absurdly low. In most cases, the short sale prices get adjusted upwards closer to reality once a bank does a BPO. But buyers, seeing the ridiculous list prices out there for so long, assume thatâ€™s the price at which it will sell and make their offers for other properties in line with the artificially low â€œfakeâ€ short sale list prices.
So who is REALLY driving the market down?