A combination of declining values and the inability (or unwillingness) of the owner to continue to make loan payments that usually causes a property to be classified as distressed. Depending upon which stage the property is in, it can be known as a short-sale, foreclosure or bank owned property (REO – real estate owned property).
Crisis Isn’t Over Yet
In 2010, we were told by experts to expect a property market bottom in 2011. However, not only did we not hit bottom, the foreclosure crisis accelerated. Late in 2011, again the experts said we could expect “peak foreclosure” in 2012. Finally, at the beginning of 2013 we have what appears to be a stabilized real estate market, but foreclosures are still likely to be a factor through 2015 and perhaps beyond.
Since 2008, declining property values, as a result of foreclosures, left millions of homeowners upside down in their homes. Predictably, many of these homeowners simply gave up and walked away. Their homes went back to the lending bank and most of the time the property was purchased by an investor.
In simple terms, this perfect storm of foreclosures and loss of value meant that real property was (and still is) changing categories of ownership. It’s shifting from “owner occupied” to “non-owner occupied”…from owners to investors. And, while it is unfortunate that the economic collapse has resulted in loss of home ownership, there is a silver lining…at least for investors.
The foreclosure market has created a very favorable environment for real estate investing. In 2010 alone, rents increased nationwide by 11.6%, moving from $1181 to $1319.
Opportunities to pick up distressed properties as part of an investment portfolio that will accelerate growth in a Self Directed IRA or 401(k) plan will continue. This is especially true since banks are demonstrating little interest in re-entering the the market as lender of choice.