RealtyTrac recently analyzed residential sales over the year that ended in March to determine what drives discounts in the market value or premiums in the sales price for distressed properties. They looked at four factors, foreclosure status, occupancy, equity, and property age, using them to construct 24 different distressed property profiles. Each profile was compared to a control group of properties not in foreclosure that sold in the same time frame.
As might be expected, the properties that sold at the largest discounts, an average of 28 percent, were vacant, had negative equity, and were older (but not the oldest), built between 1950 and 1990. What is surprising is that some property profiles sold at a premium.
Bank-owned properties overall went for an average of 3 percent above market value while bank-owned properties that were built prior to 1950 brought 6 percent more than the control group. The largest premium was paid for properties that had negative equity but were neither in foreclosure or foreclosed. Those properties sold at a 19 percent premium. (Note: in the chart below, negative numbers indicate above-market-value sales prices).
Two profiles tied for the second largest discount, 26 percent. One profile was properties that were in default with positive equity; the other was properties in default with negative equity, vacant, and built before 1950. Discounts of 25 percent were the average for two other profiles; vacant properties with negative equity that were scheduled for foreclosure auction and vacant properties scheduled for foreclosure auction.
While REO has a whole sold at a premium some sub-categories of bank-owned homes were discounted. Those that were confirmed vacant - without the former homeowner or tenant still living there - sold at an 18 percent discount below the non-distressed control, and bank-owned properties that sold after 1990 and between 1950 and 1990 also sold at slight discounts.
The analysis also found the property profiles with the biggest discounts - and the discounts available - varied significantly by state. For example in California the largest discounts were for properties scheduled for auction that had positive equity - 17 percent discount, while in Florida it was also houses scheduled for auction but with negative equity, vacant, and built between 1950 and 1990. Those had an average discount of 29 percent. Properties in default, vacant, with negative equity, and built between 1950 and 1990 that received the largest discount in Ohio, 34 percent, while that same discount in Michigan went to properties that were merely in default and vacant.
While we don't have access to the raw data that formed this analysis it would seem that vacancy was the most prominent common denominator among properties that received the largest discounts prior to foreclosure. Foreclosure status appears to be the driver post foreclosure as REO properties on the whole sold at a small premium and those properties tend to be vacant.