The word “discount” gets thrown around all the time in the struggling real estate market. The term “discount” means something different to each person unless it is carefully defined in a given situation.
The novice investor may feel like they are getting a good deal by tying up a property listed at 50% of the original loan balance. The problem is that the original balance of the loan does not make sense for the deal. The discount must be determined from the current market value within the specific market. The average market value discount for a property from a bank is around 26% across the country, while a short sale can be settled on average at a 15-20% market value discount. Specific typical discount values for foreclosure and short sale will vary considerably from market to market and neighborhood to neighborhood, as well as lender to lender.
Different markets can also paint a different picture of whether short sales or REOs are typically more profitable, depending on the amount of competition for deals in the area. If there are many REO investors and relatively few active short sales, competition on the REO end may very well drive up the price when the property comes on the market, while short sales may continue to command deep discounts. In markets where there is relatively little foreclosure activity, the fact that a property is “distressed” may have little or no impact on the listing price of the property because the property can be sold quickly at a small discount.
To determine an appropriate discount for a given market or neighborhood, ask a local agent to list similar properties recently sold in the area. If there is a wide range of prices for similar properties, the lower prices likely represent the price of comparable short sales or foreclosures, and the higher prices likely represent resales to retail buyers or buy-and-hold investors.
Whether a deal is good or not will also depend on the investor’s exit strategy. A buy-and-hold investor may be happy with a 10-20% discount off market value because the strategy is to hold the property for appreciation and rental income. A wholesale investor will need a higher discount, perhaps 50% of current market value, to generate a profit and expense margin when selling the property to another investor-buyer who will rehab the property and sell it to a retail buyer or hold the property. property for appraisal. The rehabber who must get a hard money loan to fix up a property sooner will typically need at least 40-45% of the current market value less rehab costs to make the deal profitable and pay off the hard money loan.
Therefore, the answer to the question of what discount means will depend on the market and the types and numbers of buyers that are attracted to that market. The discount should always be determined from the current market value, not the existing mortgage balance.