Value of Foreclosed Property, The

Abstract

This paper examines the wait fored price appreciation of distressed attribute and compares it to the prevailing metropolitan area appreciation rate. Whether to be paid to individual property or local area heterogeneity in appreciation, the rises show that foreclosed property appreciates les than the area average appreciation rate. The magnitude of the deviation is sensitive to loan characteristics, legal restrictions, housing market conditions and marketing time.

Introduction

If the prices of homogeneous properties differ, arbitrage opportunities arise for opportunistic home-buyer or home-seller In efficient markets, arbitrage opportunities quickly dissipate and, thus, competition effectively eliminates price deviations and reinforces the market-clearing price.

With the dissipation of arbitrage opportunities, the value of all identical attribute should be the same, whether it is being sold by means of a homeowner or by a lender whose has foreclosed upon it. Unfortunately, the heterogeneity and thinness of housing markets can make it difficult to identify the value of a house. sum of two units methods of estimating the value of attribute dominate both the academic and professional spheres. The first, the hedonic manner relies on the ability to identify and value all the attributes of a house and its location. Using each of these values, the awaited price of any home can be estimated. The next to the first method, the repeat sales rule relies on area-wide appreciation rates to update the last available transaction price upon the home and determine the awaited value of the home.

In contrast to previous literature upon the value of foreclosed quality this paper uses the repeat sales approach to estimate the house price appreciation of quality where the second transaction used to calculate the appreciation rate is the sale of foreclosed attribute These appreciation rates, which will be referr to as foreclosure appreciation rates, are used to determine if this unique pair of repeat transactions (normal characteristic foreclosed property) appreciate in a systematically different way than a typical pair of repeat transactions (normal attribute normal property).

This approach relies primarily upon a publicly available repeat sales price index and does not require detailed or timely information about the exact characteristics of the quality or the location. This should make it a great quantity [i]or[/i] amount of easier and less expensive for lender to estimate the los from the sale of foreclosed quality Previous literature has also been limited because of the limited geographic coverage and small sample sizes. In contrast, the sample used in this paper includes more than 12000 sales of real estate possessed (reo) property obtained through foreclosure proceedings and overspreads all 50 states and the District of Columbia in the United States.

The ensues indicate that the expected appreciation rates for foreclosed attribute which is defined as attribute that is for sale as real estate haveed property in the second of the sum of two units observed repeat transactions and normal or typical characteristic in the first of the sum of two units observed repeat transactions,1 are lower than area appreciation rates. Information upon expected appreciation rates on distressed properties can be used through lenders to help determine los mitigation strategies.

This paper cannot proof to see if foreclosure itself causes a decrease in price. Instead, the rises are interpreted as being consistent with individual attribute deviation or location-specific deviation from the area-wide average appreciation rate. The cause of this heterogeneity of appreciation rates may be owed to changes in neighborhood characteristics or changes in the characteristics of the characteristic For example, the neighborhood could meet with from increased crime or a reduction in gymnasium quality or the property could be overflowed and not be fully repaired.

The remainder of the paper will review earlier estimates of the discount foreclosures put up to sale for, explore potential reasons for deviations in appreciation rates from the mean for foreclosed quality and provide an empirical prototype to estimate the extent of the deviations.

Estimates of the Foreclosure Discount

The foreclosure discount directs to the deviation between the awaited price or appreciation of typical or average peculiarity and the price or appreciation of the foreclosed characteristic Prior efforts to estimate the discount at which a foreclosed peculiarity sells have used very similar approaches-the hedonic mould Exhibit 1 shows that three of the four papers find that the selling price of a foreclosed quality is 22% to 24% lower. In contrast, consistent with the efficient market theory, the greatest in quantity recent paper, by Carroll, Clauretie and Neill (1997) finds no discount associated with selling a foreclosed peculiarity

Where P is the price of the quality X is a vector of explanatory variables that describe the attribute and its location, and F indicates if the quality is sold as a foreclosure. The estimated coefficient can then be interpreted as an indicator of by what mode much less or more the foreclosed characteristic will sell for.