When the housing market collapsed in 2007, the most accurate metaphor about it was that of a tidal wave. It was this enormous and terrifying wall of despair that washed over the entire country, some parts more than others, but nowhere was dry. To use another more common financial term, it left many homeowners underwater: the debt they still owed on their homes was higher than its value. Even people who weren’t foreclosed upon were struggling for breath. This actually provided opportunity for residential rehab professionals, who could buy less-expensive properties, fix them, and flip them when the market rebounded.
The market has of course gotten considerably better. The tidal wave has receded, and solid land has reappeared. A full 91% of homes currently have equity, according to CoreLogic. This is great news for anyone in real estate, of course, as well as for homeowners. For people looking to buy inexpensive property though, there are still areas to work with. There are many cities with a higher percentage of underwater homes, and, most importantly, many homes with equity are still struggling, leading to a state of distressed property. These are all attractive to the fix-and-flip professional who, with the help of a hard money loan from Socotra, can turn around homes and be part of a regional resurrection.
Understanding Distressed Property
In general, a distressed property is one that is currently worth much less than its potential. There are two ways a home can become distressed.
- A home has a low value relative to close neighbors. Imagine a grid of five squares: one in the middle and four surrounding it. The one in the middle is a residential area where homes are worth $150,000. Two of the surrounding squares are business areas that are suddenly filling up with boutique stores, nice restaurants, a pedestrian plaza, etc. One of the squares has been given over to expensive, mixed-use condos, and the last one is a nice neighborhood where homes are worth $250,000. It doesn’t take a huge leap to understand that the middle square is going to do very well soon. A house might be priced at $150,000, but it is worth much more.
- A house that is undervalued due to disrepair. Stay in this same neighborhood—the middle square—for this scenario. There was one person who had been underwater for a long time, wasn’t able to remortgage or borrow against his equity (which he didn’t have), and so couldn’t afford to do any repairs. The house is a mess. It can easily be had for $90,000 due to all the work that is needed, and even if the neighborhood doesn’t hit its boom, a fixed house can go for the average price of $150,000. This is what residential rehab pros look for the most.
In addition to homes that are outright underwater, there are also properties known as “underequitied” homes. This is where they have less than 20% positive equity, which makes it very hard to borrow against the mortgage. That makes it harder, in turn, to make repairs and perform vital upkeep. That’s is what makes for a distressed property, one that is worth less than it should be, due mostly to neglect. This is the sort of property a fix-and-flip pro should look for. It is estimated that, nationwide, that 19 percent of homes that have positive equity are still underequitied, which comes to a full 9 million homes. Close to 2 million of those have less than 5% positive equity, which is not quite underwater, but means they’re standing on their tiptoes as the tide comes in.
Riverside: Finding Distressed and Underwater Property In California
So, as we said, there is now a 91% equity rate for homeowners in America. But that isn’t uniform. There are states where it is much higher, and of course states where it is lower. California as a whole is doing fine, but the Riverside-San Bernadino-Ontario statistical area has one of the highest negative equity rates in the country, at 12.3%. Riverside alone is at an enormous 15.8%.
This means that there are plenty of undervalued properties to choose from in Riverside. Now, you might be thinking that it isn’t a good investment, given that the statistical region as a whole is hurting. But look at the areas around it. The Anaheim-Santa Ana-Irvine market has a remarkable 97% positive equity percentage, and of course the Los Angeles market is booming. These are good neighbors, and as more people spread out from those areas as they grow, it stands to reason that Riverside will rise as well.
There are still a lot of markets for the smart residential rehab expert to buy in that can turn a profit. A distressed property loan from Socotra, California’s premier hard-money lender, can help you get the house you need. Your skills can turn it around and transform a run-down or drowning property into what it is actually worth.
