What Is a Fire Sale in Real Estate?
In June 2021, home sales saw no change in the South, but they rose by 1.4% in the West, Midwest, and Northeast regions. The house types in question included single-family homes, co-ops, and condos. We can safely say that real estate sale prices haven’t reached a point at which buying a property is impossible.
The market isn’t that hot right now, which means it’s the perfect opportunity for you to start hunting for your dream house. Don’t forget to get a credit check before you start your search. Your eligibility for a mortgage loan is the biggest factor in determining whether you will be able to afford a house or not. Buying a house is a huge investment, and how you negotiate with the seller on the asking price shows them you are a serious buyer.
You are probably wondering what all this has got to do with a fire sale. When searching, you will come across various types of houses; some you will reject, and some you will like. Then, you will come across the house you fall in love with at first sight. We are trying to prepare you for this situation. What if the house you choose is on a fire sale?
What is a fire sale?
In the past, a fire sale was referred to as your run-of-the-mill sale, like a backyard sale, where everything, from furniture to knick-knacks, was sold at a steep discount.
Today, the same term is used for real estate and refers to an urgent house sale in which the house is available at a steep discount. The house is priced at a value that’s not only lower than the current market price but also what it was previously purchased for. So, despite the processes being different, the bottom line is the same.
“If a house is being sold at a steep discount, isn’t that a great opportunity for me to buy it?”
Yes, but there are few things you need to know about it. Houses that are usually on fire sale have that one feature, which attracts you – the price. No doubt, if a house valued at $250,000 is being sold at $190,000, you would want to grab the contract with both hands and never let it go. However, an evaluation of the property will reveal the numerous repairs that are awaiting you. And that’s the secret a fire sale property hides!
Understanding fire sales
A fire sale is a great opportunity for real estate investors. Usually, the securities on such a house offer a risk-reward payoff. It’s highly unlikely that the value of the house will decline any further or they might be limited. The upside potential is that your renovations can bring a huge return on investment or ROI. The only challenge for investors during a fire sale is to purchase the securities.
When a certain company’s stocks are on fire sale, it’s a sign that it’s not a good time to buy those stocks. Buying when everyone is selling is a trait associated with stock market contrarians. You will seldom see a big fire sale, as it usually happens during a financial crisis.
Fire sale properties sure do result in thousands saved but as a buyer, you don’t get to see the downside until you start living in it.
The reason behind a property on fire sale
A fire sale does not just happen because the seller felt like giving away their property at a low price. The link between the price and the hasty sale has got to do with several things, which we will explain below:
The seller could no longer pay the remaining home loan and so decided to let it go
A seller’s distressed financial situation is one of the biggest reasons why a fire sale happens. When the seller can no longer pay off the mortgage loan, the bank takes possession of the property so they can be relieved of the financial obligation. Hence, you need to plan when making such a huge investment.
The seller is divorced and wants to split the assets
During a divorce, shared assets are split into two and divided between both spouses. This can also be a reason behind the fire sale. If the seller is looking for an easy way out and wants to liquidate the property quickly, a fire sale is the best way to do it. This also helps in speeding up the divorce process.
The seller is about to declare bankruptcy
Let’s say that you are about to be bankrupt. There are a dozen expenses you need to take care of but no cash. The biggest expense of them all is your house, which still has outstanding loan payments. To pay your debts, you decide to sell the property. Since it’s such a hasty decision and you didn’t have any time to stage the house or make any repairs, you end up setting the asking price extremely low.
Companies too are put on a fire sale when a business experiences cash-flow problems. Since a commercial property can’t be liquidated, the owner is forced to hold a fire sale.
Developers who don’t want to pay absd
Developers who buy land in hopes of constructing condos, a shopping center, or a mall but fail to complete the project within the given time frame can also take advantage of a fire sale. Additional Buyers Stamp Duty (ABSD) refers to a fee imposed on developers. This fee is 30% of the land price, and developers have to pay if their construction isn’t completed in 5 years.
The seller doesn’t want to experience a huge loss due to a downturn
Predicting the real estate market is a skill that only professional agents have. They know how to collect the right data and keep their eyes and ears open to any information that might hint at house prices falling. This way, they can offload undesirable properties, which they think will sink further in price when the market falls.
If you foresee an economic downturn, selling the property makes sense even if it’s through a fire sale. The deal might not be lucrative but at least, you won’t be stuck with a property that has no chance of selling.
In case the rental demand falls too, you won’t be able to rent out the place and end up making the mortgage payments out of your pocket.
How to find a fire sale property
Broadcast your intent
There are plenty of people out there who are ready to offload their property. You just have to find them and let them know that you have the cash on hand to purchase the house. Contact the real estate agents in your area and tell them to spread the word. For a small fee, you will get a fire sale property in no time.
Attend property auctions
When a buyer can’t pay off the mortgage, the bank repossesses the property and auctions it off. This information can also be found out by visiting your local real estate agent.
Look for listings that have been on the market for too long
A house that has been on the market for more than 6 months is most probably a fire sale property. However, when you approach the owner of such property, make sure to quote your price because sellers are keen to listen to any offer you might have.
Search on property portals
There are plenty of websites online with MLS that are solely dedicated to fire sale properties. When searching on these platforms, use the keywords “fire sale,” “urgent,” “must sell,” “serious seller,” “below valuation,” “selling at a loss,” etc.
In conclusion, a fire sale can have both advantages and disadvantages. If you are an investor, you will benefit from the property bought as it can be refurbished and priced high as premium real estate. However, if you are buying the property to live in it, it will prove to be a bad investment.
So, make sure that you are searching for a fire sale property for the right reasons, and your ROI will be huge.