Buying distressed properties, whether they are in foreclosure or are a short sale, can be difficult. I am going to cut and paste an email from a prior client in relation to this topic, and my reply, as an example of how difficult it can be to buy distressed properties:

"Hi Brian,
I found myself doing initial legwork for a home purchase and found myself posting the following to a forum. I'd like to hear your recommendations, as someone who is in the business. Thanks
________
In this day of browsing for your home, I do not see why Redfin cannot represent buyers for homes below their target price, or foreclosed homes for that matter. If there is an expense issue, buyers like myself may be willing to pay the regular commission just to facilitate property purchase.  There is much opportunity there. I find a property that is outside Redfin's purview and search for the listing agent and/or actually visit the property and write down a posted number. Somehow, I cannot get anyone to either call me back, or follow up with initial contact. I can't believe this. I saw one house in foreclosure that I was willing to pay cash for due to location, land etc. and willing to accept other conditions. I call the agent, leave a message, and nobody returns my call. House sits on the market for a few more weeks. Then its price drops! WTF?

Second case, I find another property that a local says is on the market. The empty looking house has no signs on the lawn, no listing in Redfin.com, Homesdatabase.com, or Google Real Estate. A few weeks pass. The other day I drive by and BINGO – brand new sign with agent contact info. I call the number and get my call returned promptly (unusual) only to tell me that the property is under contract. That property was so ideal, I would have been willing to engage in competitive bidding to acquire it. Now I can only hope that their financing falls flat. 

I don't understand what I am doing wrong, other than the fact that I should probably not represent myself without a broker, which I want to avoid!. Now that my time has been wasted finding out about this chaotic process, I am forced to find broker representation elsewhere unless Redfin can fill the niche presented by loan free buyers.

Any advice?"

And my reply:

"Interesting post. I have heard similar stories. In fact, I have seen some Realtors say they flat out will not work with anyone interested in foreclosures and short sales, because the banks and listing Realtors are so difficult to work with. Most people feel buying these properties is difficult to impossible. Many Realtors feel it takes too many hours and their time will be more rewarded in regular resale's.

I don’t know if its due to them being inundated with interest that they are unable to handle? Think about it, if you are a bank and just want inventory off your books, and you are a large out of control organization, not unlike government, do you care about getting top dollar or being efficient? So if a foreclosed property gets 34 calls, and half go unreturned, and the 17 parties that got called back bid the property up to the right number the bank was looking for, do you think the bank and the Realtor care about the other 17 people who did not get calls back who all insist they would have bid “a little bit more.” My guess is it just a sloppy inefficient process, the banks are probably leaving some money on the table and are too inefficient to know it, and I think buying these properties is like finding a needle in a haystack.

I am not sure getting a Realtor to help you will improve your odds, but I’d be interested to hear how that goes if you go that route. In other words, I am not sure a Realtor is going to return another Realtor’s call and faster than they would return your own call. I just think the process is a mess. I have done financing for a few foreclosures, and can see why people don’t want to work with them. It takes weeks or months to get a reply from a bank on a simple question pertaining to the loan of the buyer, or the settlement date, or a change to the sales contract. Good luck"

To finish the discussion, I just had a Realtor friend of mine finish my sentence. I said, "I am blogging about how hard it seems to be to buy foreclosed/distressed real estate for the…" and he stopped me and said "for the average consumer." And I said yes, how did you know!? And he responded that regular consumers are getting beaten out by investors who are paying cash. He said, "its a waste of time for someone who wants to buy a foreclosed home and live in it, because they usually have financing contingencies, take too long to settle, and want home inspections!" Further, "investors come in and offer above asking, with no contingencies, pay cash, and settle fast, then they fix them up and flip them." So it seems the bottom line is that if you want to buy a distressed/foreclosed home, you need to have all cash, settle fast, and maybe even say you are an investor!

Isn't it always a good time to buy real estate? There are hardly any Realtors, builders or other industry participants who have ever said it is NOT a good time to buy real estate. There are some very good Realtors and builders, I know many, but let's not forget these people are ultimately salespeople, not investment analysts equipped with the tools to know the real value and direction of real estate. You hire a Realtor to help you buy and sell real estate, but you should make your own determination as to when is the best time to do so. So that means you are left to your own devices as to determining if real estate is a good investment.

We have to discern if we are talking about buying a primary residence or investment property. Since buying investment property is a simple cash flow numbers analysis, I'll restrict this blog post to buying a primary residence. And when buying a primary residence your first concern should not be if it is a good 'investment'. You should not go into it looking for investment returns. It is a home, shelter, a place to live, sleep, entertain, raise a family, and enjoy the community and neighbors. But you do want to make a careful decision and get the best possible financial gain from your home that you can.

In general, real estate is usually always a good buy. End of discussion. In fact, I wish there was no reason for this blog post at all. However, all markets, even real estate markets, are subject to the whims of the economy and can get twisted and distorted. Recently, from the very late 1990's through 2006, real estate went through a doozy of a fantasy world in most areas. Many larger, urban markets doubled and tripled in value. However, incomes did not double or triple and population growth did not double or triple. So why did real estate double and triple in some of these markets? The answer is solely: "speculation fueled by cheap money and easy loans." There are no other economic, fundamental answers. There are lots of emotional answers, but no rational ones.

For hundreds of years real estate has been driven by income and population growth, there are no other proper building blocks to real estate values. So until real estate reverts to the mean, and comes back into line with income and population growth, my answer is now is may not a good time to buy real estate in some markets. You'll have to do some research in your local market as to median income and median home price. Historically, the median home price is three to no more than four times the median income. In Washington DC, the median income is $99,000 and the median home price is $360,000 for a condo and $427,000 for a single family home. This seems to suggest that real estate here is not drastically over-inflated, and may be close to being in line with fundamentals. You should also research the cost to rent versus the cost to own the type of home you want to buy. The chart below, from real estate economist Robert Shiller, makes it pretty simple:

I know that one can't be a market timer, but one can certainly use common sense. If you find that real estate prices are inflated when compared to median incomes, you may want to consider waiting to buy. However, if prices are no more than three to four times the median income, then you can feel comfortable that you are paying a fair price at that time. In many markets, real estate will still get cheaper…a lot cheaper. Combine all of this with the uncertainty with the economy in general (housing prices getting distorted may very well be the reason for the economic uncertainty we face) and you have a recipe for caution in buying real estate in some markets. It may pay to be more concerned with hanging onto your job, saving money, and fine tuning your 401k and other investments that are likely way down in value.

Everyone has a reason for why their market "is special and not subject to the same rules as other real estate markets." I have heard them all, "New York never goes down", "DC has the ever expanding federal government so we are immune", "here on the West Coast you can't develop any more land, because you hit the ocean!", and my personal favorite, "they are not making any more land". These are all non-sensical and emotional. In fact, they have "made land" before. For example, the "Marina District" in San Francisco was built up from marshland which was filled with rubble and sand pumped up from the bottom of the ocean. And you can always "make land" by building upwards, and building more densely. Stick to the facts and fundamentals. Look at median incomes, median home prices, population growth, and rents. The fundamentals say real estate in some areas got wildly distorted and disconnected from its fundamentals, and still has room to correct to the downside.

But let's not forget that median incomes can go down (anyone hear about the rising unemployment in this country?) which further pushes real estate down values. And interest rates can spike (we do have a big deficit, big spending, and big government; all of which can cause higher interest rates) which causes real estate values to go down.

The chart below shows indices of real estate in several cities (for more on Case Shiller Indices go here: http://www.macromarkets.com/csi_housing/sp_caseshiller.asp). You can see that prices were going up at a normal pace with inflation from 1987 to the late 1990's, matching income and population growth. I could also have added data going much further back than 1987, but trust that the data shows modest growth, matching inflation in general. And then real estate prices got distorted in the late 1990's through approximately 2006. What is the next stop for these indices?

Phoenix/Los Angeles/San Diego/San Francisco/Denver
YEAR PHX LA SD SF DNVR
1987 67.78 59.40 52.23 49.85
1988 85.82 69.83 62.47 47.44
1989 66.50 99.77 83.57 73.39 48.21
1990 65.45 96.55 84.03 71.86 48.73
1991 66.04 93.14 81.34 70.45 51.32
1992 66.68 85.82 77.48 68.58 55.60
1993 70.13 77.57 74.11 66.63 62.24
1994 74.90 76.39 73.44 68.31 67.58
1995 78.86 73.94 71.81 66.85 71.64
1996 82.48 74.52 72.22 69.21 75.19
1997 86.56 79.91 78.09 76.50 80.05
1998 92.20 91.78 88.90 85.40 87.43
1999 99.65 100.33 100.07 100.03 99.67
2000 106.02 110.71 116.96 130.07 114.55
2001 111.67 121.29 129.99 126.85 121.64
2002 116.75 143.98 155.20 143.84 125.73
2003 126.33 174.81 185.08 156.02 127.28
2004 152.33 218.24 234.41 187.17 132.76
2005 220.65 265.68 250.13 216.58 137.94
2006 221.39 270.70 239.70 213.42 137.66
2007 187.60 233.53 203.89 190.30 131.60
2008 123.89 171.79 153.27 130.84 126.38

Real estate will stabilize eventually, even in markets that are currently over priced, and real estate will remain a main ingredient in your finances and long term plans. First, we need some more downward price adjustments in many markets before it is time to think real estate is a safe purchase. How long will it take? I have heard from the media and interested participants that it is the market bottom in real estate prices every year since 2005. Eventually they'll be right. I know one thing, watch the fundamentals, not the news nor the biased industry participants.