Project Description

DISTRESSED PROPERTY

Abstract: This paper explores the pricing effects of duress on commercial investment (apartment properties) for multiple cities (MSA). We estimate models using data from five metro areas over the 2005 to 2011 time period.  This research expands the analysis of apartment market research on distress and foreclosure price effects. We segment duress (distress and REO) for apartment properties into distressed conditions (non-bank owned) and a real estate owned (REO), bank owned properties. Refinement of the hedonic model by the addition of explanatory variables for deferred maintenance and vacancy condition at the time of sale shows that these variables are partial explanations for duress discounts.

Unlike prior apartment studies with limited samples, we employ a model using a two stage least squares model (2SLS) to control for the endogeniety of time on the market (TOM) and a Heckman selection model to control for sample selection bias. We find a 12% to 13.3% discount for duress. Separately, we find a 11.8% discount for distressed properties, and 12.4% discount for REO properties. After controlling for selection bias using a Heckman model, results in a 14.2% discount for being distressed, but there is no significant effect for being an REO property per se. Our results also show that a price discount for deferred maintenance is greater than the actual cost to cure and last, and we show that out of town buyers pay a premium in comparison to local buyers.

MORE FROM AVP