Improvements in Negative Equity Situation Spell Opportunity for Real Estate IRA Owners

It’s been a cold, dark, lonely winter, as George Harrison sang. But the sun seems to be gradually coming out. According to the Zillow Q1 2015 Negative Equity Report, the U.S. negative equity rate among homeowners who are carrying mortgages was 15.4 percent during the quarter.

Further, out of those who owe more than what their home is worth, half of those homeowners are currently underwater by 20 percent or more. That equates to 4 million homeowners, nationwide.

Zillow reports that low-end homes are far more likely to be upside down than higher-end homes. 25 percent of all homes in the bottom tier, as measured by Zillow’s research team, are worth less than the balance on their outstanding home loans. Among the higher-end homes, the negative equity rate is just 8 percent.

The good news is that the passage of time and the substantial home price recovery in recent years has actually slashed the U.S. negative equity rate by 50 percent or more since the rate peaked in the first quarter of 2012.

Some 8 million homeowners have finally slipped free of the chains of negative equity – which means they have much more freedom to buy or sell homes.

Ramifications for Real Estate IRA Owners

For the fix-and-flippers, mid-range to higher-end homes are the place to be. This is because the negative equity rate among the low-end homes is so high that a lot of people just can’t sell you their homes. The only way out for them is foreclosure or short sale. If the bank won’t approve a short sale, then they’re stuck – and you can’t get a deal going, no matter how hard you try. They’ll have to come to the closing with cash they just don’t have.

Meanwhile, Zillow’s researchers estimate that the severe leftover negative equity situation is hampering the ability for people in their starter homes to move up to the middle market. There may be some opportunity here, however, as some renters may be able to cross over to the middle market home, while many of those in middle-market homes may have some pressing reasons to sell: For example, a new job, an empty nest, retirement, etc.

If you can find a motivated middle market seller and get a house at a nice discount to fair market value, you may well be able to find a buyer at retail prices.

The lowest rates of negative equity are in San Jose and San Francisco – two of the highest-priced markets in the country – which clocked a negative equity rate of 3.8 percent and 6.1 percent, respectively. This favors someone looking for a home to buy, of course, because at least 93.9 percent of homeowners you approach are in a position to sell at fair market value or lower. They don’t have to get a short-sale approval from the bank first.

The three markets with the highest negative equity rates, according to Zillow, were Chicago, St. Louis and Cleveland, with negative equity rates of 23.7 percent, 20.4 percent and 19.8 percent, respectively.

Other outliers, according to Zillow, included Detroit and Atlanta where 46 percent of homeowners in the lower price tier were in a negative equity situation. Only 7 percent of the Detroit owners in the top tier were shackled to their homes by their mortgages, and 10 percent of the top-tier owners in Atlanta.

If you had to focus your deal-finding efforts on one price point in the marketplace, the top tier is the place to be. Working class homeowners in these areas are having a hard time – especially in the high-unemployment Detroit, because their negative equity cause them tremendous difficulty in relocating to where the jobs are.

American IRA, LLC has thousands of clients successfully pursuing a self-directed real estate IRA strategy, nationwide. We are nationally recognized experts in handling transactions related to self-directed retirement accounts. If you are considering this strategy, or you are already involved in real estate, we would like to work with you. Visit us online at and peruse our vast library of informational articles and blog posts like this one, or call us at 866-7500-IRA-472. We look forward to hearing from you.