Don’t judge a foreclosure by its price

foreclosure

With home prices more affordable than ever, it stands to reason foreclosures are a steal.

Not so fast.

Foreclosures are selling at deep discounts, but those discounts can come with some hidden factors that could cost you more than you bargain.

“Buyers often think that buying foreclosures is a true win-win. Why? Because of the price and only the price,” said Natalie Dean, a real estate consultant with Taylor Properties-MRE Group Annapolis, MD.

But there’s much more to consider.

The National Association of Realtors (NAR) recently reported home prices are more affordable than they’ve been since NAR began keeping records back in 1970.

In another report NAR said foreclosures accounted for 13 percent of sales in June and sold for an average discount of 18 percent below market value in June. That average discount could lop more than $36,000 off $189,400, June’s national median home price.

If only it was that simple.

Competition

Those foreclosures aren’t just sitting there waiting for you to come along and cherry pick.

Investors, including all-cash buyers, have already peeped the deals and are descending on the market in droves. Not only do they have the cash or financing to purchase, they also have deep pockets that allow them to follow up with fixing-up to flip or rent so they can quickly regain their investment and a decent return.

Investors purchased 19 percent of all listings in June, unchanged from a year ago. All-cash buyers, investors and others, grabbed 29 percent of June’s listings, also unchanged from a year ago, according to NAR.

In a given market, spend too much time wrangling with investors and you could wind up in a market of dwindling inventories, rising prices and miss the bottom only to end up spending more than you expected for either a foreclosure or conventional listing.

Even the most experienced real estate agents are having a tough time swimming with the sharks.

“Inventories are low, there’s just not a lot of stuff. I have a CEO I’ve been trying to help buy a home in The City (San Francisco) in the last two or three months and the competition is just like it was in 2005 and 2006. It’s amazing,” said Mark Brandemuehl, vice president of marketing and business development for Movoto.com a San Mateo, CA-based brokerage with 1,800 agents in 30 states.

“We started making offers on places, we weren’t off by much, but now it’s gotten to a point where there are dozens of offers on properties in the last 30 days,” Brandemuehl added.

Condition

Investors, aren’t looking to occupy the property and have deep pockets that allow them to follow up with fixing up to flip or rent the property. They are in the game to quickly regain their investment along with a decent return.

Investors know the discount on a foreclosed property isn’t always just because the bank wants to unload it and cover as much of their losses as they can as quickly as possible.

Foreclosed homes are often in poor condition and are sold “as-is” but it can be tough to determine exactly what “as-is” is.

“Often, there isn’t even the ability to conduct a full and thorough inspection as the utilities have been shut off, usually for a long time. This does not permit the buyer to really have a grip on the possible risks when purchasing said property,” said Karen Smyth, a real estate agent with Keller Williams Realty-Peachtree Road, Atlanta, GA.

Cash

“If they are willing to take those risks, they must have a budget for possible big ticket items, such as plumbing, electrical and most importantly, any structural issues. The majority of foreclosures are owned by banks or the government entities. They will not make any repairs to these properties nor offer an allowance for repairs,” Smyth added.

Dean said for those who can’t go toe-to-toe with buyers who have the cash to go the distance on a foreclosure fixer-upper purchase, preapproval for a Federal Housing Administration (FHA) 203k loan is an option, albeit a tough one.

Many lenders don’t offer 203k loans. Those that do require extensive documentation in terms of your ability to pay as well as in terms of the work to be done. Again, difficulty in obtaining an inspection can be a road block.

Because of the added risk to the lender, a higher interest rate could offset any savings you expect to realize in the price. Also, closing a 203k loan can take up to 90 days.

“Do you have the money to continue to stay in your rental or other home while this takes place?” asked Dean.

“These are real issues that every buyer needs to consider when they decide ‘I want to buy a foreclosure’,” she added.

About the author

DeadlineNews.Com's Publisher, Executive Editor and Founder, Broderick Perkins, was the first real estate journalist to manage a daily newspaper's online real estate section. He parlayed more than 30 years of old-school journalism into a digital real estate news service offering "News that really hits home!" -- the Silicon Valley bootstrap, DeadlineNews.Com. Network with Broderick Perkins on LinkedIn, FaceBook, Twitter, Google+ and the Bloomberg Business Exchange.

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