How To Get a Bargain on a Foreclosure

foreclosureOne of the most remarkable and surprising aspects of the current housing market is the price of foreclosures.  Rising prices and thin supplies of foreclosures are contributing to the housing recovery, but they are also making things tough for prospective home owners and small investors who want to find a good deal before the “foreclosure era” ends.

Traditionally foreclosures sell at a significant discount from “normal” homes.  RealtyTrac reports that in the fourth quarter of 2012, REO properties sold for an average price of $151,998, up 1 percent from the previous quarter and up 3 percent from the fourth quarter of 2011. The average price of an REO residential property in the fourth quarter was 39 percent below the average price of a non-foreclosure residential property, down from a 40 percent discount in the third quarter but up from a 34 percent discount in the fourth quarter of 2011.

Foreclosure prices, however, have been rising.  In the fourth quarter, properties in foreclosure or bank-owned sold for an average price of $171,704, an increase of 2 percent from the third quarter and an increase of 4 percent from the fourth quarter of 2011.

However, the national numbers don’t tell the whole story.  The quality of foreclosures on the market varies wildly.  Some are significantly damaged from poor upkeep and long periods of vacancy as the foreclosure process moved slowly.  These damaged foreclosures sell for less, since buyers may have to invest tens of thousands of dollars to get them into shape to move in or rent out.

There’s strong evidence that the quality of foreclosures is deteriorating rapidly, which makes the modest price increases noted above even more remarkable.  A survey of Realtors by the National Association of Realtors in September found that 69.8 percent were below market value or worse.  By January that number had grown to 75.7 percent.

Why?  First, the foreclosure pipeline was slowed considerably by the foreclosure/robo-signing scandal, and foreclosure times are still very slow across much of the country.  During this period of time many homes deteriorated as they sat vacant.  Second, investors are cherry picking the best properties and paying cash to get them off lenders’ hands.  As a result, the leftovers are continuing to deteriorate as they wait for a buyer. Finally, owner occupant buyers have become less interested in foreclosure fixer-uppers over the past year.

The good news is that these damaged properties are actually becoming less expensive, according to the latest Campbell/Inside Mortgage Finance HousingPulse Tracking Survey.  According to HousingPulse results, the average price for a damaged REO property sold in January was just $88,100. That was not only 17.1 percent below the average damaged REO price recorded a year ago – $106,300 – but also the lowest level ever recorded by HousingPulse in its four-year history.

Meanwhile, investors, lured by low prices and the growing opportunities for flipping, have significantly increased the purchase share of damaged REO properties in recent months. During January, investors accounted for 65.4 percent of damaged REO home purchases, according to HousingPulse numbers. That was up from 58.1 percent a year earlier and the highest level recorded in the survey’s four-year history.

Strong homebuyer traffic and limited housing inventory continued to push overall home prices upward in January. HousingPulse data show that home prices overall, based on a three-month moving average, are at the highest level – $236,100 – seen in nearly three years and have been climbing since last spring. Prices for non-distressed properties accounted for 65.0 percent of total home purchase transactions tracked by HousingPulse in January. Average home prices for non-distressed properties were up a healthy 5.1 percent on a year-over-year basis – rising from $264,700 in January of 2012 to $278,200 in January of 2013.

Are you handy at home repair with some time on your hands?  Know some good tradesmen and contractor who will give you a good price?  Buying and renovating a bank-owned foreclosure that’s been hanging around for a while might be the best way yet to turn a nice profit in today’s foreclosure market.


Steve Cook is managing editor of Real Estate Economy Watch, which was recognized as one of the two best real estate news sites of 2011 by the National Association of Real Estate Editors. Before he co-founded REEW in 2007, he was vice president of public affairs for the National Association of Realtors. In 2006 and 2007, he was named one of the 100 most influential people in real estate.


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