Friday, July 22, 2011

Are Foreclosures a Good Deal?

People often begin a home search saying "I want to buy a foreclosure". What's really meant is "I want a good deal". So what constitutes a "good deal"?

That may depend on how you define the phrase. Sales hype sometimes uses phrases like "below market". To me that's silly. "Market" is the price that willing sellers and buyers who are not under duress will agree. "Unexpected" might be the better word for a price that seems low.

Foreclosures sometimes seem priced unexpectedly low. But there's a reason the market will pay less for these properties. Usually it's condition. A homeowner being foreclosed on is hardly going to leave a home staged for optimal showing. I've seen far worse: on the way out the door an angry homeowner has been known to take a sledge hammer to the place. I'm in the premarketing stage on one where the bid to trash out the place is $12,500!

Sometimes the property is in such poor condition that no bank will finance it. When you see a home with a tax-assessed value of $250,000 being offered for $175,000 that's usually the situation. You have to write a check for the whole price. And, have the additional cash to fix the place. There can be an opportunity in that. If you have that kind of financial depth, and repair skills, you could profit when you resell it.

Even when a foreclosure will qualify for financing there's a market discount associated with simply being a bank-owned property. It's like the kind of stigma that sometimes attaches to a home that has been a crime scene, or is close to commercial development. The discount isn't much in the Anchorage market, perhaps 10%-15%. Lenders would prefer that it not be disclosed that their property is bank-owned, but at present Alaska MLS requires its members to check the box that says it's a foreclosure.

That market discount is not without logic, however. It's just generally true that an institutionally-owned property is often cosmetically that much (maybe 10%-15%) below the standard that most private owners offer. You can buy a foreclosure for less, but if your tastes are like most people you'll be spending as much or more of the difference when you make improvements.

So, yes, foreclosures can be a good deal. If fun for you is playing with your home, go for it.

Yet when you start your search, don't limit your consideration to bank-owned homes. Alaska has one of the lowest foreclosure rates in the nation, which explains our stable market. (See the blog post immediately below this one.) There aren't a lot of foreclosures. Keep your search broad. Focus on all the homes that show some potential for meeting your needs. As you narrow the search you'll form opinions you can trust about which ones represent the best value. Or, "good deal" as you might define the phrase for yourself.

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