– “Could you find me a really good house in foreclosure, I mean a nice house, priced below market?”
From time to time, I get this question, and the answer is, “Probably not”.
What prompts such a question?
If you pick up a newspaper or business magazine, it’s hard to avoid seeing something about the increase in foreclosures being reported throughout the housing industry. It’s a fact that foreclosures are increasing, particularly for properties that were purchased utilizing sub-prime loans. This Reflection article isn’t about sub-prime loans or the poor lending practices of the lenders that sold the loans. Such practices are now coming under scrutiny, and Congress will undoubtedly hold hearings to pass legislation to prevent such practices in the future. But for many, the horse is already out of the barn. Defaults on sub-prime loans, and the eventual foreclosures on some of these properties by their lenders, are on the increase. Many “experts” forecast that the rise in foreclosures will continue for some time.
What do foreclosures mean to buyers?
Let’s assume for a moment that the forecasts are correct. What do these predictions mean to me as a buyer? Could I go out and find for myself an undervalued house on which some poor individual just experienced a foreclosure? After all, we know that banks really aren’t in the real estate business. They don’t want properties, they want their loans paid. Therein lies the answer to the question as to whether or not we can find a special bargain in this default mess. Since the amount of a housing loan is determined by market value at time of loan, and sub-prime loans are typically low- or no-down-payment loans, the amount the banks are owed is not much less than market value of the houses collateralizing those loans. And, although listing prices on many houses are coming down and will continue to decrease until we burn off this excess inventory, many foreclosed properties had values established during the period of run up in value. As a result, some banks now find themselves holding paper worth more than the current market value of these houses. The banks then really have no choice but to reprice these properties downward to the current market price. However, they aren’t knowingly going to price properties below the estimated market value. The banks are most likely going to use a CMA, (Comparative Market Analysis), to determine a listing price for such houses. For more information on CMA’s, refer to my Market Reflections article dated March 14, 2007.
So what is a realistic expectation regarding foreclosures?
The best that buyers can reasonably expect, when buying a foreclosed property, is to pay the going market price. This is the same market price that would be available if they shopped for a similar house, not in foreclosure, in the open market. It is unlikely that the housing market here in the valley will collapse as it has in some areas of the country such as in parts of Newark, NJ, or Detroit, MI, where drastic price drops in housing are common. Today, buyers here in the valley will find just as good a deal on similar homes in the open market as they will on a bank-owned (repossessed) property. It’s better to focus on the entire inventory of homes out there, rather than solely on repossessed homes, or homes that are in foreclosure, in trying to find that “super deal”.
As always, the services of an experienced REALTOR® will be invaluable to you in helping to sort out your alternatives, which include exploring the availability of repossessed properties. In this way, you will find the real estate that best fits your needs.