by Jeff Dekko, CEO of Wealth Enhancement Group
With the housing market in what seems to be a freefall, is this a time to zero in on the foreclosure market – either as an investment opportunity or as a new, upgraded or downsized homeowner?
Depending on your source, at this writing you’d have more than 1,300 (forecloserNet.net) to 1,900 (foreclosuredeals.com) homes from which to choose – and that’s just in Hennepin County.
As a result, this has become a very active market, with many real estate companies and agents creating specialty niches just to service these properties and clients. Barry Tanner, of Edina Realty, a six-year veteran of the firm, has been focusing on this market exclusively for almost three years. In the past year he and his firm have experienced a doubling in the number of foreclosures in Edina Realty’s database of available properties.
“We are seeing a lot more foreclosed properties being put up for sale,” he says. “But on the other hand, the past three or four months have been busy with buyers testing the market for bargains.”
The foreclosure market is broken primarily into two segments – properties in foreclosure and bank-owned properties, with the vast majority falling into the latter category. While it is possible to buy a home in foreclosure, the process can take considerably more time and involves a lot more risk because of the number of parties – servicing companies, investors, banks – who have to sign off on a sale before it’s completed.
On the other hand, bank-owned properties are just what they are: Homes where the bank has taken back the property and is eager to get it off their books.
It’s important to recognize that banks try to recoup as much of their investment as possible, so they aren’t inclined to give away a house, Tanner says. So like other sellers, banks try to act as rationally as possible.
“Banks differ from one to the next based on the number of homes they have in foreclosure, the condition of the property and the amount of time the house has been on the market,” Tanner says. “For instance, if a house is in a less desirable neighborhood or needs a lot of work, then the bank might be inclined to be more aggressive on price.”
One clear difference in this market: Foreclosed homes are sold “as is.” That means a prospective buyer absolutely needs to hire an independent inspector to go through the property. “It also means that someone who is a little bit handy is at a definite advantage,” Tanner says.
The foreclosure market isn’t a place for a novice homebuyer, so it’s probably a good idea to use a real estate agent with some experience in this space. For example, Tanner explains, banks from a pure policy perspective differ in terms of their willingness to negotiate on price and a level of professional knowledge in this market not only helps to pinpoint those situations but to establish the relationships with the right lenders.
In addition, pricing on foreclosed homes is highly fluid. With no clear signs that the market has found a bottom, pricing on homes remains a moving target, more often than not requiring some day-to-day expertise with those trends.
John Shaw, manager of Edina Realty’s 6800 sales office location in Edina, notes that of the 137 properties Barry Tanner closed deals on in 2007, the average sale price totaled $192,189, a discount of about three percent from an average asking price of $198,665. While that doesn’t seem like much, Shaw also notes that the vast majority of these sales involved prices that were already down substantially from peak levels in 2006, but also included significant seller concessions. At a minimum, such concessions involved seller-financed closing costs, which typically run three percent of the price of the home.
Both Shaw and Tanner note that foreclosures are popping up just about everywhere – from tony suburbs such as Eden Prairie to the near north side of Minneapolis and the east side of St. Paul. In addition to the standard variables concerning price, a key determinant in this market is the number of foreclosed properties in a given neighborhood. The more such properties, the more aggressive the pricing.
Said Shaw: “The inventory of foreclosed properties has undermined the marketplace and it’s important to us that we get these homes sold in a way that will stabilize the market and stabilize the neighborhoods these homes are in.”