It should be no surprise to anyone that this market is full of foreclosures. (Briefly – A FORECLOSURE is a situation where a homeowner can not make their monthly mortgage payments and the bank seizes the home and sells it as a stipulation in the mortgage documents). The question I get most is, “I can get a good deal in this market, right?” Well… it depends on how you define “good deal.” Most consumers are under the impression that they can get foreclosed homes for very little money. This just isn’t the case in our area. There are very few 100% loan programs for consumers. This means the potential buyer must have a down payment in order to purchase a home. The average sales price, in our area, is $253,063 (October 2008) that is a minimum down payment of $7592. Closing costs can range from 3%-4% of the sales price, so that is another $8900, on average, that the buyer needs to buy a house, if the Seller does not agree to pay the buyer’s closing costs. So, homeownership comes at a cost of $16,500, on average, in this area.
So, what about those mortgage foreclosures where your monthly mortgage payment would only be $300!?! Well, that house would have a sales price of about $20,000. There aren’t many of those around here and if there were, I’d hate to see its condition! Our local market does have foreclosures, and the foreclosures are in all price ranges. But the “good deal” isn’t looking so good anymore. And here’s why:
When foreclosures first started hitting our market place in late 2006 the market was still fairly strong. The areas average sales price in September 2006 was $369,088. Prices were still high and the average days on market were hovering around 3 months. There were not very many foreclosure homes on the market yet, so the majority of the comparable sales being used by appraisers to establish market value were still traditional resale homes, listed at higher prices than foreclosures. In the 2006 market, foreclosures were a great deal. For example, in a Staffordneighborhood, in 2006, there was a foreclosure that sold for $50,000 less than its comparables in the same neighborhood. Sounds like a good deal to me, even if the home did need some TLC. Comparing this to the market in 2008, in one Stafford neighborhood there is only a $5000 difference between the foreclosed home’s list price and a traditional sale home’s list price (when the traditional sale home is priced within reason of what the market will bare).
Why is this? As more low priced foreclosures came on the market and competed with traditional resales, prices began to drop. In order to remain competitive traditional Sellers had to make their home’s price more appealing than the foreclosure home’s price. Traditional Sellers also had to make sure their home was in better condition than their foreclosure competition. In return, banks started listing the foreclosed properties at lower prices. And thus the vicious cycle began. Foreclosures then became the predominant comparable that appraisers could use when establishing market value. So, market values dropped. And when the majority of homes that are selling are foreclosures, foreclosures start determining market value. Appraisals on foreclosed properties are no longer coming back higher than contract price, which would have been instant equity for the buyer. Some appraisals are coming back at even less than contract price causing the bank and the potential purchaser to renegotiate the sales price. And to add injury to insult many of the foreclosed properties are in dire need of repair. Many of them need much more than cosmetic work. What ever break you are getting on the price is being made up for in the amount of money that will be spent getting the house the attention that it needs. So where’s the deal? The deal is that the potential purchaser can get a home for hundreds of thousands less than their neighbors paid just 2 years ago. And if they stay in the home long enough and can tough out this market, they stand to make a nice profit if they sell during the next upswing. So, the deal isn’t necessarily a deal in today’s market, but rather a deal compared to the market in 2006 and the potential market in the years to come.
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