Many home buyers, whether they are first time home buyers or not, get excited about foreclosure and short sales. Is a foreclosure or a short sale always a bargain?
Absolutely not, many times a foreclosure or a short sale can turn into a nightmare. When looking at foreclosures and short sales, it is important to determine fair market value of the property first. In many cases with a foreclosure or a short sale there is much work to be done to bring it up to the level of the comparables you used to determine fair market value. Work from fair market value and subtract the cost it would take to bring it up to the level of the comparable properties you used to determine value.
Potential Problems with Foreclosed Homes
- Many times a foreclosed home’s condition is sub par as the home owners lost interest in the home nor have had the money to keep up the home.
- Sometimes home owners do damage to the home on their way out in their anger towards the bank.
- The bank will have absolutely no disclosure on the home as they had not lived there.
- Buy the time a home hots the market it could have been vacant for many many months. I have noticed that vacant home deteriorate quickly.
Potential Problems with Short Sale Homes
- The long waiting time to see if your offer has been approved. Typically about 90 days.
- Most homes that are short sales the home owner is having financial distress and have not been able to upkeep the home.
- Much like a foreclosure, if a short sale home is vacant for a long period of time the home can deteriorate quickly.
“The National Association of Realtors’ January housing survey, released last month, found that 35 percent of houses on the market were either short sales or foreclosures, up from 32 percent in December and 29 percent in November. Of these, 37 percent were categorized as being “below” or “well below” average condition, sometimes resulting from the ravages of abandonment, others from damage inflicted on homes by disgruntled owners forced into foreclosure” as reported by the New York Times
Compare Short Sales vs. Foreclosure vs. Regular Sales
The chart below shows the sale prices over a 2 year period comparing short sales, foreclosures and regular sales. There is only a 4% swing between the average price of each and remember the condition of some of the foreclosures is pretty rough!! The chart shows that the foreclosure and short sales do not offer huge discounts that people believe they will get.
|Street||Foreclosed Home||Short Sale||Sold Price|
|Avg Foreclosed Sold Price||$137,400.00|
|Avg Short Sale Sold Price||$143,000.00|
|Avg Regular Sold Price||$143,500.00|
My advice to home buyers is don’t hyper focus on foreclosures or short sales there are just as many good deals with out the hassles of a foreclosure or a short sale. In my experience decent short sale or foreclosure homes sell for pretty darn close to fair market value.
The best deals with foreclosures and short sales are where the homes need significant work, this is where large discounts can come in. These are the properties that are generally not available to conventional financing and need a rehab loan or cash to purchase.
Don’t unilaterally think because its a foreclosure or a short sale you are getting a bargain, in fact you can be getting a ton of headaches!