You need to sell your home as quickly as possible and for top dollar. But the only buyers in the market seem to be bottom-fishers who want to snap up a bank-owned property at a substantial discount. How can you sell your home when you’re surrounded by foreclosures?

Foreclosures have been on the rise, according to data compiled by the Mortgage Bankers Association, and at least a few, if not many, foreclosed homes may be on the market today in just about any neighborhood, regardless of the residents’ socio-economic status.

Sellers don’t have many options in a strong buyer’s market, but there are some tactics that can tip the balance between a sold home and what Realtors call a “stale listing,” which refers to a home that has been on the market so long that buyers have become suspicious as to why no one has bought it.

Foreclosures aren’t all alike

Home sellers need to understand that foreclosed homes, which are often referred to as real-estate-owned, or REO, aren’t all the same and consequently don’t all have the same impact on nearby homes that are for sale.

It’s helpful to divide foreclosure properties into three groups, according to Dave Billings, West Coast regional director for Redfin, a multistate realty brokerage company.

3 groups of forclosure properties
  • “Pre-foreclosures” are homes on which the owner has fallen behind on the mortgage or which have already been taken back by the lender, but haven’t yet been placed on the market.
  • “Auction foreclosures” are bank-owned homes that will be sold on the auction block. Auctions historically have been dominated by small numbers of experienced investors, but these days individual homebuyers may be found at auctions as well.
  • “Listed foreclosures” are bank-owned homes that have been listed for sale with a local realty broker. Oftentimes, these homes will be described in the local multiple-listings service, or MLS, as “bank-owned” or “lender-owned.”

Real-estate brokers typically have access to plenty of information about the location, price and condition of listed foreclosures. But information about pre-foreclosures and auction foreclosures typically is much more difficult to obtain.

Banks that own foreclosed homes, asset managers that oversee those homes for the banks and Realtors who list those homes for sale may all have information about pre-foreclosures, but this market is very fragmented, so “all they would know about would be the property in their own inventory,” says John J. Lynch, a broker with Keller Williams Realty Greater Cleveland West, in Westlake, Ohio.

Auction foreclosures typically aren’t included in the MLS because they aren’t listed for sale with a broker. However, the sales prices of these homes may be obtained after the auction through local tax records, which can be researched by enterprising buyers or can turn up when a comparable home is appraised.

The easiest way to identify possible pre-foreclosures and auction foreclosures is to drive around in the evening and look for homes that appear to be unoccupied. If the lights are never on and the grass has grown unusually high, the home may have been left vacant in advance of a foreclosure. A for-sale sign in a front window may be a good clue as well.

Buyers look for fair-market prices

Listed foreclosures can be tough competition for owner-occupied homes because banks and asset managers usually are more willing to negotiate prices than the typical homeowner would be, Lynch says. That’s especially true today, since banks have more REOs on their books, and they don’t want to pay the costs to maintain and manage those properties.

Auction foreclosures are “a separate market,” but if buyers know the sales prices of those properties, “that is going to impact their thinking about the value of your home as well,” Billings says.

Home sellers should be aware of auction properties even though they may not be directly comparable because of their poor condition or lack of wide exposure to the market.

The impact of foreclosures on the value of nearby houses was quantified in a 2006 study, ” The External Costs of Foreclosure,” by Dan Immergluck of the Georgia Institute of Technology and Geoff Smith of the Woodstock Institute. This study used statistical models to analyze data collected in Chicago in the late ’90s. The researchers concluded that each foreclosure within one-eighth of a mile from each home reduced the value of that home by 0.9 percent.

Yet, “fair market value is still an option” for home sellers, Billings says. “Just because a foreclosed property is down the street doesn’t mean you have to take $15,000 less than your house is worth. But it does mean that any sort of shoot-the-moon option isn’t available. It requires a laser focus on a true justifiable fair-market price for your home.”

Homes that are overpriced run the risk of being stigmatizing, Lynch warns.

“It could be that nothing is wrong with the house, but the longer it sits, the more people think there is something wrong with it,” he says. A fair-market price can be made more attractive with the addition of a sweetener such as a price concession, decorating allowance or seller-paid closing costs.

Homes in top condition sell faster

Bank-owned homes are notorious for their poor condition, because the former owners typically leave under duress and have neither the means nor the inclination to take care of the property. Moreover, these homes are almost never prepped before they’re placed on the market.

“Whether it’s an auction or a listed foreclosure, nothing is going to be done to those properties. They come with all of their ‘charm’ intact,” Billings says.

The poor condition of foreclosures can be a strong selling point for an owner-occupied home.

Sellers need to “make certain their house looks special, is in good condition and has been well-maintained,” Lynch says. Some home sellers mow the grass and park their own cars in front of vacant properties to disguise the presence of vacant homes, he adds.

Buyers who want a “project” home that’s being sold at a discount because it needs substantial repairs and improvements typically won’t purchase an owner-occupied home in good condition, Billings says. A well-maintained home might appeal to someone who was looking for a deal, but soon realized a foreclosure home would require a substantial investment of time, money and anxiety compared with a move-in ready house.

The foreclosure “offers the unknown, and you want to offer peace of mind,” he says.

Easy-to-show homes are easier to sell

Not all foreclosure homes are in poor condition, says Alan Wagner, a sales agent with RE/MAX Gold in Elk Grove, Calif., and 2008 president of the Sacramento Association of Realtors.

“A lot of people who move out because the bank is foreclosing will still vacuum the carpet on the way out. The house is not trashed; it’s a very nice house in a good neighborhood that now belongs to a bank,” he says.

To compete against these properties, sellers need to make sure their homes are not only in top condition, but also accessible and well-presented to the market. Sellers should hire a Realtor who is an area specialist and who will make a concerted effort to market the home as effectively as possible on the Internet, Wagner says. Experience and realty-related education can be beneficial as well, he adds.

“People want to beat up the bank on price, but when they come into a house that has owner-occupants, if it is competitively priced, it is probably going to show better,” he says.

Billings advises it’s probably not a good idea to hire a Realtor who specializes in the sale of bank-owned property, since these homes typically are sold on a high-volume, low-cost basis and that strategy may not be appropriate in a conventional situation.

Unsold home calls for new strategy

If your home proves impossible to sell, there are still a few other options you might want to consider:

Price reduction. The most obvious recourse is to lower the price of your home until it attracts a buyer. If the proceeds of the sale aren’t enough for you to pay off your mortgage, you may need to pay the deficiency in cash or sign a personal note to close the deal.

Time the market. If only one or two foreclosures are on the market, you might want to wait until those have been sold before you place your own home on the market as well. Ask a Realtor to tell you when the bank-owned property has been sold or you may notice that the for-sale sign has vanished and the home appears to be newly occupied.

Short sale. If you can’t make your mortgage payments due to a genuine financial hardship that was not self-inflicted and you can’t bring cash to closing, you may be able to negotiate a short sale in which your lender will forgive some of the debt that you owe.

Convert to rental. If you can handle the risks, hassles and headaches of being a landlord, you might want to take your home off the market and rent it to a tenant, perhaps with a lease-to-own agreement that could enable the tenant to purchase the home in the future.

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