real estate

How foreclosures affect buyers and sellers

Foreclosure sign
Highlights
  • Distressed sales create a gap between perceptions of fair prices.
  • Long-lived low interest rates mean buyers are willing to wait for a while.
  • It can be hard to determine how bad the damage is in a long-vacant home.

Real Estate » How Foreclosures Affect Buyers And Sellers

If anything is certain about the foreclosure crisis, it's that it isn't over. That fact has important implications, not only for people losing their homes, but also for those planning to sell or buy a home this year.

As of January, about 3 million properties were in foreclosure, headed that way or already owned by banks, according to CoreLogic, an information, analytics and business services company in Santa Ana, Calif.

Approximately 1.6 million of those homes were believed to be within the so-called shadow inventory, a supply of foreclosure properties not yet listed for sale. It's a major stumbling block to a housing recovery, says Mark Fleming, chief economist of CoreLogic.

"It puts downward pressure on home prices, which hurts home sales and building activity," Fleming said in a statement.

Given that prelude, here's what sellers and buyers can expect.

Price

Foreclosures and short sales have widened the gap between sellers' and buyers' perceptions of prices. Sellers "think their home is worth more than it really is" and buyers "think the prices are too high," says Louis Cammarosano, general manager at HomeGain, a real estate information website in Emeryville, Calif.

One cause of that gap is realty brokers' tendency to scrub foreclosures and short sales from comparable sales data used to set sellers' asking prices. While sellers might feel a moral justification for that approach, Cammarosano says it's "disingenuous" because the status of the seller's mortgage isn't important to buyers.

"(Just because) you happen to be paying your mortgage, that doesn't mean the buyer has to step into your shoes and pay your inflated price," he says.

Interest rates

Traditionally, mortgage rates have been something of a wild card for homebuyers. But that's not the case today because the Federal Reserve has announced its intention to keep rates low at least through late 2014. That's not a guarantee, but it has taken some of the urgency out of homebuying and put more buyers into a wait-and-see pattern.

"The perception that prices could go lower, a lot of foreclosures in the pipeline and (the expectation) that rates will remain low -- that's certainly keeping some people on the sidelines," Cammarosano says.

Location

Buyers might be reluctant to purchase a home in a neighborhood plagued by foreclosures and short sales. But Stephen Israel, president of Buyer's Edge Co., a real estate brokerage in Bethesda, Md., says buyers can take a clue from real estate investors who are looking at areas that have been hard hit, yet might be prime for a turnaround.

"Investors are interested in neighborhoods that were beat up by foreclosures and that have other redeeming features that they then believe will be the first to bounce back," he says.

Those redeeming features might include easy access to public transportation, well-regarded schools, attractive shopping centers and other positive infrastructure elements. Neighborhoods that have such amenities can be "really interesting pockets, where there could be some very good values," Israel says.

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Condition

Foreclosure and short sale homes are often, though not always, in worse shape than other homes on the market. That's especially problematic for buyers if a home has been vacant a long time because neglect can result in problems in plumbing, heating, cooling, electrical and other systems.

"There is a big difference," Israel says, "between a property that has been vacant a few weeks and one that has been vacant a year or more."

A home that's in poor shape might not be a bad buy if the buyer understands the risks, he adds.

Sometimes, though, those risks can be difficult to assess if the term of vacancy isn't known or the water, sewer, electricity and gas have been shut off. The utilities not being in service is "an interesting part of this equation that people miss all the time," Israel says.

Buy or sell

The bottom line for buyers is that they need to "buy smart," to use Israel's term, researching neighborhoods and being aware of a home's actual condition beyond its cosmetic appearance.

The bottom line for sellers, Cammarosano says, is that they need to get serious about pricing, cleaning, decluttering, staging and improving the value and desirability of their home.

"That's getting real," he says. "And if that's not what you want, don't sell it."

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