My local service area which includes the Phoenix West Valley cities of Avondale, Goodyear, Litchfield Park, Surprise and Glendale has been one of the hardest hit real estate markets in the country. As a result, most new clients in these cities always want to start with foreclosures. Thanks to dozens of late night infomercials and a host of real estate companies touting foreclosure auctions, the average consumer assumes that bank owned properties always sell below the market. They have been trained into thinking that they can find houses for 50 cents on the dollar and that banks are desperate sellers looking to rid themselves of any house on their books.
Unfortunately this misguided information often leads consumers to overpay for property or to miss the best deals in their search area.
I just spent the past 2 weekends at the REDC auctions in Phoenix and Mesa. I personally inspected every home in my local market and watched as hundreds of these homes were sold. While it is true that a small percentage did sell well below market prices (about 15-20%), the overwhelming majority of properties at these auctions sold at or near the current market price. This is particularly true when you factor in the "Buyer's Premium" of 5% that the auctioneer adds to the winning bid. Many of these homebuyers were obviously unaware of the condition of the home they were buying, underestimated the cost to cure the property, or simply did not know about current active listings that were comparable to their subject. In one case a buyer purchased a home for $85,000 (+ a 5% buyer's premium) when there was an IDENTICAL (model match) home in BETTER condition NEXT DOOR that is currently listed for $75K! Ugh.
And of course there is the "Previously Valued To" figures thrown out by the auctioneer. I love those. The auctioneer puts that figure in big bold print above the property address every time. As though somehow knowing that the home was once worth $350K is going to change the fact that it's worth $95K today. But I imagine there are some consumers who get fooled by these numbers.
The point I am obviously making is that not all banked owned properties are "deals." Yes, it is true you can find REO property offered well below the current market. And yes, now really is a great time to buy. But every transaction is unique and must be evaluated on its own merits in light of current market conditions.
So where should home buyers turn if they really want the best deals? I would argue that short sales, on average, are better deals than foreclosures. In fact, as my local markets have started to pick up over the last 45-60 days, I would say that short sales have become an even better deal relative to foreclosures.
How is this possible? Consider the following:
- A Short Sale typically sells for the same or lower price than a foreclosure. This is because:
- The seller is disinterested in price - they just want to clear the debt and save their credit rating.
- Banks will agree to take less because they are avoiding the cost and delay of foreclosure proceedings.
- Short sales are generally in far better condition than bank owned homes. Unlike foreclosed properties which are often missing appliances and have significant deferred maintenance, short sale properties are often kept up by the seller to ensure they sell. In many cases the seller is still occupying the property. As a result, there is far less cost to cure a short sale property than there is an REO.
- Short sales attract fewer buyers because of the time delays and hassles. Consequently, there is less price competition from other buyers.
The key difference with short sales is that you need to be a patient buyer. Short Sales generally take 4-8 weeks to get an approval from the bank. This is substantially longer than bank owned properties where you usually receive an answer within a few days.
As I mentioned earlier, every transaction is unique and should be evaluated in light of current market conditions. Naturally I would recommend that consumers employ a qualified Realtor to assist with the analysis. But if you are a buyer who does not need to close right away, then I would implore you to ask your Realtor to make short sales a part of your search.
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