5 REAL ESTATE FORECLOSURE MYTHS

Your Real Estate Myth Buster is on the job!  Recently one of my buyers asked me where are all the foreclosures that she is hearing about on the news.   Have you been asking the same question?  Let the truth-telling begin.

MYTH #1: There is going to be a flood of new foreclosures to the market.

This rumor has appeared every year since 2008 and has been routinely debunked.  However, the announcement that the Feds reached a settlement over the robo-signing scandal reignited speculation earlier this year. The idea is simple: Since the cork is now out of the foreclosure bottle, we’ll soon see another flood of REO’s inundating the marketplace.  (REO means Real Estate Owned = Bank or Lender Owned).

My personal opinion: don’t hold your breath.

Banks have learned that if they control inventory, they can affect local prices. By releasing homes in measured amounts, they realize higher prices than if they released a glut of homes. In addition, they’ve learned that if they can mitigate their losses by agreeing to a short sale, everyone wins. 

REALITY:  All real estate is local and some areas have been harder hit than others.  More than 50% of all foreclosures nationwide have occurred in only 4 states!

MYTH #2: You can go directly to a bank to buy a foreclosure.

Someone knows someone who is being foreclosed on and they want to step in and grab the house before it hits the market. 

Don’t we all? 

In reality, banks have a simple system – they first offer properties on the courthouse steps. The rest they assign to asset managers who then hire local real estate agents to put them on the market along with all the other homes. Want an REO property? Pay cash at the courthouse steps (if you really know what you’re doing) or get in line with everyone else when they hit the local MLS (Multiple Listing Service).

REALITY:  The process is complex.  Unless you are experienced, hire someone to help you.

MYTH #3: You can get a killer deal by submitting lowball offers on foreclosures.

And Elvis is still in the building!  Here’s the truth: Banks want REOs sold in 30 days or less, so they typically appear on the market priced slightly under comparable properties. If the property doesn’t sell quickly, the bank will lower the price after about 30 days.  

Lowball offers are most often ignored and are, frankly, a waste of everyone’s time and effort.  

You might get a good deal by offering a lower price on a foreclosure that’s been sitting on the market for more than 90 days, but remember that there are good reasons its gone unsold for so long. And even if you have cash, your lowball offer probably still won’t be accepted — really.

REALITY:  In our area, you will not get a $200K home in excellent condition for $100K or less in a foreclosure.  Lenders are hiring experts who are pricing homes competitively.  If a home is priced under $100K in our area, I can guarantee you that it needs work – serious work.

MYTH #4: You can’t use foreclosures when doing an appraisal.

Or short sales, for that matter. That is no longer true. In fact, in some neighborhoods, that’s all that’s there. Therefore, foreclosed or distressed sales represent the actual value of homes in the area and MUST be used to appraise other properties. Times have changed and the ways neighborhoods are valued have changed as well.

REALITY:  I hate having to tell my sellers this, but it is true.  A couple of short sales and/or foreclosures in a neighborhood during the past six months or so can and will affect the price you will get for your home.

MYTH #5: Foreclosures are only affecting the bottom end of the market.

This used to be true. However, while foreclosure rates on the lower end of the market have actually decreased, they’re actually increasing on the upper end.  According to Daren Blomquist, vice president of RealtyTrac, the market share of foreclosed homes under $1 million is shrinking, but those among properties valued over $1 million are rising – up 115% since 2007. And foreclosures on properties valued upwards of $2 million have increased by 273%.

While some well-known jet-setters have melted down and lost everything, others are choosing to strategically default.  They see it like liquidating a poorly performing portfolio – they have enough resources to cut their losses and move on. Historically, banks have been reticent to foreclose high-end homes and absorb a large loss, but defaulters are now forcing their hands and mansion foreclosure rates are moving on up.

REALTY:  See Reality #4 – you will not get a fabulous mansion for cheap, so be prepared with some significant cash if you are considering a high-end foreclosure property.

I work hard to educate my clients, debunk myths, explain market trends, and educate with solid facts.  This is only the tip of the iceberg with regard to foreclosures.  What questions can I answer for you?

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