Foreclosures: The Time To Buy?

For buyers looking to snag the lowest possible price, a foreclosed home just might be the way to go.

According to data from RealtyTrac, buyers who purchased a foreclosed home in 2010 received a discount, paying 28 percent lower than the average sales price for non-foreclosure properties in the area. That's up from the 27 percent and 22 percent discounts seen in 2009 and 2008, respectively.

Considering that foreclosed residences comprised about 26 percent of all home sales last year — down from 29 percent in 2009 — and that total sales volume of homes in some phase of foreclosure dropped 31 percent from 2009, it's hardly a surprise that banks are more motivated to sell quickly, experts say.

“In many markets, home prices are at an historically affordable level right now, and foreclosed homes often represent the best bargains in a market,” says Daren Blomquist, director of marketing communications for RealtyTrac in Irvine, Calif. “In addition, interest rates are low. If you finance the purchase you'll be paying much less in the long run in interest, and buyer demand is low, meaning you'll have less competition from other buyers and therefore may be able to negotiate terms that make the deal even better for you.”

How much of a discount can buyers of foreclosed homes expect will vary depending on location. Distressed properties can sell for 10 percent to 20 percent below market value, says Jonathan Miller, a housing market analyst for RealEstate Business Intelligence in Washington, D.C.

Typically, the discount you can reap depends on two factors: the condition of the house (the more repairs needed, the greater the price reduction) and the duration on the market (the longer it's been listed, the greater negotiating power buyers have).

Finessing Foreclosures

To ensure the lowest discount possible, do some homework. Work with an agent and investigate the property thoroughly, including property taxes. Talk with neighbors about the history and reputation of the house and talk with municipal inspectors and previous listing agents to learn if there are any undisclosed issues that could give you more leverage.

Armando Montelongo, former host of “Flip This House” on A&E, recommends taking photos of everything you spot wrong with the home. Bring the images to the attention of the bank, which may not be aware of the condition of the property.

Even with data and photographic evidence, it's important to be realistic about negotiating a low price. Be prepared for competitive bidders and brace yourself for rejection, especially if you're too aggressive in your initial offer.

“Most banks price their foreclosure inventory lower than the true market for an immediate sale,” says Lisa Johnson Sevajian of Coldwell Banker Residential Brokerage, Andover, Mass. “Many times buyers go into negotiations with banks expecting to receive a huge discount because they believe they will be the only one interested. (However,) there are usually many people bidding on most bank-owned homes.

“If the average reduction in your market within the price point is 5 percent and your agent is confident you have no competition bidding, a safe place to start is with the list price minus 5 percent,” John Sevajian says. “Going below the average adjustment in the price point and the market can prevent you from being viewed as serious.”

If you're planning on living in the foreclosed property, be sure it's located in an area you're comfortable residing in, and research property values in that location carefully. Compared to a non-foreclosure property, the transaction can take longer and involve more paperwork. Expect to put a lot of extra effort and resources into repairing the home, although you can save big if you perform the repairs yourself. Be prepared for hidden problems — from mold in the walls to a leaky roof — that may arise later.