Wednesday, November 14, 2012

The “Foreclosure Discount”

The “foreclosure discount” is the difference in sales price between a property that is bank-owned and a property that is sold by a person.  It is the discount that a buyer expects to get on a bank-owned property as opposed to a regularly owned property.  The perception in the general public is that foreclosures are much cheaper to buy than a normal property, but the tradeoff is the condition of a bank-owned property might be much worse and the buyer must purchase the home “as is.”

What Affects the Discount?

Different factors contribute to the amount of the discount rising or falling.  The part of the country the property is in impacts the discount in several ways.  Different states have different foreclosure laws and regulations.  If these laws work to lengthen the time it takes for a bank to complete the foreclosure process, then that can lead to a higher foreclosure discount.  A longer time period means the property is more likely to fall into greater disrepair since it will have been neglected for a longer period of time.  The low price of the bank-owned home compared to what one might normally expect to pay for a home reflects the likely potential for many repairs.

The region of the country also can impact the discount due to the fact that certain areas of the country are more maintenance intensive than others.  Homes in climates with extreme temperature changes need consistent interior temperatures to keep wooden floors from buckling and mold from growing just to name a few potential repair scenarios.  The type of property and location relative to the lender can also impact how much upkeep the home receives during the foreclosure process.  Banks are not in the home maintenance business, however some lenders have started taking proactive steps to keep bank-owned properties in somewhat decent shape as a way to protect what is left of their investment.    

Why is the Discount Important?

Nick Timiraos writing for The Wall Street Journal points out that the decrease in the foreclosure discount is a good indicator that the housing market is improving.  The article cites analysis from Zillow that puts the national foreclosure discount around 7.7%.  That is down from 9% last year and the 24% discount peak 3 years ago.

More Zillow analysis shows that many “Sunbelt” markets showed either no foreclosure discount or discounts of just over 1%.  Midwestern and Northeastern cities had higher foreclosure discounts due to the factors discussed earlier; longer foreclosure processes and expensive maintenance.  Several major cities including Chicago, New York and Boston had foreclosure discounts greater than 15% according to the article.     

As the number of foreclosures continues to drop in many areas, home sales are starting to increase.  Bank-owned properties tend to pull prices down thus depressing the surrounding inventory.  Lenders have also become more adept at pushing short sales through the system which is helping to reduce the overall inventory of distressed properties.  The laws of supply and demand come into play as the supply of cheap bank-owned properties decreases the prices of the remaining inventory naturally increase.  The banks who own properties understand this concept so they are less likely to deeply discount their properties. 

To put it simply, falling foreclosure discount rates even in cities where the rates are still relatively high indicate that the real estate market is improving.   
What does this have to do with you?

If you are facing the possibility of foreclosure or are considering the short sale option, it is important to understand the current state of the real estate market and how lenders are currently handling these situations.  Changes in the markets or changes in mortgage regulations might translate into a more positive direction for you and your situation.  Our experienced real estate attorneys will work with you to assess your situation and devise the best strategy for you to move forward.

Please See Our Related Blogs:
Be Wary of Cement Blocks Disguised As Rescue Floats
The Anatomy of a Foreclosure

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