Foreclosure Bargains on the Block

Even in affluent communities, foreclosures often offer a chance to buy a luxury home for as much as 40% or more off the market value

by Prashant Gopal

RealtyTrac

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At the end of 2006 a new 4,000-square-foot home with a three-car garage in a small gated subdivision in Las Vegas sold for $1 million. On May 6 the bank that owns the now foreclosed property at 7604 Noche Oscura Circle agreed to sell it for $500,000 ($32,900 below the already discounted asking price).

Banks—particularly in hard-hit real estate markets such as Arizona, California, Florida, Michigan, and Nevada—are slashing prices to entice buyers and clear away rising inventories of homes. The banks are competing with desperate builders and sellers facing foreclosure and, as a result, bargains are abundant, especially for buyers with strong credit, ready cash, and a willingness to take a chance on markets in free fall.

The Las Vegas house was near the top of a list of 25 high-end foreclosures with deep discounts compiled for BusinessWeek.com by RealtyTrac, an online foreclosure listing service based in Irvine, Calif. "It's an exceptionally good deal," Dillon England, an agent with Las Vegas Realty, said of the house, which is listed with his company. "What holds a lot of people back is when they walk into a small, 20-home subdivision like this one that has eight foreclosed houses.… It would scare you, wouldn't it?"

Investors and first-time home buyers, who previously couldn't afford boom-time real estate prices, are snapping up foreclosed homes, driving sales activity in some communities. "Bank-owned properties are sitting vacant" in markets such as Las Vegas and South Florida, said Rick Sharga, vice-president for marketing at RealtyTrac. "If you're in a strong financial position, you're really sitting in the catbird seat."

Foreclosure Bus Tours

Buyers these days don't need to leave home to come up with a list of potential purchases. Log on to a foreclosure home listing Web site and you can pull up photographs, virtual tours, and maps that pinpoint nearby houses in various stages of foreclosure (a useful tool when gauging the health of a neighborhood). Lenders such as Countrywide (CFC), JPMorgan Chase (JPM), and Bank of America (BAC) provide online listings of the thousands of foreclosed homes that they're selling across the country, along with contact information for the listing agents. Some agents even post video tours of foreclosure-heavy neighborhoods and the insides of bank-owned properties on video-sharing services such as YouTube (GOOG).

But buying a bank-owned home requires on-the-ground research. Many agents specialize in bank-owned listings, and companies in Michigan, Maryland, Nevada, and other hard-hit markets have started foreclosure bus tours that take buyers to several properties in a given day. Walking in and around a bank-owned property is especially important because they're typically sold in "as is" condition, and lenders can be exempt from normal disclosure requirements. A buyer also can gain some protection by hiring an inspector to thoroughly check the roof, pipes, and foundation, although even a good inspector can miss something. "Typically a foreclosure is not going to be in pristine condition," said George Fountain, owner of Equitybustours.com, which organizes foreclosure tours of the suburbs in Montgomery County, Md., near Washington, D.C. "When banks take over a property, they don't invest in repairs. …You can't just go in and run the water in the bathtub."

Take, for example, the five-bedroom, four-bath, Granada Hills (Calif.) ranch house with two kitchens at the top of the BusinessWeek.com list of foreclosure discounts. The $579,000 asking price for the 3,600-square-foot house on a pretty, tree-lined street north of Los Angeles is 43% below market value, according to RealtyTrac. But walk inside the one-story house and you'll see that it's a fixer-upper, said listing agent Ryan Trefry of Coldwell Banker in Encino. The bathroom and kitchens need updating, the paint is peeling, and the flooring is buckling. The bank that owns the property spent $2,000 just to remove trash left behind by the tenant who was evicted after the foreclosure. The house is in "poor to below-average shape" and needs about $65,000 in repairs, Trefry said. Still it's a good deal even compared with other foreclosures, he said. "To buy a home that big in a desirable neighborhood for $500,000 is unheard of."

A Lot of Inventory

Even houses in good shape may come with surprises. Stacy Magid, an agent with Coldwell Banker Elite in northern Virginia, thought she "was going to die" when a buyer opened the refrigerator in a bank-owned home, and her nostrils were filled with the stench of rotting food. The milk had turned black during the 240 days since the house was added to the multiple listing service, she said.

But buyers this spring are willing to brave such surprises to find a foreclosure deal, she said. "The last few months have been the busiest ever for me," said Magid, who specializes in hard-hit Prince William County, about 30 miles from D.C. "Around here, people are buying. There is just so much inventory."

And the inventory includes many more pricey homes. JoAnn Callaway, who owns Scottsdale (Ariz.) real estate agency Those Callaways, was recently approved by Countrywide to sell its properties listed at more than $2 million. "You can get a great deal and can get into the better neighborhoods, where in the past you couldn't," she said.

See the BusinessWeek.com slide show for 25 high-end houses available at low-end prices.

Gopal writes about real estate for BusinessWeek.com in New York .