Are Banks Keeping Foreclosed Homes Off the Market?

Posted by: Chris Palmeri on May 21, 2009

Buyers looking to purchase foreclosures should still have plenty of opportunities. Only 30% of bank-owned properties are listed on the multiple listing services, says Rick Sharga, senior vice president at foreclosure listing firm RealtyTrac. He figures banks still own as many as 500,000 properties that they want to sell but haven’t put on the market.

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A home many not be listed because the bank is wrestling with title, repair or owner right of redemption issues. (Several states such as Michigan and Wisconsin give the previous owners the chance to buy back a home that’s been foreclosed on). Banks may also be holding houses off the market because selling them now would lower prices even further. Foreclosures typically sell at a 31% discount to similar homes whose owners aren’t in distress. Listing all those homes now, Sharga says, “would have a devastating impact on inventory and pricing.”

RealtyTrac and Trulia.com came out with a survey this week that looked at consumer willingness to buy foreclosed properties. Some 55 percent of U.S. adults indicated that they are at least somewhat likely to consider purchasing a foreclosed home in the future, compared to the 47 percent who indicated the same in November 2008.

“Foreclosures are the heart of the real estate crisis and the key to the recovery,” says Pete Flint, co-founder and CEO of Trulia. All home sellers have to compete with the bank-owned properties on the market. As a result, “homeowners are absolutely pricing to sell,” Flint says. “Nationally, one quarter of all homes have cut their listing price at lease once in the past year.”

While interest in buying foreclosed homes has increased, the study also found growing concerns about purchasing bank-owned properties. Of those surveyed, 85 percent said there were negative aspects to buying foreclosures, up from 80% who said that in November. Among the top concerns, 71 percent cite hidden costs, 46 percent believe the process is risky and 31 percent are concerned that the home will lose value.

RealtyTrac’s Sharga says the two most common mistakes foreclosure buyers make is that they over value the property or underestimate the cost of repairs. He said fear of prices falling further shouldn’t be as big a concern if you’re buying a place to live for the next ten years or so. “An 8% decline won’t make a difference over the course of the cycle,” he said.

Reader Comments

Commercial Property

May 22, 2009 11:22 AM

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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