No Surprise Here: 43% of Sales in California are Foreclosures

30 Sep

Newsflash:  In case you have been living in a cave, you might be interested in knowing that foreclosures continue to dominate the market.

RealtyTrac’s latest numbers on home sales are out.  While Nevada landed on top of the pack in terms of the percentage of homes (a whopping 56%) sold during the second quarter of 2010 that were foreclosures, California was a not-too-distant second at 43%.  This is something that should not be entirely surprising:  many buyers avoid short sales, and sellers who are not underwater on their mortgages have little incentive to sell unless they absolutely need to.

Consider, though, that the average foreclosure sold at a 39% discount compared to non-foreclosure sales.

That’s great news for buyers.  The sheer number of foreclosures puts a great deal of downward pressure on prices of non-distressed properties.  And if you happen to be handy with tools, you can save huge by buying a foreclosure and putting in a little bit of sweat equity.  However, buyers also need to keep in mind that many banks have already priced their properties with that discount figure in mind.  You may be in for a surprise if you think the bank will consider lowball offers; often, the bank has already priced the property for a quick sale, and many banks won’t seriously consider offers that are significantly below their asking prices. (That’s not to say they won’t be willing to negotiate at all, especially if the property has been languishing on the market for some time.)

Of course, these numbers are terrible news for sellers, especially those without significant equity in their properties.  It is true that appraisers and brokers do not include foreclosures in their estimates of value on similar properties (only “arms-length” transactions can be factored into valuations), and foreclosures often have significant problems—we’ve all read about stories of angry owners destroying their homes as they’re being forced out—that often appeal to very different pools of buyers than non-distressed homes.  However, sales prices of foreclosed properties continue to have a profound effect on equity sales.  Equity sellers who are selling “fixers” will need to price their homes to compete with foreclosed properties.  Even sellers who have pristine, move-in-ready homes must be prepared to negotiate with buyers whose offers are going to be in a strong position to walk away if you’re not willing to budge on price, and who will simply move on to Plan B: buying that foreclosed house down the street from you and then doing a little work.

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