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Do Buyers Have Unrealistic Expectations of the Foreclosure Discount?

A new survey from RealtyTrac and Trulia shows a host of interesting data points regarding consumers' attitudes toward foreclosures: from buying foreclosures to exit strategy for foreclosure purchases to considering a so-called "strategic" foreclosure. What stuck out to me was that 36 percent of those surveyed said they would expect to receive a discount of at least 50 percent when buying a foreclosed home. The press release announcing the survey editorialized that this is probably an unrealistic expectation, while the 18 percent of those surveyed who said they would expect a discount of 25 percent or less on an REO purchase were more realistic. I agree that 50 percent may be a little unrealistic, but an internal RealtyTrac analysis of foreclosure sales shows the average sales price of REOs in the first quarter of 2010 was 34 percent below the average sales price of properties not in foreclosure. And there were a couple states where the average discount was above 50 percent (New York and Connecticut).

Somewhat counter intuitively, Nevada had one of the lower average REO discounts (17 percent) even though the state has consistently posted the nation's highest state foreclosure rate over the past couple years. But that could be because the Nevada market is so saturated with foreclosure sales (65 percent of total Nevada sales in the first quarter were of properties in some stage of foreclosure, according to RealtyTrac) that properties not in foreclosure are being priced down closer to what foreclosures are selling for. That would mean many of those non-foreclosure sales are likely short sales as well.

RealtyTrac plans to issue a full-fledged foreclosure sales report sometime in the next month that covers average discounts of both REOs and pre-foreclosures as well as percentage of total sales that foreclosures represent in each market.

Do buyers have unrealistic expectations of the foreclosure discount in your market?

Here's a graphic showing some of the findings of the survey.

American Attitudes Toward Foreclosure Infographic May 2010.pdf

Posted: Thu, May 20 2010 10:44 AM by darenb
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Comments

brian said:

In our area, many pre-existing homes are selling for $120-140 a sq ft.  These homes have not been maintained to the point where they are worth a new home, example..never updated, 18-year-old roof, etc. Building quotes are ranging from 84-100 for new construction by good builders.  Even assuming a lot price of say $75,000 (which is very high, as 20 minutes out of the town, you can buy acres for a couple thousand an acre), a 3000 sq ft house can be built for $75k + $30k (to clear land) + 300k (3000*84 or 100)= 405k for brand new at most.  While a similar house is listed and demanding $455k.  

Foreclosures are typically in much worse shape here, practically destroyed with huge renovations needed just to make it livable...I think a much better measure of foreclosure pricing is price/sq ft...not a % discount...as that can be infinitely skewed by the starting price...

# May 20, 2010 11:49 AM

Confuzzled said:

I do not have unrealistic expectations. I know the housing bubble started about 1998. We have had about 30% inflation since then. That means sell me a house for 1998 prices + 30% and that is reasonable. More than that is still bubble needing to deflate.

I tihnk sellers have unrealistic expectations for their selling price. As tech stocks do not sell for their pre-bubble prices today (inflation adjusted) we can not expect house prices to sell for what an unrealistic bubble drove them to.

# June 1, 2010 4:47 PM