What kind of home should you look for?

July 18, 2010 | 9 Comments

I found this great article from MSN Real Estate about the many types of homes there are to look at when beginning your home search. Check it out…

If you’re shopping for a home, you may be considering new homes, short sales and foreclosures. The best deals will depend on your local market — and how much patience you have.

By Amy Hoak of MarketWatch

Which homes should you look at? (© moodboard/Corbis)


The nation’s housing inventory is cluttered with foreclosures, short sales and homebuilders willing to make a deal. If you’re in the market to buy a home today, you’re likely weighing the benefits of each type of property available for purchase.

Don’t be fooled. Not all bank-owned foreclosures are sold at deep discounts. Not all builders are slashing prices. Short sales can be a crapshoot, with some buyers enduring months of waiting and still not getting the property.

All things considered, it’s possible that your best deal is purchasing a traditionally sold existing home, so don’t count those out of the running.

To get the most for your money, it’s important to understand the local market’s inventory; market dynamics will have a lot to do with how various types of homes are priced. Also, do some soul-searching to determine how much risk you’re willing to take and the amount of time and money you’re willing to invest in a home.

You won’t be alone: “Buyers are more educated these days. They’re coming to us with a good sense of what they’re looking for,” said Diann Patton, real-estate agent with Coldwell Banker.

At the very least, go in knowing what you can afford and in what neighborhood you’d like to live, said Leonard Baron, a real-estate professor at San Diego State University. Since most properties find their way to local multiple listing services, shoppers also can decide what type of home they’ll buy after finding one that fits their needs, he said.

Bank-owned properties
Foreclosures reclaimed by the bank, often called bank-owned properties, are often sold at a discount. However, the size of the discount depends on the market you’re in.

A recent report from Zillow.com found that the typical discount for bank-owned properties, compared with a traditionally sold home, averaged 20% to 30%. According to separate data from RealtyTrac, an online marketplace of foreclosure properties, the average discount on bank-owned properties was 34% in the first quarter.

There is more than one reason why the selling price of a foreclosure is lower than a traditional home.

“The seller is typically a bank, and would like to move (the property) off the books as quickly as possible. A traditional seller is interested in getting a certain price and is willing to stay in the market,” said Stan Humphries, Zillow’s chief economist.

Also, the condition of the home can be an issue. A buyer who wasn’t able to make mortgage payments also probably wasn’t able to keep up with needed maintenance. One of the biggest mistakes homebuyers make when buying a foreclosure is underestimating how much it’s going to cost to repair it, said Rick Sharga, senior vice president of RealtyTrac.

Others agreed. “It usually costs a lot more than you think,” Baron said. “You can add value to a property by rehabbing it, but probably not more than the cost you put into it.”

For the lower price, buyers also need to accept that they’re most likely purchasing a home that has been sitting vacant, which comes with its own set of issues because small problems — a leak, for example — can become big ones if no one is there to notice them. These homes also may have limited seller disclosures, because the owner — the lender — hasn’t been living in the home and thus has less information to disclose.

Home inspections are generally recommended regardless of what type of property you’re buying, and they’re essential in the case of a bank-owned property.

Location matters, too, in the pricing of a bank-owned foreclosure. In places with the highest incidence of foreclosure, bank-owned properties garnered the smallest discounts, compared with traditionally sold existing homes, Humphries said. “The places that did not have very many foreclosures right now had large discounts,” he said.

Another way to look at it: A homeowner aiming to sell his home in a market where a large percentage of sales are foreclosures will likely have to price it like a foreclosure just to be competitive.

Short sales
Patton said that in her California market, short sales offer some of the best deals. A short sale is when the seller owes more on the mortgage than the home is worth, and the lender agrees to accept less for the property to make a sale.

But even if you save money on a short sale, you could pay in other ways, she said.

Although lenders and government programs are trying to speed up the process required to complete a short sale, a buyer could still wait months just to find out he or she failed to get the home, Patton said. The home is discounted partly because of the uncertainty that the buyer experiences, she said.

“You need to understand there’s a reason why they’re less money — you have to play the game,” she said. “You have to be patient.”

The market generally discounts short sales by 5% to 8%, compared with traditional sales, said Travis Hamel Olsen, chief operating officer of Loan Resolution Corp., a national pre-foreclosure asset manager.

New homes
In many markets, the supply of new-home inventory is dwindling. That has caused pricing in the new-home market to stabilize, said Ken Lee, product analyst for Hanley Wood Market Intelligence, the research arm of media company Hanley Wood.

That is, fewer bargains may be available for new-home buyers.

“There is less flexibility on the builders’ side to negotiate prices,” Lee said. Plus, with supply more in control, “there’s not as much urgency to drop prices to move the homes that are currently sitting on the market.”

Buyers typically pay a 20% premium for a new home, compared with a traditional (nondistressed) existing home, but that also varies by location, Lee said. In his area of Philadelphia, a new home might cost $300,000, where a similar existing home would sell in the mid $200,000s, he said.

That isn’t to say builders won’t find other ways to make a deal. They’re still willing to throw in incentives, like finished basements, as a way to sell a home, Lee said. But if you’re looking to get the lowest price on a home, this might not be the best route.

And if there are distressed sales in new communities you’re considering, proceed with caution.

“A lot of foreclosures in the area will drive down the prices of nonforeclosure homes,” Humphries said, and that can extend to new-home inventory. It’s not impossible to find foreclosures and vacant properties in communities that aren’t even finished yet, he said.

Source: www.MSN.com


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