With foreclosures rapidly increasing, many lenders are finding themselves with more foreclosure properties on hand than they can deal with, and are slashing prices as a result.
"By setting prices at extraordinarily low levels, say, $175,000 for a house that sold for $350,000 three years ago, banks can spark multiple offers," according to the Associated Press. Many lenders use this strategy because they can get multiple offers on each foreclosure property from buyers lured by the hugely decreased prices. Lenders can then choose the buyer who offers them the least amount of risk.
The bursting of the housing bubble and the rapid rise in foreclosures have made many lenders wary of risk. Between April 2007 and April 2008, skyrocketing foreclosures caused the number of bank-owned properties to more than double, from 254,000 to 660,000, according to First American CoreLogic, a real estate information company. Bank-owned properties are also known as real estate owned properties (REOs).
"For real estate agents, helping banks sell off properties is one of the only flourishing businesses these days. But it's not for everybody," according to the AP. "Agents can easily pay hundreds of dollars a month on upkeep—including utility bills, cleaning and lawn care—and must go through the hassle of getting reimbursed by the bank. They sometimes have to evict homeowners, tenants or squatters. And in many cases, they have to deal with vandalism or theft of everything from copper pipes to appliances and air conditioners." (For more on how investors can take advantage of the rising number of foreclosures, please see our previous article Capitalizing on Record Foreclosures.)
Several areas in particular have been hardest hit by this glut of foreclosures, including parts of California, Florida, Nevada and Arizona. In all of these areas, prices increased dramatically during the housing boom and are now falling just as dramatically.
In Merced, Calif., "Houses vacated by their insolvent owners have become damaged eyesores on many blocks. Businesses such as plant nurseries and paint stores have seen sales plummet as construction and remodeling work has stalled. The local association of real estate agents has seen its membership drop to 650 from more than 1,000 two years ago," according to the Los Angeles Times.
Merced was chosen as the location for the newest University of California campus during the housing boom, but now the benefits to the housing market from the new university are probably years away, according to the Los Angeles Times. (For more on real estate in college towns, please see our previous article, College Town Real Estate.)
In the Orlando area, about one third of bank-owned properties receive more than one offer, but the properties often return to the market after a deal falls through, according to the AP.
A record number of Americans—close to 3 million—are at least one month late on their mortgages in the first quarter, according to numbers released earlier this month by the Mortgage Bankers Association. Nearly 450,000 Americans had reached the final stages of foreclosure—also a record.
As foreclosure numbers keep setting records, many lenders are likely to keep slashing the prices of the foreclosure properties they hold until the housing bust bottoms out. Investors with cash available could take advantage of this situation by choosing among the foreclosure properties at auction or by finding deals on REOs. For investors, REOs are often preferable to foreclosure properties bought at auction. Investors pay cash at an auction when purchasing a foreclosure property and don't get to see the interior of the home or have it inspected prior to purchase, which means that purchasing such a property is riskier than purchasing an REO.
