How Foreclosures Affect Your Home Sale

Though for the past several months, the number of pending home sales has gone up and the excessive inventory of unsold homes has been slowly going down, the Twin Cities real estate market still faces some challenges.  Rising unemployment, sagging wage growth, higher down-payment requirements, and stricter mortgage qualifications are all weighing progress down. Moreover, the rising number of Twin Cities foreclosures sales and short-sales taking place are particularly hitting home sellers hard. 

A sharp rise in foreclosures across the country is being blamed for declines in home prices that have shaken the economy. The foreclosure crisis has directed lenders and the government to launch extensive efforts to keep people in their homes, even if it means renegotiating the terms for hundreds of thousands of loans and in some cases, banks taking a loss. Most worrisome, the high foreclosure rate means home sellers must cut their prices to compete with short sales and foreclosure sales.

While about one-third of all home sales in the metro area during the July-September quarter were "lender-mediated" transactions, in some communities they represent more than 60% of sales so far this year, according to data compiled by the Minneapolis Area Association of Realtors.  In Brooklyn Center, for example, 64% of home sales so far this year have been lender-mediated, while in Edina only 8.3% were. Regardless of what community you live in, if there are foreclosure homes or houses involved in short sales on your block and you’re trying to sell yours, it will influence your sale price in the end.

Some might be asking why foreclosures have hit some areas harder than others.  Foreclosures tend to be concentrated in areas with a large quantity of first-time and low-income borrowers, as they are more likely to have subprime mortgages. These loans in turn are more likely to go into default. Some figures place subprime borrowers at more than six times as likely as prime borrowers to end up in foreclosure.

Communities with a high percentage of foreclosure sales also tend to see a steeper decline in the median sale price. In the Regional Multiple Listing Service district that includes north Minneapolis, 67.2% of the sales were lender-mediated. As of October, the median sale price of houses in that district fell 70% in two years. In Edina, where foreclosures include a small number of upscale homes but make up a low proportion of the total sales, the median sale price has fallen just 1.2%.

Not every trend is a rule, however. Even within cities like Brooklyn Center and Brooklyn Park, where foreclosures have really made an impact on prices, pockets of residential areas are holding their own and maintaining their property values.

There are plenty of buyers, even investors with cash on hand interested in picking up lender-owned properties at a steal. But most are unwilling to wait through the long and complicated process of buying a short sale home or foreclosure home. Because of the sheer number of foreclosures happening, it can take 90 to 120 days just to get a response to an offer from a lender. By that time, many buyers have moved on.  As a result, the lender is forced to reduce the price further in order to generate more interest in the property, and forcing the prices of nearby seller-owned homes down even further just to compete.

Those successive price reductions can cause trouble in other areas, other houses that are in a similar price range or condition. This is because foreclosures often become comparisons for appraisals. Because bank-owned listings are going to be priced below market value to move them quickly, the appraisal values of seller-owned listings will go down. 

There is the possibility of more trouble. As more homeowners fall into foreclosure because of increases in their adjustable-rate mortgages, as opposed to job loss or other economic misfortune, a growing percentage of homes foreclosed on are well maintained and thus more likely to be used as comparables for traditional home sales.

If you’re a home owner thinking about moving up to a bigger or better house, listen up: Don’t be afraid of the market.  Even if as a seller you lose some money on the home you’re leaving, as a buyer you'll pay less for the house you're moving up to.