5 Ways to Minimize the Impact of Foreclosures on Your Home Sale

By Dawn Handschuh, Personal Finance Writer   

Today's rising tide of foreclosures has a lot of would-be home sellers sitting on the sidelines. During the second quarter of 2008, foreclosures increased 121% nationwide from a year ago.¹ Small wonder, then, why many homeowners who don't absolutely have to sell their homes are waiting things out until housing values show signs of recovery.

But some homeowners have no choice but to put their homes on the market, whether due to divorce, a job loss or a relocation. For most of these home sellers, what they get for their current house greatly affects their ability as borrowers to purchase their next house.

Selling in a buyer's market is never ideal, but with so many bank-owned properties creating added competition for buyers, sellers must be savvy. Foreclosure is usually the homeowner's last resort; many try to sidestep that alternative by negotiating a "short sale" with their lender. Sometimes, it's more cost-efficient for a lender to accept less than what's due on a mortgage, if there is true homeowner hardship, rather than going through the foreclosure process. Short sales also make it more difficult for other homeowners not experiencing financial hardship to attract a dwindling pool of buyers.

Here are some things to remember when preparing your home for listing:

1. Pricing is everything. In Merced, California, the median sales price of residential properties fell by 50% from its high three years ago. With thousands of foreclosures crowding the marketplace, some realtors advise homeowners not to bother listing if they can't match the price of comparable, bank-owned properties.²

Other realtors emphasize the need for accurate pricing right from the gate, because if a listing becomes stale, meaning it stays on the market too long, buyers become suspicious about why the house hasn't sold. Thus, realtors say, it's better to price aggressively from the start, and if you must lower your price later, it's better to make one large price reduction rather than a series of less-than-meaningful price cuts.

Sellers also need to be aware of price points.

"If a buyer is looking for homes priced between $250,000 and $300,000 and you price your home at $301,000, you'll lose that buyer," said F. "Cheetah" Currier, a Keller Williams realtor in Punta Gorda, Florida. "You can still price your home at $300,000 to compete with the $250,000 homes, but your home will have to show better, have more upgrades and a pool that isn't breeding mosquitoes."

If sellers can't compete on price, Currier said, "They should find other ways to make their buy more compelling than a short sale," whether it's a home warranty, a pre-inspection report or chipping in on closing costs. Because most short sales in her area were made by investors who never saw the property, Currier said, other home sellers can compete by keeping the lawn mowed and the bushes trimmed.

Before setting your price, research what comparable homes, including foreclosures, were listed and sold for in recent months. Remember that auction foreclosures won't be listed in the Multiple Listing Service (MLS) because they aren't being sold by brokers. You can get the sales price of auction-sold homes through local tax records, after the auction.

2. Emphasize pride of ownership. Despite general perceptions, banks don't usually sell foreclosed homes at bargain-basement prices unless the property's in terrible condition. At most, "banks may price foreclosed property at 10% below market value because they've already taken a loss and don't want to lose anymore, but they do want to sell it quickly," said Currier.

Still, foreclosed properties can sit vacant for months. In some neighborhoods, they become vulnerable to vandalism (sometimes by the former homeowner, either out of anger or for extra cash) or become unkempt. In cities like Detroit, scrappers will tear out copper plumbing, light fixtures and even siding. Drug dealers can move in. So banks may be more flexible in negotiating price, especially with so many foreclosed properties to manage.

Home sellers can leverage their home's move-in condition and all-around "homey" qualities. Recruit a realtor who can "stage" your home to showcase its best features and make it obvious it's a well-loved and well-kept home.

3. Be upfront about imperfections. Because banks aren't required to disclose material defects in a foreclosed property, they're sold "as is," which can be a crapshoot for anyone who's not an experienced contractor. There could also be unknown liens or judgments.

Offering full disclosure (warranties, appliance manuals, utility bills and details about home improvements) makes your home more appealing when compared to the multiple unknowns of a foreclosed property.

4. Make it easy. Simplify the transaction as much as possible by being readily available and helpful. Dealing with a homeowner or their realtor directly means the buyer should be able to count on a timely close. But buyers who are considering foreclosed properties have to deal with a bank, which can mean a longer close and extra delays associated with legal work, title insurance, appraisals and financing. Make this a selling point.

According to Currier, the minimum wait for a lender's response to an offer is six weeks on southwest Florida's Gulf Coast. "Lenders are overwhelmed by the number of short sales. It's like the Wild West here. There are no rules, no policies or procedures, and every lender's different." Currier, who is representing a seller in a short sale, said, "I have begged the lender to give me even a ballpark figure of what they could accept; if they did, I could put in the MLS listing that the property was bank-approved at this price, and I could get an offer right away." For home sellers not involved in a short sale, a speedier transaction is a definite advantage, Currier said.

5. Choose the right time to list. Foreclosures reduce local property values; the size of the reduction depends on the strength of the local housing market and the distance between a foreclosed home and surrounding homes. According to one study, every foreclosure within one-eighth of a mile from a given home reduced that home's value about 1% and even more so (1.4% to 1.8%) in low- and moderate-income neighborhoods.³

If you can, consider delaying your listing until the foreclosures in your neighborhood have sold. Obviously, this is feasible only if foreclosures in your area are limited.

Footnotes

¹ "Foreclosure Activity Up 14% in Second Quarter," RealtyTrac, July 25, 2008
² "In the Central Valley, the Ruins of the Housing Bust," The New York Times, August 24, 2008
³ "There Goes the Neighborhood: The Effect of Single-Family Mortgage Foreclosures on Property Values," Woodstock Institute, June 2005