What's the deal with Foreclosures? What is the alternative?

Hi Everyone!

We are getting tons of calls these days with customers wanting to take advantage of the "lucrative" foreclosure market. I figured it was time for me to throw in my two cents to all of you. In this market, foreclosures are not the best deal. Yes, you heard me right. Foreclosures are not what they used to be and there is a logical reason for this comment.

Firstly, five years ago foreclosures were running at about 50% of the value of property. They were great deals. The reason was simple. When a person went into foreclosure, they usually had put 10% or more down on the property. Also, as the years have gone by, prices in our area increased. With more equity in the property and prices skyrocketing, foreclosures made a lot of sense. Let's look at an example:

A person buys a property for $100,000. He puts 10% down for a mortgage of $90,000. Over the next three years the property value went up to $130,000. Once this person goes towared a foreclosure, he has $40k equity in the property. The bank is also willing to take less of a payoff to avoid going through the legally taxing foreclosure property. Ultimately the buyer can buy this home from approxinmatley $75,000 or so and with a built in equity of $55,000.

Ok, now let's fast forward to the fall of 2007 (no pun intended). A person buys his property two years ago for $300,000. As with most people during that time period, he financed 100% of the propery and now has a mortgage of $300,000. Now in 2007 he needs to sell his home or go into foreclosure. The problem we run into now is that property values have dropped around 30% since 2005 when he bought the home. Therefore, his home is now valued at $210,000. This means, if the bank goes into foreclosure, they are going to sell the property at market value to recoup as much as they can to minimize their losses. The buyer of this property is buying the property at market value and is not going to see much, if any, equity upon the purchase.

With all that said, you can see that foreclosures today are not going to offer you the best bang for your buck. So what is going to get you the best deal. If you are looking to get your best deal, look for homes that have been on the market for more than 6 months and have been owned by the owner for more than 5 years. This will most likely insure two things unless the seller had refinanced in the past two years and taken equity out of the home. First, the owner might have only paid $125,000 for that same house that sold for $300,000 in 2005. If he needs to sell the home, he can lower the price of the way below market value and still make a decent profit from the home. If the market value is $210,000 as we figured in the above example, then selling the home for $199,000 would still offer the seller a tremendous profit while offering the buyer a great deal below market.

Hopefully this all make sense to you. If you have any questions please don't hesitate to call or write. We are always here to help you accomplish your Real Estate goals!

Have a great day!

Mitch