Looking for a bargain-priced home? Thinking of flipping houses? Not too long ago, foreclosures would have been your go-to.
In fact, at the start of 2015, the average foreclosed property sold for just 75% of its actual market value. So a home worth $200,000? You’d pay the bank just $150,000 for it. (Full disclosure: The foreclosed home I bought back in 2011 cost a mere $106,000. I sold it six years later for $50,000 more.)
Sadly, it seems foreclosures are no longer the beacon of low-priced hope they once were.
According to Auction.com, an online foreclosure marketplace, foreclosed homes now cost around 86% of their market value. That’s up nine percentage points in just 12 months and the highest share seen in seven years.
To be fair, a foreclosure is still a good deal compared to a traditional listing. Paying $172,000 instead of $200,000 still means quite a bit saved. But with inventory so low across the board, competition is stiff for these properties — both for investors and for average homebuyers.
Does that mean more price hikes are on the horizon? Probably. Are there steps you can take to still snag a deal? Most definitely. Here’s what you need to know.
Why are foreclosures getting more expensive?
As with most things these days, the coronavirus — especially economic relief efforts — has a lot to do with the changes in foreclosure pricing.
Since last March, mortgage forbearance options created by the CARES Act have allowed homeowners to defer mortgage payments without added interest. And for those who were behind on payments before the pandemic? A foreclosure moratorium has protected them from losing their homes as well.
Combined, the measures have whittled foreclosures to nearly nothing. As of September 2020, national foreclosure supply was just 22% what it was a year prior.
Match that dwindling supply with increased interest from both traditional homebuyers — largely inspired by record-low mortgage rates — and investors clamoring for deals, and you’ve got more demand than ever.
“The inventory of foreclosure homes for sale has dropped nationally, while demand from investors and homebuyers looking for bargain properties has risen,” said Rick Sharga, executive vice president at RealtyTrac, an online hub for foreclosure listings. “That supply-demand imbalance is the root cause of rising prices on foreclosure homes.”
Are foreclosures still worth it?
Foreclosures definitely aren’t the absolute steal they once were, but they do have their perks. Primarily, they’ll save you a little bit off the top — about 14% off the market price, on average.
As Daren Blomquist, vice president of market economics at Auction.com, put it, this presents a “value-add opportunity.”
“Buy below market and add value through renovations,” Blomquist said. “This sets them up for success, whether they resell the property at full market value, rent the property at full market rent or just keep the property to live in.”
Buyers will also reap the benefit of skyrocketing home values, which will allow new owners to build equity almost instantly. In the long run, this means more profits from a sale or more cash when refinancing or taking out a home equity loan.
There are some major caveats to consider, though. For one, foreclosures are often poorly cared for, and they typically require some work before you can live in the property or sell it for market value. This is most common on vacant and abandoned properties which, due to the ban on new foreclosures, have made up nearly 100% of all foreclosures since the pandemic began.
Foreclosures are also typically sold as-is, and that can be “a dangerous and time-consuming option,” according to Samuel Olson, a Realtor with RE/Max Gold in Reno, Nev.
“Most foreclosures are in some state of disrepair — from carpets and flooring needing to be replaced to holes in the walls to dead landscaping to having been stripped of appliances and fixtures or worse,” Olson said. “The cost-savings of scoring a home below market value can easily be negated.”
There are also potential legal hiccups to think about. Many times, foreclosed properties will have liens filed against them — claims for the home due to unpaid taxes, repair bills and more. Many times, you’d need to pay these off before buying the home and transferring the property title.
If foreclosures are on your radar …
If you end up eyeing a foreclosure property, there are a few things you can do to ease the process and lessen your risk.
First, you’ll need to do some research — both on the home (through property records) and on other homes in the area. Property records can be found through your county clerk’s office. You’ll specifically want to look for any liens against the property, any improvements to the home, its ownership and sales history, and its assessed value with the county.
You can also ask your agent to pull comparable sales in the area. This can give you a good idea of what the home may sell for once it’s in top condition.
“Buyers need to do their homework and understand property values and price trends in the vicinity of the foreclosure property they’re interested in buying,” Sharga said. “Knowing the sales price for similar homes gives them the information they need to determine what kind of discount they’re getting, and knowing price trends gives them an idea of what they might be able to get in terms of a return-on-investment if they plan to resell the home.”
You should also consider the potential repair costs when making your offer. Getting a home inspection can help with this (if the seller allows it on the foreclosure you’re buying) or you can talk to your real estate agent or a general contractor before putting in an offer.
Once you’ve estimated the price of repairs, work backward to determine how much you should offer. Home flippers often follow the 70% rule, which says, in order to make a profit, your purchase and repair costs should not exceed 70% of the home’s expected after-repair value.
As Sharga explained, “There’s no point saving $15,000 on a home purchase only to find out that the home needs $25,000 in repairs.”
Finally, you will also want to get pre-approved for a mortgage. On most foreclosure properties, you’ll be up against investors — many paying in all cash. All-cash offers come with fast closings and little red tape and can be extremely appealing to sellers, especially a third-party looking to offload the property quickly.
While you may not be able to drum up $100,000 in cash on the spot, having a pre-approval letter is the next best thing, showing sellers you’re qualified, prepared and a safe bet to follow through on the deal.
Keep in mind that buying a foreclosure isn’t the same as buying a traditional home. Though you could use an agent, most times you’ll buy the property at a sheriff’s sale or through an auction (these are often held online these days). You might also buy directly from the company that seized the home. Homes foreclosed on by the Department of Housing and Urban Development, for example, are listed at HUDHomestore.com and are available for purchase directly from the agency.
The future of foreclosures
Foreclosures aren’t currently the bargain-priced deals they once were, but that will change. Supply should increase once the federal foreclosure moratorium expires and lenders can begin foreclosing on more properties. At that point, prices will likely fall closer to pre-pandemic levels.
When that will happen, though, is unclear. And until then, we may very well see prices keep rising. Current foreclosure moratoriums are set to expire at the end of March, but those could get extended.
“It seems likely that we won’t see very much foreclosure activity until the second half of the year — and possibly not until the beginning of 2022” Sharga said. “As long as the supply of foreclosure homes continues to be artificially low, it’s almost a certainty that prices will continue to rise.”
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