Is Buying Foreclosures Now 'Sexy?'

Haven't you heard? Foreclosures are "sexy."

Just ask Phil Faranda, a Realtor who specializes in distressed properties. He says foreclosed-on homes, which may have been frowned upon by homebuyers in the past, have become hot-ticket items in recent years.

"When you think of a foreclosure, lots of the time you think of a kind of boarded-up, dumpy place," says Faranda, who owns Briarcliff Manor, N.Y.-based brokerage J. Philip Real Estate. But the housing downturn, he insists, "has made foreclosures sexy."

A recent survey seems to suggest the same, albeit less colorfully: Realtor.com found that buyers are now three times as likely to buy a foreclosure as they were just 2½ years ago. In the May survey, 64.9 percent of respondents said that they were likely to buy a foreclosure, leaps and bounds ahead of the 25.3 percent who said the same in the online listing service's October 2009 survey.

That sheds light on what industry insiders say is a broad shift in the public's perception of foreclosures, as more buyers and investors have familiarized themselves with a market dominated by foreclosures.

"Foreclosures have become such a dominant part of the market," says Daren Blomquist, vice-president of online foreclosure marketplace RealtyTrac. "Buyers realize that they have to at least consider a foreclosure purchase if they're in the market."

Foreclosure-related sales, which include short sales and sales of bank-owned homes, have accounted for 26 percent of total home sales in the first quarter of 2012, up from about 1 percent in the same time period in 2005 and down from a peak of 45 percent in 2009, according to RealtyTrac.

Currently there are about 1.4 million homes in the national foreclosure inventory, according to analytics firm CoreLogic. Though that level is marginally lower than a year before, when foreclosures numbered 1.5 million, it still represents an enormous increase compared to foreclosure levels before the housing meltdown. In January 2005, there were only 240,000 homes in the foreclosure inventory, according to CoreLogic data.

Faced with a swollen supply of distressed properties, more buyers have responded positively to distressed properties' main attraction: their price tags. And it's not only investors looking to flip or rent out a foreclosure after buying it with cash who are going after these properties.

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A significantly higher proportion of homebuyers interested in foreclosures now say they intend on living in those homes. Just 6.9 percent of buyers today say that they want to buy foreclosures for investment purposes, down from 13.2 percent in 2009, according to Realtor.com.

That's because the "irrational exuberance" of a freewheeling young crop of borrowers, the owner-occupants of yesterday who fueled the housing bubble, has morphed into "crazy psycho caution," Faranda says. American buyers today want to hedge their bets, and there's no better way for them to do that, Veranda says, than to snag a home at a bargain rate.

Laura Yarbrough, who lost her Munson, Mass., home to a tornado, is on the hunt for a foreclosure to live in. She is one of many buyers searching in a less-then-stellar economic climate for bargain purchases.

"I just figured I get more bang for my buck," she says.

She seems poised to do just that in light of today's depressed foreclosure prices: The risk-management approach of purchasing a heavily discounted property would, in the event of a continued slide in home prices, cushion potential losses much more than in years past.

Peter Vulaj, who has flipped distressed properties, including foreclosures, for the past 15 years, says discount margins on foreclosures over the last few years have been as high as he's ever seen them.

They used to hover around 10 to 12 percent below market rates, but since the housing meltdown, the discounts have skyrocketed, says Vulaj, who lives in Putnam Valley, N.Y. Today, the average sales price of a home in some stage of foreclosure is 27 percent below the average sale price of a non-distressed home, according to RealtyTrac.

Ariana Loucas, who worked in mortgage lending and is now a Realtor in Columbia, Md., says one reason for the unusually steep discounts is that banks, seeking to avoid the tangle of legal and maintenance costs associated with foreclosures, are willing to accept even steeper discounts on foreclosures than in the past.

"[Buyers] believe that banks are really willing to negotiate to get the properties off their books," Loucas says.

Mery Swanson of Gig Harbor, Wash., says that she may start searching for a distressed property in the coming months. She sees it as a shrewd investment, since, by her measure, home prices are set to rise.

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"Buying a foreclosed home at the rates and the prices they're going for? That's a great deal right now," she says.

Across the street from Swanson, a 20-something couple just purchased a recently renovated foreclosure, she says, adding that they bagged a great deal.

People like them are "getting practically brand-new houses, even though they've been foreclosed-on," she says.

Indeed, in addition to offering a vast supply of homes running at unusually steep discounts, much of today's foreclosure inventory is made up of homes that defy the stereotype of beat-up buildings riddled with defects.

They may have recently undergone renovations paid for by homeowners who had not anticipated a drop in home values, or they may even have been recently constructed by hapless builders who built on spec just before the market downturn.

"They're virtually new properties in many ways, if you are buying them today," Blomquist says of such properties.

Many of today's foreclosed homes are also occupied by their distressed owners, who, even as they face repossession, maintain them and preserve their quality.

See also:
10 Cities Getting Slammed by Foreclosures
How to Buy Foreclosures
Hope That U.S. Can Weather New Foreclosure Storm

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