Want to save $100,000? Buy a foreclosure-type property

The following chart looks at the cost of buying a "normal" home verses  a "foreclosure-type" home.  A normal sale is described as one where "the owner is selling their home (in an arm's length transaction) simply to move to another location." A foreclosure-type home can be described as one where the owner is "moving towards a trustee's sale or, due to financial hardship, is short-selling the home for less than the mortgage balance."

ARMLS (Arizona Regional Multiple Listing Service) allows Realtors to classify foreclosure-type properties as either "short sale,"  "lender owned property," or lender/corporate approval required.  That is how the foreclosure-type numbers can be obtained. 

I think you'll find the these results very telling (disclaimer: foreclosure-type properties often need work and can also be in undesirable areas).

Read the chart this way:

• 5,829 homes were sold in August, 2008
• the average price per square foot of all homes sold was $127.00 per square foot
• a normal sale averaged 2,038 square feet and sold for $317,020, which equals $156.00 per square foot
• A foreclosure-type sale averaged 1,984 square feet and sold for $185,856, which equals $94.00 per square foot
• $131,164 is the difference between the average cost of a normal sale verses a foreclosure-type sale (only in August 2008)
• $62.00 per square foot is the difference between the average cost of a normal sale versus a foreclosure-type sale (only in August 2008)

I've provided you with fifteen-months of information that clearly shows a normal sale costs the buyer about $100,000 more than a foreclosure-type sale. Additionally, and on the average, a normal sale costs the buyer about $50 more per-square foot than a foreclosure-type sale.  Click here for an explanation of why price per-square foot is a more valuable  and accurate guide. 

Very interesting, right?  This post was not written to discuss the psychological reasons people do not buy foreclosures, though I have written on that subject.  It is more directed towards the downward pressure that foreclosures cause on home pricing.  Two points about that:

• normal sellers whose house has been on the market for one year must realize these facts
• the only way for home prices to level off and become more stable is to cleanse the market of foreclosure-type homes

I provide these numbers to give you a factual basis for understanding the current market. Did anyone  have an "aha" moment? 

Comments

[RW]

Great stuff. I love all the statistical reports reports you run, very interesting.

Given that you're such a stickler for accuracy (you call for using $/sqft over price - which I agree with) I'm surprised you calculate all these numbers and draw all these conclusions (such as regular buyers pay $100K on $50/sqft more) without any disclaimer as to the real causes of the difference.

Realtors love to point out that the houses are not in the same condition. Foreclosures may require repairs, cleaning, back taxes or HOA dues, landscaping etc. and are generally sold as-is you don't get to negotiate for any "extras".

But I'm talking about the even bigger geographic bias. The foreclosure sales are still largely concentrated in the outlying areas: Queen creek, Maricopa etc. while the traditional sales are more evenly distributed.

So to exaggerate just a bit, you're not just comparing a foreclosure vs. traditional sale, you're comparing a foreclosure on a beat up house with the fixtures torn out in Buckeye to a regular sale on an immaculate home in north Phoenix. Is it any wonder the former is significantly cheaper?

Run the comparison again in a single zip or subdivision and I think you'll find the difference almost disappears.

[Ron]

RW,

Thanks for reading. Yes, I see your point. I write so many articles on this blog that sometimes I think everyone has read them. Property condition and geographic bias have been addressed in previous posts. However, the difference between normal and foreclosure type properties does not disappear when we break down the analysis. The most volatile comparison would be with subdivisions because of their relatively small size. However, zip codes and cities produce more reliable results.

Look at these figures for Gilbert zip code 85296. I randomly picked 85296 by closing my eyes and placing my finger on a zip code and map. Since we're looking at a much smaller number of sales, I ran these figures for the last three months. The average "normal" sale was $274,993 and 2,247 square feet, for a price per square foot of $122. The average "foreclosure-type" sale was $232,762 and 2,116 square feet, for a price per square foot of $109. Thus, a difference of only $13 per square foot.

However, here are the numbers for the City of Phoenix during this same time period. The average "normal" sale was $290,461 and 1,924 square feet, for a price per square foot of $151.00. The average "foreclosure-type" sale was $160,308 and 1,740 square feet, for a price per square foot of $92. You can see a difference of $59.00 per square foot.

Granted, there is a geographic bias when you consider homes sold in south Phoenix compared to north Phoenix. Nonetheless, there are countless examples of homes on the same street selling for dramatic differences in prices. Click here

http://www.foreclosureexpert.info/2008/04/a-tale-of-two-h.html

for one example. In this example, the REO home only needed the carpets cleaned.

[Ron]

RW,

Thanks for reading. Yes, I see your point. I write many articles on this blog, and sometimes I fantasize that everyone has read them all. Property condition and geographic bias have been addressed in previous posts. However, the difference between normal and foreclosure type properties does not disappear when we break down the analysis. The most volatile comparison would be with subdivisions because of their relatively small size. However, zip codes and cities produce more reliable results.

Look at these figures for Gilbert zip code 85296. I randomly picked 85296 by closing my eyes and placing my finger on a zip code map. Since we're looking at a much smaller number of sales, I ran these figures for the last three months. The average "normal" sale was $274,993 and 2,247 square feet, for a price per square foot of $122. The average "foreclosure-type" sale was $232,762 and 2,116 square feet, for a price per square foot of $109. Thus, a difference of only $13 per square foot.

However, here are the numbers for the City of Phoenix during this same time period. The average "normal" sale was $290,461 and 1,924 square feet, for a price per square foot of $151.00. The average "foreclosure-type" sale was $160,308 and 1,740 square feet, for a price per square foot of $92. You can see a difference of $59.00 per square foot.

Granted, there is a geographic bias when you consider homes sold in south Phoenix compared to north Phoenix. Nonetheless, there are countless examples of homes on the same street selling for dramatic differences in prices. Click here
http://www.foreclosureexpert.info/2008/04/a-tale-of-two-h.html
for one example. In this example, the REO home only needed the carpets cleaned.