January 26, 2008
You need to sell your home as quickly as possible and for top dollar. But the only buyers in the market seem to be bottom-fishers who want to snap up a bank-owned property at a substantial discount. How can you sell your home when you’re surrounded by foreclosures?

Foreclosures have been on the rise, according to data compiled by the Mortgage Bankers Association, and at least a few, if not many, foreclosed homes may be on the market today in just about any neighborhood, regardless of the residents’ socio-economic status.

Sellers don’t have many options in a strong buyer’s market, but there are some tactics that can tip the balance between a sold home and what Realtors call a "stale listing," which refers to a home that has been on the market so long that buyers have become suspicious as to why no one has bought it.

Home sellers need to understand that foreclosed homes, which are often referred to as real-estate-owned, or REO, aren’t all the same and consequently don’t all have the same impact on nearby homes that are for sale.

It’s helpful to divide foreclosure properties into three groups, said Dave Billings, the West Coast regional director for Redfin, a multistate realty brokerage company.

"Pre-foreclosures" are homes on which the owner has fallen behind on the mortgage or which have already been taken back by the lender, but haven’t yet been placed on the market.

"Auction foreclosures" are bank-owned homes that will be sold on the auction block. Auctions historically have been dominated by small numbers of experienced investors, but these days individual home buyers may be found at auctions as well.

"Listed foreclosures" are bank-owned homes that have been listed for sale with a local realty broker. Often, these homes will be described in the local multiple-listings service, or MLS, as "bank-owned" or "lender-owned."

Auction foreclosures typically aren’t included in the MLS because they aren’t listed for sale with a broker. However, the sales prices of these homes may be obtained after the auction through tax records.

Listed foreclosures can be tough competition for owner-occupied homes because banks and asset managers usually are more willing to negotiate prices than the typical homeowner would be, said John Lynch, a broker with Keller Williams Realty Greater Cleveland West in Westlake, Ohio

That’s especially true today, since banks have more REOs on their books, and they don’t want to pay the costs to maintain and manage those properties.

Auction foreclosures are a separate market, but if buyers know the sales prices of those properties, "that is going to impact their thinking about the value of your home as well," Billings said.

Home sellers should be aware of auction properties even though they might not be directly comparable because of their poor condition or lack of wide exposure to the market.

The effect of foreclosures on the value of nearby houses was quantified in a 2006 study, "The External Costs of Foreclosure," by Dan Immergluck of the Georgia Institute of Technology and Geoff Smith of the Woodstock Institute. This study used statistical models to analyze data collected in Chicago in the late ’90s. The researchers concluded that each foreclosure within one-eighth of a mile from each home reduced the value of that home by 0.9 percent.

Yet, "fair market value is still an option" for home sellers, Billings said.

"Just because a foreclosed property is down the street doesn’t mean you have to take $15,000 less than your house is worth. But it does mean that any sort of shoot-the-moon option isn’t available. It requires a laser focus on a true justifiable fair-market price for your home."

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