Our Realtor is telling Us our house won't sell for what it is worth because of foreclosures??

22 Replies

Hey BPers! My husband and I have a house in VA and we live in Kentucky. We are working with a realtor who did some comps for the area and told us we won't be able to sell the house for what we want because there are 5 foreclosures in the area bringing the prices down. I'm so confused by this. She explained it to me, but it still doesn't make sense to me. How can foreclosures bring the selling price of a house down?? I know that doesn't look good for the neighborhood, but I can't imagine someone trying to negotiate with us saying well the house down the street was foreclosed on so you need to lower your price... Can someone explain this?? Thank you!!! Liz

Hi @Liz Rogers

"Foreclosures" specifically aren't the issue here - the issue is the price of the foreclosures. Typically speaking, foreclosures are priced slightly lower than market and tend to sell at deeper discounts than traditional sales. Lower comps for your house leads to a lower valuation of your house. This is true for traditional sales in declining neighborhoods as well, as homes start to sell for less and less, it drags down the value of all the homes.


With that being said, foreclosures also tend to be less appealing than a property staged and marketed home. It has been my experience that a home that looks great can sell for 5% to 15% over a home that shows poorly. Most foreclosures show poorly, so this may or may not be an issue for you.

-Christopher

Well I will try. He goes. Thing is your property is surrounded by other properties which in all likelihood will be sold at a discount. You will have more houses purchased by investors rather than by owner/occupants and as we all know people will spend more money for a personal residence than they will pay for an investment property. So the valuation of your property will be more inline with investment properties , meaning people will generally pay less and also sell them at some kind of discount. 

Occupancy rates will be lower, care will be less, renters in the area more in number versus owner/occupants, just generally less of a demand for another property in that area which translates into less of a demand for your personal property as well. 

More foreclosures means a poorer performing economy. People living around you generally have a  poorer economic outlook and poorer economic strength. More foreclosures equates to more people wanting to move to more gentrified areas and take their money out of your area. Foreclosed homes start to get boarded up to protect them against damage, they are more unsightly.  A higher vacancy rate will start to make itself more evident which equates to a lesser desirability which equates to lower offers and a more depressed market. The good buyers will be looking elsewhere to buy and be less willing to pay a higher price for properties around you, including yours. 

Look at areas in Detroit. You can find 6000 sq. ft. mansions offered at $100K. Go to the heart of San Francisco and you will find studios priced at $500K.

Market price is a subjective thing, there is nothing saying anyone will be willing to pay a high price for your home simply because you want that. 

Many of us would think that a 6,000 sq. ft home will fetch something in the millions of dollars but if no one is living around you and no one is paying property taxes and there are less customers for businesses wishing to establish themselves around you then there is the perceived idea that your property is worth less to most buyers. Those that will want to buy your house will be those that can not afford to buy in a better area where prices are higher and a higher demand is evident.  

With more foreclosed properties around you people will perceive your property as being less desirable and therefor worth less. Remember the first rule of real estate. Location !, location! location !

There are abandoned apartment buildings all around being offered for less than $140K in depressed areas and then in areas where demand is very high you can find an apartment building that is 200 years old being sold for over $20M

@Liz Rogers

Put yourself in the buyer's position: buyer has 5 foreclosures selling at $X and your home selling for 1.2 * $X.

(Disclosure: just picking 20% as an example here.)

Would you even bother looking at the home selling for 20% higher than the other 5 in the neighborhood? Granted, there might be better cosmetics or other buyer-specific variables the prospective buyer wants, but by in large, why would any prospective buyer overpay by 20%?

In the biz, we call this the endowment effect. It's common. Most people think their home is worth more it's their home. Nothing wrong with it. Just have to recognize it and fight through it.

Hope this helps. 

"I can't imagine someone trying to negotiate with us saying well the house down the street was foreclosed on so you need to lower your price..."

The reality is they do it all the time. Buyer looks at 4 foreclosures in crappy shape and then yours looks nice and they pit the foreclosure  against yours to try to get a better price.

If a homeowner buyer pays retail it must be VERY NICE. I mean that house better have a great lot, finishes, interior layout, etc. Every seller thinks their house is the cat's meow. It sounds like you have a broker/agent that is shooting it straight with you.

I would be more concerned not only with current foreclosures on the market but what is in the pipeline?? Are banks foreclosing on lots of default notices next month and the month after?? If the Fed raises interest rates and more foreclosures than the ones you have now enter the market your equity will erode further.

You need to look at current sold's in the last 30 days or so and price to move in the bottom 50%. Minor reductions will not cut it. Better to take the reduction now to sell then chase curve down to where you can't sell anymore.

I do not focus on residential but what I mean is if solds the last 30 days are say 150k - 170k then price 160k or below to appear a deal and hopefully get multiple bids.

Chasing the market down would be pricing at 168k to 170k and then deciding to reduce down to 166k next month and now comps have dropped by 3k. So you are still you of the market. After a few months of this you are at 154k to 156k when if you would have reduced more earlier and been a deal you would have already closed for more money.

That is why you do not chase a market down with tiny drops as it does nothing.

@Liz Rogers

  Before the GFC  appraisers threw out foreclosure comps.  then with the troubles appraisers were starting to include them but note it .

this is common in many markets... the foreclosures and bank owned should be excluded from the comps... if all lenders included them nothing in say a city like Detroit would sell for more than what wholesalers are paying for properties..   And the Buy renovate refi would never work.. because the value would be what you paid for it not what its worth.

there was an appraiser I used when I loaned I Detroit  I still remember his name.. Dave Deska he wrote by far the best narrative in his appraisals that made the case that bank owned and foreclosures are not true comps.  but it depends on your market

Thank you everyone! This does help a lot. I guess I just don't agree with including foreclosures in a comp because the foreclosure price may be lot lower than the actually value of the home, but that is where the investors come in! There are other homes in the area that have sold close to what we want and are smaller. So we will see! I don't make the rules I just play the game! Thank you for the input to all of you!!! This is why I love BP!
Originally posted by @Liz Rogers
 

Be sure to get a couple opinions from top "retail" realtors and look at the comps yourself and compare, there are plenty of realtors, especially low volume ones, giving bad advise. 

We and our rehabber affiliates sell 3-4 remodeled houses a month, with an average of under 30 dom

We consistently sell our remodeled houses for significantly more then similar comps.

Its not unusual for us to sell a rehabbed home in an area where "similar" dated homes sell for 140-150 we can sell for 165-169 

I never take sold foreclosures into consideration when determining my arv. and in the last couple years we have not had any trouble getting them to appraise. 

If there are no other  foreclosed  sales to use as comps, you may have trouble getting it to appraise, but ftfromom your information that doesn't seem to be the case.

You can always start at the price you think it should sell for based on non-forclosed comps. If you don't get much activity in the first couple weeks you know you are over priced. 

You can always relist at a lower price in a couple weeks. 

Originally posted by @Liz Rogers :

We are working with a realtor who did some comps for the area and told us

 Your answer is right in the question. Home prices are derived from comps. Foreclosure prices wont help the area but a true comp is about being like in kind.

While in NY an agent give me a desktop appraisal on a property I was selling. On the the day she walked the property the value was raised another 50K. 

A Texas underwriter told me his organization use 3 tiers. Q3 is fully updated, Q2 has some updates and Q1 is a home with no updates. Seems so simple yet since learning that I've been able to do better comp on habitable property. 

I'm in Youngstown, OH in a development with mostly similar, cookie-cutter, split-level homes and my neighbor's house sold at foreclosure in the midst of the recession for about $100k less than my house.  In the last two months I've been working on putting my home up for sale and a prospective realtor that we're looking to list our property with has told me that foreclosures cannot used for comps.

Originally posted by @Liz Rogers :
Thank you everyone! This does help a lot. I guess I just don't agree with including foreclosures in a comp because the foreclosure price may be lot lower than the actually value of the home, but that is where the investors come in! There are other homes in the area that have sold close to what we want and are smaller. So we will see! I don't make the rules I just play the game! Thank you for the input to all of you!!! This is why I love BP!

 Why don't you agree that foreclosures should be included in comps? In a market economy it's all about supply and demand. In other words, the market will determine what your house is worth. 

That being said, if you don't agree with what the Realtor is telling you, try talking to different Realtors (assuming that you aren't under contract with said Realtor). Maybe they will have a different opinion of what your house can sell for.

Account Closed, I must respectfully disagree about using your own research. Unless you have acces to the MLS, or have a county with exceptionally good online records, most online resources aren't accurate. Please never use Zillow or the like to judge your own values - it will be wrong. It would be better to contact a couple of real estate agents to get their opinion (because it is an opinion).

Originally posted by @Dan Schwartz :
What part of VA?

I think this makes a lot of difference.  What area and how is the market currently?  In areas where the market is fairly good, foreclosures don't seem to have as much effect.  In slower markets they tend to sell at a discount and pull down values for other properties.

Are you selling it vacant?  This may make foreclosures more relevant, because buyers will know you are motivated to some degree.

All I will say is you are absolutely, positively kidding yourself if you believe that foreclosure properties close to your property are not being looked at by the group of buyers that would be looking at yours.

All day, every day buyers will search for VALUE. I am not taking about trashed houses that are falling down foreclosures. Homebuyers tend to shun those. Houses that are foreclosures that can still get a loan but are just outdated and need some carpet and paint with sprucing up are contenders.

Home buyers will analyze the discount they get for buying a foreclosure versus what your property has to offer at a higher price if it is turn key.

Do you have any pics to put on here for your houses interior and exterior to analyze?? How long have you had it listed?? What is the feedback so far??  

Originally posted by @Liz Rogers :

@Justin 

@Justin Tahilramaniundefined

Because the owners missed however many payments and the house is being sold for what is owed, not what it is worth. Maybe the house is worth $400K, but they only owed $50k on it so it is sold for $50K. Yes that is a great deal for an investor, but for other people living in the area who want to sell their home that is also valued at $400K, that $50K price is not a true reflection of the value of the homes in the neighborhood. Of course, it could go the complete opposite way and the people could trash the house before they move out, making it worth less. In my personal opinion, the prices should be comparable to houses that sold that were not in foreclosure. 

@Jesse T.

It is Portsmouth, VA. If you do not look at the foreclosures, houses that are similar to ours are selling from anywhere between $160-205k. We want to set our price in that range as well. I was just a little taken aback when I heard that form our realtor because I was only looking at houses that had not been in foreclosure.

@Thomas Howard

I find that interesting your realtor told you that foreclosures could not be used for comps. Is that specific to certain states or areas? Or just their opinion??? Does anyone know they answer to that?

Liz

Liz -

I can't say that I agree with your assessment of how banks deal with foreclosures. A bank is going to try and sell their assets for the most that they can get (in a reasonable amount of time).

I understand where you are coming from, but I simply do not see it that way.

Best of luck.

From a quick search on RealtyTrac it looks like Portsmouth has a pretty high level of foreclosures.  I think you will have to factor foreclosures into what you can get for your property.  Traditionally banks have sold without repairs, but some are now doing at least minor repairs, so the difference in quality may not be as dramatic. 

@Liz Rogers

Foreclosures or REOs are sold for market value, not what is owed. It sounds like you have an honest Realtor on your hands. Better than someone coming in and telling you "Nah! Don't worry about those similar houses selling for 25% less, they don't matter!" They most certainly matter. Unfortunately you're just at the wrong place at the wrong time. 

If by chance your Realtor is wrong, the worst thing that happens is you would list it, and get 5, 10, 15 offers if the price is too low.

Be wary of the Realtor who comes in and says they can get your magic number. Any good Realtor knows the values more than the homeowner. 

Call an appraiser in the area and get an appraisal done. Or see if they will tell you if they would include foreclosures as comps. In general, based on my experience) an appraiser has to include foreclosures if they are a significant part of the market. If they are a rare occurrence in the area or tend to be passed over by the majority of buyers then they can exclude them. But keep in mind the appraisal will usually at least address how they are dealing with the existence of foreclosures in the area. And ultimately (unless you have a cash buyer) the banks underwriters will decide how important those foreclosures are. If they think it lowers the value, then that is what they will do and they won't lend above that amount.