NOV 29, 2012 11:14am ET

Foreclosure Discounts Diminishing for Prospective Homebuyers

NOV 29, 2012 11:14am ET
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Prospective homebuyers who are looking to buy foreclosed properties for an inexpensive value are not obtaining the same discounts as previously accustomed to.  

In its latest analysis, Zillow said discounts for bank-owned homes have fallen 7.7% nationally in September. A year ago, the foreclosure discount was 9.1% and has since dropped significantly from a peak high of 23.7% in August 2009.  

In order to answer a consumer’s question “How much can I save by buying a foreclosure,” Zillow compares the sale price of a foreclosure to the estimated, non-distressed sale price of the same home.

Meanwhile, other firms use the median sale price of all foreclosures sold in a given period with the median sale price of all non-foreclosures sold in the same period. However, this strategy does not control for issues such as size, location or other attributes of homes, Zillow said.

“Because foreclosed homes tend to be smaller and in lower-priced locations, prior research tends to overstate the discount on foreclosures relative to non-foreclosures,” the Seattle-based real estate information provider said. “Zillow’s approach controls for those issues.”

On an annual basis, foreclosure discounts fell in approximately 77% of metropolitans analyzed by Zillow. Furthermore, all of the cities evaluated in the report are down from their peak highs, some reaching discounts that were more than 30%.

The areas where consumers can purchase foreclosed properties for the highest discounts include Pittsburgh (27.4%), Cleveland (25.8%), Cincinnati (20.2%) and Baltimore (20%).

Even though foreclosure sales continue to offer buyers discounts over traditional sales in most metropolitan areas, some of the areas hardest hit by the foreclosure crisis have seen a drop in the price gap between REO and non-foreclosed homes.

According to Zillow, two cities that have no foreclosure discounts in September were Phoenix and Las Vegas. Other metropolitans that have a very small difference between buying a bank-owned home compared to a traditional property were the California cities of Sacramento, which had a 0.7% discount and Riverside at 1.8%.   

“The smallest foreclosure discount is found in places where competition for homes is so high, people there are willing to pay the same amount for a foreclosure resale that they would for a non-distressed home simply to take advantage of historic affordability,” said Stan Humphries, chief economist for Zillow.