Homebuyers Wary of Taking on Foreclosed Properties

(May 24) -- Many homebuyers expect big bargains from foreclosures, but a growing number are shying away from the deals because they believe certain risks outweigh the potential savings, a new survey finds.

"Buying a foreclosure property still provides an opportunity for dramatic savings on a home, but the time and effort involved in executing a short sale, bidding against other buyers for a bank-owned property, or the need to do renovations may be issues for buyers," said Rick Sharga, senior vice president for RealtyTrac.

Some industry experts, however, expect foreclosure sales to increase.

Ninety-five percent of those surveyed generally expect to pay less for a foreclosed home than they would for a similar property for sale that is not a foreclosure, according to a recently released Harris Interactive survey commissioned by real estate information and search engine Trulia.com and online foreclosure marketplace RealtyTrac.com.

How much less? Thirty-six percent of those surveyed expected a whopping -- and arguably unrealistic -- 50 percent discount. Eighteen percent had more down-to-earth expectations of discounts of less than 25 percent, according to the survey.

However, fewer homebuyers say they are actually digging for gold in the distressed housing sector. The survey found that only 45 percent are at least somewhat likely to consider purchasing a foreclosed home in the future. That's down from 55 percent last year at this time.

Unless more investors step in to fill the void, that doesn't bode well for the housing market.

"It now seems clear that government programs will not reach the overwhelming majority of homeowners in trouble," said Pete Flint, Trulia's co-founder and CEO.

"Combined with decreased consumer interest around purchasing a foreclosure, and it may take even longer than anticipated to see true health return to the real estate market," Flint added.

Consumers remain jittery about foreclosures because of several issues. Sixty-eight percent fear hidden costs, 49 percent say the process is too risky and 35 percent say the home will lose value, the survey found. Hidden costs and lost value can cut deeply into any savings.

The study also revealed somewhat of a contradiction -- sales of bank-owned properties accounted for more than 30 percent of total home sales in the first quarter of 2010, and RealtyTrac expects an even greater share in subsequent quarters, especially now that the federal home-buying tax credit has expired.

"We anticipate that there will be an increased number of both real estate owned (REO) purchases and short sales throughout the rest of the year as the most active buying segments -- first-time homebuyers and investors -- continue to look for bargains," said Rick Sharga, senior vice president for RealtyTrac.

The May 10-12 online survey of 2,596 U.S. homeowners and renters also found:

• Among those at least somewhat likely to purchase a foreclosed home, 62 percent said it would be their primary residence, 19 percent would use it as a rental investment, 8 percent would use it as a second or vacation home and 6 percent said they would flip it -- quickly reselling to make a profit. Among renters, 83 percent would use it as a primary residence, while more than half of homeowners (51 percent) said they would purchase foreclosure for some other use.
• Renters revealed a stronger interest than homeowners in buying foreclosures -- 57 percent compared to only 40 percent of current homeowners.
• Potential foreclosure buyers appear to acknowledge foreclosures often need upgrades and are willing to use foreclosure savings to get them done. Among those queried, 92 percent said they would be willing to invest in improvements such as renovations and remodeling if they purchased a foreclosed home. Of those willing to invest in improvements, 65 percent would be willing to invest 20 percent or less of the purchase price to upgrade the property and make it their own.
• Only 1 percent of homeowners with a mortgage say walking away would be their first choice if they were unable to pay their mortgage. If their mortgage were to go "under water" (a mortgage balance that's larger than the value of the home), 41 percent would at least consider walking away, while 59 percent would not consider walking away no matter how much their mortgage was under water.