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In a survey conducted from May 1-May 5, 2009 by Harris Interactive on behalf of Trulia and RealtyTrac, Inc., almost 2,400 adult, prospective home buyers said they would “expect to pay at least 50 percent less for a foreclosed home.” We read this and wondered how much of a discount people are actually getting in South Orange County by purchasing foreclosed properties from a bank versus properties that are not foreclosures and sold through a more favorable (to the buyer) process. Read on to find out what we discovered.

To test this perception, we compiled the total home sales from two areas in South Orange County that have experienced a high number of foreclosures: Ladera Ranch and Talega in San Clemente. We gathered the statistics of all homes sold since January 1, 2009 through May 21, 2009 and compared the averages of foreclosed sales to those of non-foreclosed sales. Following are the results:
- There were a total of 228 homes sold
- Of these, 75 were foreclosures (33%)
- The average price of non-foreclosure homes was $675,464
- The average price of foreclosure homes was $557,675 (17% less)
- However, the foreclosure properties tended to be smaller properties
- Therefore, the average $/square foot is a more meaningful statistic
- So, the average $/square foot on non-foreclosure homes was $259 and the average $/square foot on foreclosure homes was $232 – a savings of 10%

But there is more to this comparison than just price. Purchase contracts with banks (whch are proprietary) are notoriously one-sided. For example, the buyer usually rescinds her or his right to litigate if there are issues with the property after the sale is consummated. This becomes a much more important matter because banks often (almost always) eliminate any contingency period after an offer is accepted. For comparison, a buyer has 17 days to conduct due diligence (with the ability to cancel at any time without penalty) using the standard California Association of Realtors (CAR) Purchase Agreement. This means that if a buyer has an offer accepted on a foreclosure, deposits their earnest money (typically 2% to 3% of the purchase price) and subsequently finds an issue with the property before they close, they forfeit the earnest money deposit.

This matter is further exacerbated because there are very few disclosures from the bank regarding known issues with the property, as there are in a traditional transaction. There are two forms that are required by CAR in a traditional sale which are meant to bring light to any past issues with a property: The Transfer Disclosure Statement (TDS) and the Seller Property Questionnaire (SPQ). These forms are not used in foreclosure sales, as the bank, not having ever lived in the property, are unable to provide any insight.

Of course, the most apparent issue with these transactions is the condition the property is left in after a person has been forced from their home. Frequently, the previous owner will strip the property of all items of value, such as stoves, refrigerators, microwave ovens, ceiling fans, lighting fixtures, etc. We have even seen people take insulation out of the attic, remove toilets, the furnace, solar panels and anything else that can be carried away. In these cases, the buyer ends up with an empty shell of a property that immediately requires tens of thousands or even hundreds of thousands in repairs or upgrades.

The worst offenders attempt to create as much havoc as possible as they are being ushered out the door. These are people who flush cement down their toilets, punch holes in the walls or flood the upstairs of the property to create the maximum amount of damage possible. Sometimes these issues are not apparent when doing a walk-through inspection.

The bottom line is: CAVEAT EMPTOR – buyer beware. First, buyers in our market are not experiencing anywhere near 50 percent discounts from non-foreclosure properties. We believe that number to be closer to ten percent. We are also not suggesting that all foreclosures are bad properties. However, there are enough bad ones to raise the concern level for non-professional buyers. The Csira Group believes there are great values out there (whether foreclosure or non-foreclosure), if you are patient, well-informed, adequately prepared (or represented) and diligent. We can help buyers find great home values while avoiding the many possible pitfalls often associated with foreclosure properties.