Home builders confront the foreclosure bogeyman

TRD MIAMI /
Feb.February 17, 2012 03:00 PM

Home builders are switching tactics and confronting head-on one of their biggest nemeses: foreclosed houses that not only lure buyers away with deeply discounted prices, but simultaneously depress the appraisal values of newly built homes.

At a packed session at the International Builders’ Show last month in Orlando, Fla., consultants and builders said that with gluts of foreclosures in major markets around the country — and more forecast to arrive in the next two years — the time has come to stop being passive and to begin aggressively educating buyers about the often hidden costs of buying foreclosures.

In Phoenix, one large builder, Fulton Homes, has put together the equivalent of an online truth squad —an interactive “foreclosure cost calculator” that allows shoppers to estimate the expenses they’re likely to encounter if they opt for a foreclosure. The calculator uses what the company’s vice president, Dennis Webb, said are commercially available expense averages for acquiring, repairing and outfitting foreclosed houses of varying sizes, conditions and price levels in the area.

Say you’re shopping for a home to live in, rather than to rent out as an investment. You locate a number of foreclosures at low listing prices. You’re also aware of newly constructed homes that appear to carry higher prices for similar sizes and square footage.

The cost calculator prompts you to input the size, price and physical condition of the foreclosures. Say one of them is listed for $110,000 with 2,125 square feet of living space. Based on a drive-by, you estimate the overall condition to be fair — not terrible, but not great either. For that foreclosure, according to Fulton’s data, the typical post-acquisition costs — the repairs, new equipment, appliances and other improvements — would add another $32,288 to the price.

Likely expenses include an estimated $1,063 in appliances, $2,125 in electrical upgrades, $3,613 in windows, $5,525 for flooring and carpeting, $5,695 for cabinets, $1,913 in plumbing, $1,488 for drywall, $1,399 for the roof, $683 for interior cleaning, and a long list of others. The calculator also identifies possible legal fees, such as $1,500 in eviction costs if the property is still occupied, plus lawyers’ bills for title and lien complications.

Next to the calculator — here comes the big sell — Fulton offers a look at some of its own newly built homes that are in the same general price range. They come with none of these add-on costs and instead have extended warranties on construction, appliances and equipment plus independent third-party inspections. Webb said in an interview that the calculator has been “amazingly effective” in opening the eyes of home shoppers to the “dark side” of foreclosures, and has helped the company rack up rising sales in a market where 46 percent of local listings are foreclosures.

Jay McKenzie, vice president of BDX, an online information site for the industry, said his firm recently had conducted a survey of builders in different parts of the country, and found that head-to-head comparison efforts — newly built versus foreclosures — are a strong new marketing trend. Among the key arguments builders are using in their campaigns:

• New homes are far more energy-efficient and “green,” with highly rated windows, roofs, insulation and appliances. They also come with the wiring and spaces needed for most consumers’ high-tech information and entertainment preferences. The vast majority of foreclosures offer little or none of this.

• Newly constructed homes allow the buyer to “choose what you want” in floor plans, equipment, landscaping and amenities, “rather than inheriting someone else’s choices.” Foreclosures never do.

• Closing-cost and upgrade incentives. Most builders are willing to help with settlement costs, unlike banks unloading foreclosures.

So what to make of marketing pitches like these? To begin with, buyers considering foreclosures should take the time to check out the potential downside risks. The builders have a point: The costs of their houses are all built into the price. Buyers often have no idea what their final expenses will be with a foreclosure because they buy them “as is,” typically with no professional inspection, and they can’t be totally sure where that might take them.

On the other hand, don’t ignore the potential upsides of foreclosures — the pricing and locational advantages can be huge for smart shoppers. Do your own comparisons, and you’re more likely to end up making an intelligent choice.

Kenneth Harney is a syndicated real estate columnist.


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