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Foreclosure Discounts Fade Away

Just two years ago, to the delight of investors and the anguish of homeowners, foreclosures regularly sold for 30 percent or more below the price of “normal” homes. How times have change! Now the foreclosure discount is less than half that amount and still headed south.

The discounts investors receive for buying homes that have languished in default for months, if not years, are what attracted most investors to real estate in the first place. It was hard to pass up a property priced far below the one next door when all that’s needed to flip it is a little elbow grease and a few visits to the nearby box store. Mouth-watering discounts right down the street enticed thousands into investing

In fact, rehabbing often proved to be more expensive than anticipated, making a healthy foreclosure discount even more essential. Investors spent an average of $15,600 per property fixing it up, for a total of $3.9 billion in 2011, according to the Harvard Joint Center for Housing Studies. As rehab costs have risen over time, foreclosure discounts have gone in the other direction.

Foreclosure discounts, however, were also widely blamed-fairly or unfairly–for lowering home values when appraisers mixed them in with other comparable properties when valuing a home. This practice was so controversial that it contributed to a two-year long, highly charged re-do of appraisal guidelines and today appraisers are discouraged from using foreclosures as comps.

As the discount has declined, the problem with appraisals is disappearing but investors are facing some tough decisions. The latest data, from the National Association of Realtors Realtor Confidence Index survey of 3400 plus Realtors suggests that for REOs the discount has fallen to 16 percent average discount to market, while short sales are selling at a 13 percent average discount. For properties in average or better condition, the discount is now only 11 percent.

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by Steve Cook RealEstateEconomyWatch.com