If you’ve been shopping for a home lately, you’ve probably encountered more than a few listings that are either bank-owned (REO) or short sales. In some of Redfin’s markets (Las Vegas, Phoenix, and San Diego) distressed sales make up more than half of what’s selling these days:
With prices that are often considerably lower than non-distressed homes, this plentiful distressed inventory can certainly seem attractive to homebuyers looking for a deal in today’s market.
Of course, we’re never satisfied just to bring you flashy top-ten lists (or top-sixteen lists, as the case may be), so we wanted to dig a little deeper into the data. What kinds of things could we learn about distressed sales that would really help a buyer who is thinking of making an offer on one? As it turns out, the data was happy to talk to us on that subject, providing us with some juicy insights to share with you.
To generate the chart below, we dug into our database to analyze nearly half a million sales that closed between the beginning of 2010 and the end of Q1 2011. The two bars for each market represent the average sale to list price ratio for distressed sales to the average ratio for non-distressed sales. A 100% ratio means that on average, that type of home is selling at exactly its list price. Below 100% means buyers are negotiating discounts, and above 100% means that the sellers are typically getting more than their asking price.
In every single market we looked at, REOs and short sales consistently sell for closer to their list price than the non-distressed homes. This held true across every price band, although the volume of distressed sales is certainly weighted toward the low end. Note that we are using the final list price in this analysis, not the original list price. It is also worth mentioning that we were originally only going to discuss REOs in this post, but the sale-to-list ratios for short sales were so similar that we decided to include them in our analysis as well.
Marcus Fleming, a Redfin Agent in Phoenix has seen this phenomenon first-hand. “Banks are very careful about getting a number of BPOs before listing a home,” explained Marcus. “When it goes on the market they are so confident the price is right that for the first 2 weeks they will accept nothing but offers at 100% of list price.” According to Marcus, even when the home has been on the market for months, banks won’t consider any offers for less than about 95% of list price.
As we were looking at the chart above, we wondered why some markets have a much larger difference between the distressed and non-distressed ratios. For example, in Austin they’re fairly close at 96.7% and 96.5%, while in Las Vegas they’re quite different, coming in at 99.6% and 96.3%. Why might that be?
In order to dig even deeper into the data, we created the scatter-plot below using the difference between the two ratios (i.e. the height of the red bar minus the height of the blue bar) as the Y-axis and the percentage of sales that are distressed (the numbers from the first chart) as the X-axis. The results tell an interesting story:
In general, the more distressed a market is, the bigger the difference between the two sale to list ratios. In other words, in a highly distressed market like San Diego, buyers are a lot less likely to get a bank to negotiate on price than they are in a less-distressed market like Denver. Admittedly, the correlation isn’t incredibly strong, but there is definitely a clear trend in that direction.
In some markets, banks are being especially aggressive with their listings, putting homes up for sale at well below the market value, leading to multiple bids and average sale prices that are higher than the list price. Across the entire data set we analyzed, distressed listings were more than twice as likely to sell for over list price than non-distressed listings (see a chart with the market-by-market breakdown here).
Anna Nevares, a Redfin agent in San Diego has definitely seen this at play in her market (where 41% of distressed sales are closing above list price). “Banks are pricing in line with the market, and sometimes even below in order to drive activity. Buyers are looking for a bargain and the banks know it. Their strategy is working,” said Anna. “Banks price their listings so well that buyers shouldn’t expect much of a discount, if any at all.” On the other hand, Anna points out that non-distressed sellers “typically list their homes with some degree of negotiability built in to the price. Many buyers won’t even look at an over-priced listing, so it doesn’t serve the seller well to price too high.”
So what does this mean for you if you’re thinking about trying to buy a distressed home? Here are our two takeaways:
- “Distressed” doesn’t mean “pushover.” Don’t expect to negotiate much of a discount from the bank. Even in Queens, where buyers of distressed homes are getting the biggest discounts, they’re only averaging 5% off the list price.
- The more distressed your market is, the better the banks are at pricing homes compared to their owner-occupied competition. If you’re seeing a lot of bank-owned homes for sale in your market, your chances of talking down the bank is going to be pretty slim.
The tide of foreclosures and short sales doesn’t look likely to recede soon, so if you’re thinking of jumping into the market, plan your offers accordingly!