There’s a cost to buying a foreclosed home

Homebuilders 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. More

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There’s a cost to buying a foreclosed home

Posted 2/27/12

Homebuilders 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 expo here Feb. 8-11, 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 (www.fultonhomes.com/). 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 lot 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 to make it adequate for you and your family – would add another $32,288 to the price you pay.

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 you 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.

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