Foreclosures: Is This the Right Time to Buy?

A few weeks ago I was cruising the real-estate Web sites, looking at homes for sale in my suburban town, when I came across one that surprised me: a nearby, nearly new, 5,000-square-foot Cape Cod with a four-car garage on a nice piece of land. The price? Just $699,000. Even in the current downturn, that's lower than I'd expect for a house this big. So even though I'm not in the market to move, I read the listing more closely. I quickly noticed it was "bank-owned," which explained the lower-than-expected price. Then in the fine print was another detail: while the bank was offering a traditional agent's commission, there was an additional incentive: an extra 2 percent for any agent who brought them a signed contract by Sept. 30.

It's a sign of the times. As Congress listens to administration officials explain why taxpayers should offer hundreds of billions to help bailout banks that are teetering due to investments in bad loans, homeowners far from Wall Street or the Capitol continue to feel the direct effects of these mortgages gone bad. According to RealtyTrac, banks now own a record 820,000 homes, up from 224,000 at the end of 2006 and 440,000 at year-end 2007. By the end of 2008, says Rick Sharga, senior vice president at RealtyTrac, banks may own as many as 1.2 million homes—equal to about one third of all the homes for sale in America. And as those inventories grow, so does the pressure to sell them.

"The banks are getting more aggressive and starting to offer incentives to people to move these properties," Sharga says. On some listings, banks are offering to sweeten the commission by a percentage point or two. On some properties, they're offering a lump-sum bonus. Based on what Sharga is seeing, the incentives are typically used when a foreclosed home has been sitting for a long time.

RealtyTrac has not noticed extra incentives for agents if they sell a house by a certain date, but other professionals have. In a way, that's not surprising. Banks have to file quarterly financial statements, which include their balance sheets, so it's only natural they'd like to get distressed properties off the books. In the mutual-fund business, portfolio managers have long engaged in "window dressing," the perfectly legal practice of selling stocks before filing deadlines to make a portfolio appear more attractive. Likewise in the auto industry, smart shoppers typically wait until the end of the month to shop, knowing that commission-hungry salesman are more apt to be flexible, to add one more sale to their monthly tally to increase their bonus. As more banks try to move properties, can house hunters strike better deals on bank-owned homes at the end of each quarter?

Fran Yerardi sees some signs of that. Yerardi is a Boston-based real estate investor who buys dozens of homes each year. In the last year, he says, banks have become a lot better at plowing through their inventory of foreclosed homes, and that's partly because they're putting in more incentive compensation for the agents who list their homes. "What we're seeing is they drag their feet [at] the beginning of the month—they'll hem and they'll haw, they won't accept your price," Yerardi says. "Then they'll say 'We accept your price and we need to close by next week'." He believes this is because the agents get bonuses for monthly sales. "We're seeing a ton of that."

Glenn Kelman, chief executive of Redfin, an online real-estate brokerage, also believes banks are increasingly time-sensitive when it comes to selling foreclosed properties. "Many buyers are oblivious to the quarterly and annual [filing deadlines]," he says, pointing out that it's not just banks that face pressure to make quarterly numbers but also builders. Kelman says he's seeing larger discounts from banks, particularly in northern cities like Boston and Chicago, where fewer homes sell during snowy winters. "We think what's driving this is a general anxiety among banks and sellers that properties which don't sell this fall will be on the market until the spring of 2009," Kelman says.

As an example, last week Kelman pointed me toward this home near Chicago. He says the previous homeowner listed the property at slightly more than $1 million before the bank foreclosed. Then the bank listed it at $745,000. Last week the asking price stood at $490,000, with a $2,500 bonus on top of the standard commission to any agent who brought forth a buyer. (By the time I linked to the home this week, the Web site said the listing had been pulled off the market—which may mean some buyer found that $490,000 price was too low to resist.)

Even amid the confusion and anxiety caused by the see-sawing stock market of late, there are some pros who've turned decidedly optimistic about the housing market of late. Consider Jim Cramer, who recently wrote in New York magazine that he expects real estate to reach its absolute bottom next June.

Still, with the inventory of foreclosed homes set to grow by nearly 50 percent in the coming months, it's hard to see a turnaround coming too abruptly. (That's particularly true in light of the beating that investors and consumer confidence have taken due to ongoing troubles on Wall Street.) I think the buying opportunities will continue—and may even grow as banks get more aggressive in unloading these homes.

"At the end of the year, there will be a fire sale as everyone tries to clean up their balance sheets for 2009," Kelman says.

For home buyers, that means the holiday season could bring an extra reason to celebrate.