Builders have a formidable new competitor on their hands. Foreclosed homes, with a huge price advantage over new ones, are outselling new homes in many markets. Though it’s virtually impossible to compete against foreclosures on price, builders report some success swaying potential buyers using the following techniques. Consider the following:
Get to know competing foreclosures intimately. Make sure your sales people get out to see every competing foreclosure and the shape it’s in. The lot may be overrun with weeds, the windows broken, and the appliances vandalized. The house may not even be livable at closing. Also, the foreclosure may be located in a neighborhood of other troubled homes that might further drive down property values.
Sell peace of mind. Banks make it clear that foreclosures are purchased “as is,” which means that no one stands behind the home if something goes wrong. In fact, they are generally exempt from state disclosure laws that would otherwise alert buyers to defects and problems. Even if they know something is wrong with the home, they don’t have to say so. In many cases, they may not have even seen the property. Buyers may do an inspection, but banks are under no obligation to do repairs. Builders, on the other hand, provide comprehensive warranties. They walk homes with buyers before closing to make sure everything is in working order and stand behind the home after the sale. Buyers can breathe much easier.
Remind potential buyers that a foreclosure sale may take months to close. Foreclosures may attract dozens of bids from people heeding the get-rich-quick advice of infomercials. Banks may go back to every bidder to try to get them to raise their bids. The process may take months rather than days, creating considerable uncertainty for the would-be buyer. “Builders are incentivized to make deals quickly,” says sales consultant John Rymer of Rymer Strategies. “Banks are incentivized to take as long as possible so that their bank examiners and credit committees don’t scold them for failure to follow the proper paperwork process.”
Emphasize your quick move-in homes. If buyers have any kind of urgency, they may be better off buying a home from your standing inventory. Several large private builders have had success selling new homes on this basis. Interest rates are low right now. What if they go up 1 percent while potential buyers wait for the bank to decide on the lucky bidder? Better to be safe than sorry.
Engage brokers as allies. Convince brokers that their time is better spent showing new homes than foreclosures. For agents, particularly the bigger ones, time is money, and it may take months for a buyer to find out if he’s the lucky one, as banks weigh bids and re-bids. Hold an event for real estate agents and remind them that their time is better spent showing buyers new homes. Highlight homes available for immediate occupancy. Create special incentives to move these homes.
Emphasize that buyers can customize a new home. Buyers get what they see in a foreclosed home, and it may not be a pretty sight. A new home, on the other hand, typically can be customized. It may be worth a lot to customers to get the kitchen they really want, a finished basement rec room, or a pool. Active adult and move-up buyers may have trouble finding the type of home they are looking for among foreclosed inventory, says John Schleimer of Market Perspectives. “Yes, there will be ‘bottom fishers’ that will buy on price alone. However, the more discerning buyer (with money) does not want ‘flipper’ homes. They want a new home they can spec to their level and lifestyle needs. Builders need to tell that story.”
Remind potential buyers that foreclosures have a history. “It is not unusual for the prior homeowner to leave a ‘present’ for the bank who forecloses on their home,” says Rymer. “There may be major water damage, drywall damage, clogged plumbing, or kitchen appliances that were left with molding food. Banks typically clean up foreclosed homes, but unknown damage may appear or reappear after closing.”
Gather horror stories. Find examples of shoppers who didn’t buy foreclosures because banks asked them to sign too many disclosures. Also, the buyer’s bank may insist the buyer make some repairs before they’ll make a loan. Suddenly the deal becomes much less attractive and the buyer may walk. It’s often difficult for buyers to get all the information they need from the seller to make a sensible buying decision—there may be liens, judgments, or more than one note or deed of trust.
Ask buyers if they can really imagine living in a foreclosure. Foreclosed homes are for risk-takers. Many of these properties have sat vacant for months. They are in no shape to be lived in. It’s tough to do an accurate inspection of the home if the power has been turned off and the plumbing doesn’t work. Some homes have been stripped of piping, appliances, and anything else vandals deem valuable. They may not have had many special features and finishes in them to begin with. “So many of the foreclosed homes were spec’d to the lowest level of standard features so they could be flipped down the road in hot market times,” says Schleimer.
Don’t sell yourself short. Remember that new homes should sell for more than foreclosures, even ones that are only a few years old. They have better designs, better warranties, and may hold value better. Don’t even try to meet the price of a foreclosure, though sharpening your pencil might be necessary.