Stockton, California may hold the dubious distinction of the foreclosure capital of the country, but Las Vegas, ever given to excess, may be going it one better. The market is awash in foreclosed properties, and what happens in Vegas always has something to do with cash.
So Realtors, on behalf of banks, have created a "Cash for Keys" program that pays deadbeat owners to get out of their former properties before the foreclosure process is complete. Seems the cash incentive serves a tripartite purpose for the banks who are holding the paper: It keeps the former owners from trashing the place, saves on attorney fees and gets the house on the market and sold before prices plunge even further. At least that's how Todd Miller of Nevada Real Estate Solutions sees it. He pays from $500 to $1,000 to clear out the nascent squatters.
Vegas currently has 7,000 bank-owned listings. While 2,000 of these are selling each month, another 2,000 are taking their place. In other words, the bank-owned inventory overhang is going nowhere, fast.
Vegas is also a market where only some 30% of the total homes for sale are owned by banks but make up 80% of the total sales. The reason? "The banks are being very aggressive with their pricing," said Miller.
"I had a nice 3,500 sq ft home with pool that was originally going for around $800,000. The bank that owns it is in bankruptcy itself and isn't concerned about paper losses. They asked for a price that would move the house in 30 days. We gave it to them and they came back with an even lower price. We listed that house for $400,000. They discounted so much we sold it in a day and had multiple people really interested in it."
It's this all-out quest for fast cash that's sending shock-waves through the new-home community. It is clear that the toughest competition any home builder here will face for the duration of 2008 is foreclosures.
As builders try to pay for land, pay for neighborhoods, pay for sales people and maybe even see a profit, they are finding themselves in a foot fight against banks who are concerned primarily about managing loss.
"I've got a situation with four bank-owned homes in the same neighborhood--and one is Wells Fargo, one is Countrywide, one is Wilshire and one is IndyMac. Of course, they all want to sell. When I tell them there are others in the neighborhood, they are all trying to be the price leader. And they are typically in close areas to new construction. And we are below [builder's] base price on a fully-completed home," said Miller.
Some builders are meeting the challenge head-on, specifically opening communities to compete. KB Home opened Manchester Park just two months ago specifically to undercut foreclosures in the area. KB is selling roughly 1,350 square feet for $149,900--and it's working. There have been more than 26 sales since opening a little more than eight weeks ago.
Tom McCormick, president of locally-based Astoria Homes, has a different philosophy. "Our strategy is that [foreclosure buyers] are a different kind of buyer than someone who wants a new home. They are often the type who are willing to put in the sweat equity," he said.
McCormick won't allow the company to compete on that level because he believes there is a premium to a new-home purchase. "We say go ahead and buy a foreclosure if that's what you are after. Get it off the market, set the floor. We need to move through these."
"Shame on us as builders if we aren't arguing the benefits of new construction," said McCormick. "There is a buyer for a foreclosure, but there is also a buyer for a new product with warranty and service and all that comes with that."
Miller, who manages about 400 bank-owned listings, said there are some foreclosure misconceptions out there. And the Realtor community is trying to set the record straight. Seems most people think that a foreclosed home is trash (and Miller allowed that some of them are trashed). But many are not. "We've walked into pristine houses that flippers have been caught with and they still have the instruction books stuck to the AC thermostats," he recalled.
In Vegas, realtors are organizing foreclosure bus tours to dispel the myths. They're carting potential buyers around like tourists to see all that's available in places like Summerlin and the Northwest area.
The bottom line is that, in a market like Vegas, an old house is one that's been around for three years. So most people don't see much difference--at least not a big enough one to pay a substantial premium--for new construction.
"It's all about price right now, and yes, people will pay more for a new house," Miller acknowledged. Problem is, no one seems to be able to determine exactly how much that premium is worth. "Will they pay $50,000 more on a $250,000 house?" Miller mused. "That's really the question."
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In the meantime, here's more on what's happening in the trenches:
LAS VEGAS Two Nevada development groups have filed suit against D.R. Horton, claiming the nation's largest homebuilder has missed payments on a large master-planned community. Land Investors LLC and Summerset Development Services LLC filed the lawsuit last week in Clark County District Court.
The groups claim DRHI Inc., a subsidiary of Fort Worth, Texas-based D.R. Horton, has failed to pay more than $4 million plus interest in costs related to the Park Highlands development in North Las Vegas.
CHICAGO Three of bankrupt builder Kimball Hill's subdivisions in the Chicago area are officially up for sale. The company will be completing work on homes already ordered in the communities of Shelburne Farms town homes in Winfield, Settlers Ridge in Sugar Grove and Ingham Park in Aurora., but plans to wind down operations.
DES MOINES Regions Bank filed a lawsuit this week seeking to foreclose on about 100 homes across Iowa built by Regency Homes. Regency, formerly Iowa's largest home builder, closed in April due to funding struggles and a slow housing market.
SACRAMENTO The banks keep tacking on debt to the bankruptcy case of home builder John D. Reynen. His personal debts have just been increased by an additional $200 million, pushing the tally to nearly a billion dollars.
Learn more about markets featured in this article: Las Vegas, NV.