Most people watching the real estate market realize that Walworth County foreclosures or Walworth County listings subject to short sale often sell at a substantial discount to “normal” properties. How much of a discount should sellers and buyers expect and what are responsible for these discounts?

Walworth County Short sales, properties which are being sold for less than the outstanding mortgage balance, are increasingly common in our marketplace. I’ve seen national statistics showing that these tend to sell at around a 10% discount to comparable neighboring properties. A quick glance at our local MLS confirms that this discount might be closer to 15%. I believe this discount is tied the difficulty of closing these transactions. Unlike a normal sale, there is a third party who must agree to the deal – the bank. Many banks are swamped with short sale requests and insufficiently staffed to manage the workload. Add to this the confusion of consumers and many Realtors to the approval process which varies from bank to bank and from area to area and you get a very convoluted and time-consuming process. We recently closed a short sale transaction which originally went under contract in December, 2011, nearly 7 months ago! The delay, uncertainty, and complication of the process imposes costs on the parties and this is reflected in the discount.

Walworth County Foreclosures, properties owned by the lender, sell at a significant discount. National statistics of a nearly 40% discount to neighboring properties might overstate the discount seen in the Lake Geneva foreclosure market. Our MLS data would suggest that foreclosed homes in Walworth County sell at a 30-35% discount to comparable neighbors. The reasons for this are obvious:
- marketing urgency: lenders wish to unload them quickly and will accept a discount in return for a shorter marketing time
- property condition: often foreclosures have suffered some level of damage or abuse which the buyer must correct
- stigma: buyers are aware of the foreclosed state and are unwilling to pay full-price on that basis alone

Note that these discounts are from current market pricing. In areas where the overall price level has dropped the discount is cumulative. For example, if property values in an area have dropped 25% since 2006, a foreclosed property in that area might sell for 48% of 2006 values (75% x 65%).

Post by Rob Keefe