Foreclosed homes: Now, they're hot properties

Earlier this month, David Welch, a veteran RE/MAX real estate agent, took a young couple to tour a house in the Orlando, Fla., area. The prospective homeowners liked the house and put down an offer, in cash, for nearly $8,000 over the asking price. "That would be an attractive offer for anybody," Mr. Welch recalls.

But the couple did not get the home. By the time they put in their offer, 17 others were already on the table. The big draw? The house was a "distressed property" – a euphemism for being in foreclosure, or repossessed by a mortgage lender.

Once considered damaged goods fit for only the bravest investors, foreclosures have not only lost their stigma, they've become hot properties. Middle-class families are chasing after them because, since the bursting of the housing bubble, foreclosed homes are popping up in desirable neighborhoods and typically sell at a big discount. This growing interest in distressed homes is helping to clear out a backlog of the more than 1.5 million homes in the foreclosure process and remove a huge drag on the real estate market.

Foreclosures are "still weighing down the market, but in my view it's better that the market absorb those foreclosures now rather than continue the pattern we've seen in the past of pushing the problem down the road," says Daren Blomquist, director of marketing communications at RealtyTrac, a foreclosure information website based in Irvine, Calif. "Buyers are interested and willing to buy them."

The turnaround in attitudes is dramatic. In a 2009 survey, only one-quarter of home buyers said they would consider buying a foreclosed property, according to the National Association of Realtors. Today, it's more than two-thirds. And it's not just investors looking to pick up cheap rental properties. In the same NAR survey, released May 30, 92 percent of potential home buyers said they would be interested in buying a foreclosed home to live in.

Part of the attraction is price. The average foreclosure sells for less than its nondistressed neighbor. And they're everywhere. Before the housing crash, distressed properties were generally in seedy or troubled neighborhoods, or were in various states of disrepair. Now, few neighborhoods are "too good" for foreclosures.

Supply and demand also play a role. "There are just fewer things on the market," says Errol Samuelson, president of realtor.com, NAR's website. "That encourages people to look at more options."

The interest in foreclosures is particularly strong in states hit hardest by the crisis, like Florida.

"We're probably ahead of the curve compared with the rest of the country," says real estate agent Welch of Orlando. Far from being deterred, his clients are fighting over foreclosed homes. "If buyers can get a foreclosure, they are glad to grab it. I don't know that I have run into anybody who has looked at a foreclosure and put a stigma on it. They want to get a good price."

Such attitudes are spreading.

"In my neighborhood, right across the street a home was foreclosed, priced in the $500,000 range," says Gary Ricci, a retired court officer from West Peabody, Mass. He was born and raised in the projects in nearby Everett and thought he had left foreclosures a long time ago. Instead, one of his childhood friends from Everett snapped up the property, refurbished it, and now lives there with his wife, Mr. Ricci says.

The more "for sale" signs that go up on foreclosed properties, the more buyers will become familiar with the idea. "Earlier in the cycle, people didn't understand what the process involved," says Mr. Samuelson. "Sometimes even the banks weren't familiar with short sales [sales of distressed homes sold before foreclosure]. Now, people are less scared."

"I think buyers have finally adjusted to foreclosures as a big part of the market and are more willing to accept that reality," Mr. Blomquist says.