RealEstateEconomyWatch.com

Nearly half of all foreclosures listed for sale are so seriously damaged they need major repair before they are habitable, a percentage that has remained virtually unchanged over the past two years.

Last year, damaged foreclosures accounted for 13.9 percent of all home sales.  That rose to 14.9 percent in February and accounted for 13.2 percent of total sales in August, or about 45.8 percent of all REO sales, according to the latest data from the Campbell/Inside Mortgage Finance HousingPulse survey of real estate professionals.

Damaged foreclosures have an incredibly toxic effect on home values.  Even one or two long-vacant damaged homes can hurt the value every home in a neighborhood.  They usually list at a 5 to 7 percent discount below other foreclosures, which sell at 20-30 percent below a comparable home in the same area.  These sizeable discounts impact the comparables appraisers use to value other properties for sale or refinancing.

They often linger for months in inventory because they appeal to a small segment of the market.  Few first-time buyers have the cash available for serious repairs, which can run 20 percent of the purchase price or more.  Most damaged foreclosures are purchased by those investors who have the financing and the home improvement skills to spend.

For an investor, a damaged foreclosure is a greater investment in time and money-and a greater risk-than a move-in-ready property. According to a survey of investors last April by Move, Inc. operator of Realtor.com, 42 percent of investors plan to invest their own time and energy to improve, repair and maintain the properties they buy.  The remainder said they’ll hire a contractor for repairs (29.5 percent) or purchase move-in-ready properties (28 percent).  Nearly one out of three (30.1 percent) expect repair costs to exceed 20 percent of the cost of the property.  Nearly half, 48 percent expect to recoup 20 percent or more on their investment.

With foreclosures taking nearly a year or more to process and sell, (see New York Foreclosures Take 3.2 Years), damage to properties is increasing.  Many banks are forced to hire firms to maintain properties so that they don’t deteriorate while they are in limbo.  Few lenders, however, are willing to foot the bill for major repairs, which often were needed before the lender took possession because defaulting owners lacked the funds or the inclination to keep their properties in good shape.

Now there is evidence that sales of damaged foreclosed homes are encountering additional delays when damage complicates the appraisal process. The Campbell/Inside Mortgage Finance survey reported last week that the normal timeline for a closing is about 30 days. However, the recent HousingPulse survey found the timeline to be between 45 and 60 days.

In major housing markets such as Las Vegas, Phoenix, and Miami with large numbers of foreclosures, damaged foreclosures have played havoc.  The Las Vegas Review Journal reported in July that the deterioration of vacant homes — many of them bank-owned — continued to drag down home values in Las Vegas while other housing markets were showing signs of stabilization.

Las Vegas home values dropped more than 60 percent from their peak to a median price of $111,000 in May.  Yet hundreds of foreclosed homes languish on the market for months, even years, often hurting home values in the surrounding neighborhood.  They’re consistently devalued by appraisers by $5,000 or more based simply on appearance.

“So here we’re stuck — the foreclosure capital of the nation — with a glut of vacant homes fueling the self-destruction of a once booming Las Vegas housing market. Local housing analysts estimate that three-fourths of the total real estate-owned inventory is empty homes,” wrote the RJ’s Hubble Smith.