5 Cities where homes are cheap

March 8, 2013, 2:37 p.m. EST

5 cities where houses are still cheap

Buyers can still find plenty of deals in distressed properties

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By AnnaMaria Andriotis

Despite rising home prices in many markets, buyers can still find plenty of deals in foreclosures and other distressed properties.

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Foreclosures and short sales, where homes sell for less than owners owe on their mortgage, accounted for 43% of residential sales last year, according to data released this week by RealtyTrac, a real-estate data firm. Short-sale purchases increased 4% from a year prior, while sales of homes in pre-foreclosure — that is, in some stage of foreclosure before a home is repossessed — increased 6%.
Fueling these increases are big discounts for the taking. In many markets — including Chicago; Daytona Beach, Fla.; and Santa Barbara, Calif. — buyers were able to purchase distressed properties during the fourth quarter of 2012 at an average discount of 30% to 50% off what they’d pay for a regular, nondistressed home, according to RealtyTrac. In many cases, these discounts are available in markets where real-estate prices as a whole appear to have bottomed out, experts say.
Cheap finds come at a time when many buyers are facing a tightening housing market. Real-estate listings have been dropping, pushing up prices of regular homes in many markets. As a result, listing prices of regular homes have been picking up.

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In contrast, with distressed properties, buyers still can save hundreds of thousands of dollars. Working in their favor, in part, is that banks are more willing to unload homes as short sales than in previous years. Some banks are offering homeowners who are behind on mortgage payments cash in exchange for selling the home in a short sale. (Bank of America, for instance, has been offering as much as $30,000 to qualifying homeowners since last year.) That’s led to more short sales selling at a discount. And after years of a growing backlog of foreclosures, more of these listings are hitting the market, says Daren Blomquist, vice president with RealtyTrac, as courts process more of these cases. (Many states require court approval before a home can be repossessed by a bank.)

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Experts warn that purchasing a distressed property is not typically an easy process. Buyers could end up waiting four months or longer to find out from a bank whether their offer on a short sale has been approved. And real-estate agents say bidding wars have intensified, with purchase prices of distressed homes often surpassing asking prices. In Charlotte, N.C., for instance, purchases of bank-owned properties (those that the banks have repossessed) increased 109% in the fourth quarter of 2012 from a year prior, according to RealtyTrac. Mike Hege, a real-estate agent with Pridemore Properties in Charlotte, says these homes often receive offers from 20 different buyers. Buyers should also consider the condition these properties are in and how much cash they’ll have to spend for repairs.
Even with such price pressures, buyers can find big discounts on distressed homes in several markets.
Here are five cities where homes are still cheap.

Santa Barbara, Calif.

• Average short-sale price: $283,825
• Average discount vs. nondistressed sales: 42.69%

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Santa Barbara street scene features Santa Ynez Mountains as backdrop.

Santa Barbara experienced the biggest increase in short-sale purchases, which rose 107% during the fourth quarter from a year prior, nationwide, according to RealtyTrac. Real-estate agents say buyers returned to the market late last year in search of deals as home prices appeared to bottom out: the median sales price of all properties in the city was roughly $600,000 at the end of 2012, down from about $700,000 in 2010 and approximately $800,000 in 2008, according to listings site Trulia.

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Where houses are a bargain

Despite rising home prices in many markets, buyers can still find plenty of deals in foreclosures and distressed properties — and beyond.

Many of these buyers encountered limited inventory, so they broadened their search to short sales, says Rick Hannay, owner broker of Avalar Real Estate of Santa Barbara. In total, there were just 436 listings in Santa Barbara in December, down 20% from a month prior and down 31% from a year prior, according to Sotheby’s International Realty.
Buying short sales also came with another perk: bigger discounts. Short sales in this market sold at a 43% average discount compared with regular listings, according to RealtyTrac. The discounts could have been bigger were it not for bidding wars, says Hannay. It’s common for short sales to receive up to a dozen offers within their first few days on the market, he adds, which results in a purchase price that’s higher than the listing offer.

Phoenix

• Average short-sale price: $149,094
• Average discount vs. nondistressed sales: 37.84%

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Buyers have been rushing into Phoenix in search of big deals. Short-sale purchases increased 43% during the fourth quarter of 2012 compared with a year prior, according to RealtyTrac. It’s not just investors who are behind the trend. Owner occupants are also competing for these properties. Given the competition, experts say, buyers looking to pick up a short sale will have a better shot if they come to the table with an all-cash offer.
But real-estate agents warn that the window of opportunity to snatch up distressed properties at real discounts is closing. Short-sale inventory is falling: There are currently 3,700 short-sale listings in Phoenix, down 56% from a year ago and down 76% from two years prior, says Brian North, cofounder of Green Street Realty, a boutique brokerage in Phoenix that specializes in short sales.
And buyers are more likely to encounter bidding wars, which will likely drive the purchase price up, he says. They should consider how much work the property will need in repairs to make sure that the short sale will be cheaper than buying a regular listing.

Las Vegas

• Average short-sale price: $124,555
• Average discount vs. nondistressed sales: 33.4%

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Aerial view of Las Vegas

Despite being ground zero for the housing bust, there are a lot more short-sale listings to come to Las Vegas, says Paul Rowe, director of short sales at Shelter Realty, a real-estate brokerage based in Henderson, Nev. Nearly 8,000 homeowners in Vegas are currently in default on their mortgages, according to RealtyTrac — and their properties could turn into short sales or foreclosures. “[Short sales] aren’t going anywhere for another two to three years,” Rowe says.
That could give more options to buyers looking for a deal. There are roughly 16,600 listings in Las Vegas, down 24% from a year ago, according to the Department of Numbers, which tracks real-estate data. While that’s pushed up prices roughly 17% over the past year, prices could reverse course if there’s an influx of short-sale listings.

Cleveland

• Average REO sales price: $57,782
• Average discount vs. nondistressed sales: 56%

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Cleveland skyline as viewed from Lake Erie shoreline

Cheap prices have helped give a boost to home sales in Cleveland. Buyers looking for rock-bottom prices turned to bank-owned properties — also known as real-estate owned or REO properties, homes that lenders repossessed after foreclosure — which were selling for less than $60,000 on average during the end of 2012, a 56% discount off regular listings in the city. During the fourth quarter of 2012, there was a 141% increase in buyers purchasing these properties from a year ago — the largest purchase spike for REOs nationwide, according to RealtyTrac.
Experts say deals are unlikely to go away soon. Home sales have been dropping since mid-2012, according to data from Trulia.com. And many existing homeowners are facing foreclosure. One in 10 homeowners in the Cleveland metro area was 90 days past due or in foreclosure in the fourth quarter, according to the Mortgage Bankers Association.
Of course, while real estate is cheap, buying property in Cleveland isn’t without risk. While the city’s unemployment rate is lower than the national average, job losses have contributed to home price declines.

Charlotte, N.C.

• Average REO sales price: $111,260
• Average discount vs. nondistressed sales: 43%

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Downtown Charlotte skyline.

Sales of bank-owned properties shot up 109% in the fourth quarter of 2012, according to RealtyTrac. Real-estate agents say investors and individual buyers who want to occupy the homes are behind the sales. Hege, of Pridemore Properties, who specializes in REOs and short sales, says he sold roughly 20 bank-owned homes last year, about double the number in 2011.
Cheap pricing is creating an opportunity for buyers who are relocating from pricier markets, like New York and Boston, he says. After selling their homes, these buyers often have enough cash to buy a home outright in Charlotte, he says.
The state is also home to several other markets with big spikes in REO purchases, including Winston-Salem and Greensboro. According to RealtyTrac, those homes sold at an average discount of 49% and 40%, respectively, compared with regular listings during the fourth quarter