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RISMEDIA, March 7, 2011—Foreclosures and short sales, collectively known as distressed properties, have accounted for anywhere from 35-48% of home sales in the metropolitan Chicago real estate market over the last year, according to RE/MAX. As a result, distressed homes now represent a huge source of potential competition for those who want to sell their home for more traditional reasons.

“The sheer number of distressed properties and the low list prices that many of those homes carry can be a bit intimidating for other sellers,” said Jim Merrion, regional director of the RE/MAX Northern Illinois real estate network, “but the fact is that non-distressed homes still outsell their distressed competition. Sellers must be flexible in today’s market, but with the help of a good agent, they still can be successful.”

How large a role distressed properties play in the local home market can vary substantially.

Tim Winfrey of RE/MAX Associates West in Bartlett, Ill., reports that while distressed homes can constitute as much as 70-80% of the inventory in some communities that percentage drops to 40% or less in others he serves.

Though most common in the entry-level segment of the market, distressed properties can be found in all price ranges, even homes priced at $1 million or more, according to Julie Brown of RE/MAX Experts in Buffalo Grove, Ill. Whatever the price of the properties they are considering, buyers tend to be either extremely interested in distressed properties or avoid them almost entirely, according to Brown.

“Some buyers, especially first-time buyers, focus exclusively on distressed properties. They feel those homes will give them the best possible value, but the reality is that many non-distressed homes are priced quite aggressively and are in excellent condition as well,” she said.

While many distressed properties do offer good value, they may no longer be the bargains they once were, according to Connie Scott of RE/MAX At Home in Rolling Meadows, Ill., who says that a year ago it was not uncommon to find foreclosures selling for 20 or 30% less than other comparable homes in the same area. “That spread has tightened up considerably in the last year,” she said, estimating that it is down to 10% or even less in at least some cases.

Winfrey said that he may recommend pricing a home in very good condition 15-20% higher than nearby distressed properties, but that can change as properties come on and off the market.

“You have to be willing to constantly readjust your pricing strategy in this market because while there may have been limited competition when a property is first listed, that can change rapidly,” he said, especially when a bank decides to put a group of foreclosed homes on the market.

Understanding which distressed homes constitute actual competition and which do not is vital for sellers and their agents, in part because not all sellers have the flexibility to drop the price of their home to compete with distressed homes.

Winfrey said he usually doesn’t view short sales as major competition for his non-distressed listings because many buyers are put off by the fact that it can take six months or more to complete a short sale.

“Short sales are primarily of interest to investors because they have flexibility. On the other hand, the typical family that needs to move in three or four months doesn’t want to deal with the uncertainty that is part and parcel of purchasing a short sale,” he said.

Broadly speaking, any similar home within a mile radius of a listing should be viewed as potential competition, according to Erica McClain of RE/MAX Vision 212 in Chicago. “But at the same time, you have to evaluate each competitive property based on its condition and specific location,” she said. Plus, “bank-owned homes often sell so quickly that they aren’t much competition.”

McClain noted that many sellers are reluctant to compare their home to distressed properties, but doing so is essential in the current market. “As recently as six months ago, most foreclosed homes were not in good condition, but that is changing as the institutions that own those homes realize how fixing them up will get them sold faster and at a better price,” she reported. “I recently saw three or four foreclosures with new appliances, new carpeting and fresh paint, which makes them very competitive with comparable non-distressed homes.”

Should that become a broad trend, it could put more pressure on sellers to make the home they are selling look and function at its best.

Julie Brown said that in and around Buffalo Grove, a non-distressed home that is freshly painted with new carpeting, minor updating and staging will sell more quickly and possibly at a better price.

Still, Brown stresses that to sell successfully, you need to have both the best house and the best price.

“There’s no doubt that many buyers, especially first-time buyers, can get mesmerized by the prettiest home,” said Connie Scott. But beyond appearance, the other strategy she uses in competing with distressed homes is to make sure buyers know why her listing is a good value.

“I find as many examples as I can of comparable properties that have sold recently so that buyers understand why our listing is priced where it is. I also want to make sure buyers know how well our listing has been maintained because foreclosures can’t offer that kind of assurance,” she said.

The bottom line for sellers, according to Winfrey is that the more competition you face, particularly from distressed properties, the more aggressive the approach you have to take.

“What I find is that in the current market, those who would like to sell but don’t have to do so, end up not selling, while those who are willing to price their home competitively will sell,” he observed. “When sellers feel they have to get a certain price for their home, it makes selling more difficult.”

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