When is it more profitable to buy a foreclosure than a new home? Apparently, with today’s tenuous real estate market, more often then not. New home builders across the country are faced with this dilemma as they compete against the rampant number of foreclosures throughout the country.

In the past, foreclosure homes were few and far between, and often in need of repair and upgrading. Today, there is a plethora of choices, often times nearly new homes located right in a builder’s own development. A recent article in the Wall Street Journal described a foreclosed, four-bedroom home built in 2006, and priced at $229,900. In the same D.R. Horton subdivision, a buyer could purchase a comparable brand new home for $299,000.

In a Henderson, Nevada development by Pulte Homes, a new, four-bedroom house costs $214,990, and a similar home built in 2007 is being short saled for $149,999. Many buyers aren’t even stopping to consider the merits of buying new construction and heading straight to the distressed home sales.

KB Developments were selling their smaller homes in Beaumont for a starting price of $207,990, but have been forced to drop them to $169,990 to compete with foreclosure sales in the area.

How can a builder compete in this type of market? For one thing, the herd is definitely thinning, especially with many of the smaller builders dropping out of the game. The remaining larger companies are changing the way they do business by restructuring and reducing expenses. Some builders are looking at constructing smaller, more economical houses.

Some builders such as Dallas-based Centex, are using incentives such as low interest rates, energy-efficient designs, and extra warranties to attract buyers. D.R. Horton offers to cover buyer’s closing costs, and advertises a $10,000 California tax credit for a new home purchase. Other popular perks include technology packages, landscaping, designing and appliances.

Many builders are educating the public about the merits of purchasing new versus used. When you weigh the costs of possible repairs to move into a foreclosed property against the incentive savings, many still consider purchasing new is better than buying someone else’s problems. Not only do these homes come without a warranty, they may have outstanding liens and often time the purchaser buys “as is”. Hidden issues or surprise repairs can cut into a buyer’s budget quickly.

Money also needs to be set aside for decorating. Unlike when buying new and the customer selects their desired carpeting, paint colors, etc., a used home was designed with someone else’s tastes in mind.

Foreclosure sales are also very different from conventional real estate transactions. Ideally, you should use an agent experienced in this type of purchase. A deal can fall apart if the offer is not submitted correctly. The approval from the lender, especially for a short sale, can take several months, so these sales can drag out. The bottom line here – sometimes what seems like a deal on the surface, really isn’t.

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