When prices are too good to be true

A constant stream of headlines about rising foreclosures and falling home prices in many U.S. markets might lead bargain hunters to believe that there are some incredible deals to be had out there.

And indeed, there are. But are there really more than 100 homes available in tony Miami Beach, Fla., for less than $100,000? A search for foreclosure properties with an upper price range of $100,000 turns up 126 properties at Yahoo Real Estate.

Is the housing downturn so bad that you can now swoop in and buy a house in Hermosa Beach, Calif., for less than $100,000? A search for foreclosure properties on Trulia -- which puts the average sale price of a home in the coastal city at $1.67 million -- might lead you to believe that the answer is yes.

The problem is that most, if not all, of these properties aren't officially on the market. They are "pre-foreclosures," meaning that their owners have defaulted on a loan, prompting a lender to begin the foreclosure process.

Some troubled borrowers may be interested in attempting a short sale, and other pre-foreclosure properties are scheduled for the auction block. But the dollar figures that accompany pre-foreclosure properties on listings sites don't represent an asking price.

They may represent the amount outstanding on the loan that's in default -- sometimes a relatively small second loan -- or the amount that the borrower is in arrears. Real estate agents, investors and sophisticated buyers will know that it's impossible to buy a house in Hermosa Beach for $4,712. But first-time home buyers may miss the fine print on sites like Yahoo and Trulia that explains that this is not the home's listing price -- and that the property may not even be for sale.

The practice of mixing pre-foreclosure properties with listings of for-sale properties by major listings sites like Yahoo Real Estate and Trulia is misleading to consumers and damages the credibility of the sites that allow it, according to a company that's in the business of supplying similar information itself.

Brad Geisen, the founder and chief executive officer of Foreclosure.com, says that when consumers go to a site that's dedicated to foreclosures -- such as his own, or rival RealtyTrac.com -- they understand that many of the properties are pre-foreclosures, and not for sale.

But Geisen said that when consumers go to listing sites, they expect to find just that -- homes that are listed for sale. While some "bank-owned" properties that have gone all the way through the foreclosure process are on the market, most pre-foreclosures are not, Geisen said.

"These are people who have fallen behind on their payments, and the bank has started litigation" to take back the home, Geisen said. "The reality is that the majority of homes that start the foreclosure process never complete it. The borrowers refinance, catch up on their payments, or do something else to avoid foreclosure."

Geisen singled out Yahoo Real Estate and Trulia -- which have partnerships with Foreclosure.com's rival, RealtyTrac -- as sites that are presenting pre-foreclosure data to consumers in a potentially confusing way.

Property searches conducted by Inman News show both sites provide information that could help consumers understand that the pre-foreclosure properties are not "listings," and that the dollar figures displayed with each are not asking prices. But there does appear to be potential for confusion.

Checking "foreclosures" under "listing type" and entering a maximum value of $100,000 in the "price" field, a Yahoo Real Estate search for properties in Hermosa Beach, Calif., turned up seven properties, accompanied by dollar figures ranging from $4,712 to $100,000. According to Yahoo, the median asking price for 34 homes on the market in Hermosa Beach is $1.29 million.

But click on any of the properties for more details, and you are given a "property description" that reveals -- for the first time -- that the dollar figures associated with each property in the search results is not the asking price. Although "price" was specified in the query, the numbers may represent "estimated loan balance" or another figure related to the borrower's indebtedness.

The property description for a four-bedroom, three-bathroom house on Hermosa Beach's Prospect Avenue explains that the property "is a notice of default" -- meaning it has been subjected to a notice of default filing by a lender, beginning the foreclosure process.

If home buyers don't realize that none of the properties retrieved by this particular search are actually for-sale listings, they might be further confused by the generic form used by Yahoo Real Estate to present details about each home, which states they are "offered by" RealtyTrac.

Yahoo Real Estate users are further advised to "Register with RealtyTrac for more property detail" -- but not told they will be required to pay a monthly subscription fee of $49.95 a month (Foreclosure.com also charges users a weekly subscription fee of $9.95).

A similar search at Trulia for "foreclosures" in Hermosa Beach priced at $100,000 or less turned up only two results, both from RealtyTrac's database.

As was the case at Yahoo Real Estate, clicking on more information for a property at 35th Place revealed that the property had been subjected to a notice of default, and that the $75,000 dollar figure attached to the home was an estimated loan balance, not a listing price.

In a comparison of how the property compared to others in Hermosa Beach, however, Trulia identified a "listing price" of $75,000.

Unlike Yahoo Real Estate, Trulia does not claim that properties are "offered by" RealtyTrac, but advises users to register at RealtyTrac for more details. The "listing type" of properties may be identified as "foreclosure" or "auction," even though they have not actually been listed for sale.

When a property's listing status is given as "notice of default (pre-foreclosure)," "auction" or "bank owned," on Trulia, a "What's this?" link provides further information. "The foreclosure process begins when a borrower/owner defaults on loan payments and the lender files a public default notice, called a Notice of Default or Lis Pendens," the link explains. "Buying a property in pre-foreclosure involves approaching the borrower/owner and offering to buy the property outright."

Yahoo Real Estate and Trulia did not immediately respond to requests for comment.

Rick Sharga, vice president of marketing for RealtyTrac, said that while the terminology that's used to describe listings and pre-foreclosure properties on listings sites could be better "aligned" to avoid potential confusion, Geisen's complaints are "really a non-issue."

"Neither Yahoo Real Estate or Trulia or RealtyTrac is setting out to mislead anybody," Sharga said. "Anybody looking to purchase a foreclosure property is going to have to educate themselves a little on the process. It's not as straightforward as just buying a resale property from an agent."

That's why RealtyTrac provides so much educational material on its Web site -- including "hundreds of FAQs" (frequently asked questions) -- and a staff of 15 who field calls from RealtyTrac users, Sharga said.

Geisen sees a simple solution to the problem: that listing sites include only those foreclosures that have gone all the way through the process to become bank-owned properties and are listed for sale.

Sharga disagreed, saying that while pre-foreclosures may require more work and knowledge to buy, they present the best opportunities for bargain hunters.

"To clamp down on dispensing that information across as wide a range of eyeballs as possible would really be doing the people looking for the properties a disservice," Sharga said. Alluding to Foreclosure.com, Sharga said, "If I was running a site that had only a third as many listings, I might suggest that was a good alternative, too."

One way to reduce the confusion over the dollar amounts attached to pre-foreclosure properties would be to substitute valuation estimates, Sharga said. RealtyTrac has valuation estimates for most of the properties it tracks, he said.

Sharga said RealtyTrac will soon announce the incorporation of "several million" MLS listings onto the site, which will resolve any confusion by allowing users to find out "almost instantly" whether a pre-foreclosure property is listed for sale and determine its price.

In the meantime, Geisen is not the only one who sees problems with the way the system works now.

Doug Birnbaum, a Realtor with Veranda Homes in Costa Mesa, Calif., said he recently fielded a call from a client who saw what she believed was a listing for a four-bedroom house for $100,000.

"In Costa Mesa, there's not going to be a four-bedroom for less than $350,000," he said. The $100,000 figure "could have been the second mortgage in default," Birnbaum said, but "the Web site was so misleading I never actually figured out where the property was -- there was no address, just an intersection."

That experience led Birnbaum to post a warning on Trulia Voices, titled: "RealtyTrac, are the prices too good to be true?"

"It appears that ReatlyTrac is posting homes on Trulia for shockingly low prices," Birnbaum wrote. "Now what these prices actually reflect is the dollar amount of one of the liens on the home. This in no way reflects ... the true value of the home. If you are looking for the best deals in this red hot market, contact a Realtor!"

Birnbaum said that while he doesn't see the practice as unethical, "they have to differentiate the two (pre-foreclosures from listings). It's not helping anyone get a home if the property values are all over the map, and they're not really the asking price."

Sharga has made himself available at Trulia Voices, answering questions such as "How can I avoid the scam of RealtyTrac racking up my credit card ... but yet get information on foreclosures?"

Sharga pointed out that RealtyTrac allows users a free seven-day trial, and advised the Trulia Voices user that "If you're simply looking for a house to live in, the easiest way might be to contact a Realtor who specializes in selling bank-owned homes and ask the agent to help you find a property."

On Yahoo Answers, one user asked if RealtyTrac is "a joke that just takes your money? because they only show you old properties that you can't even buy."

The "best answer" (as determined by the site's users) came from another user identifying himself/herself as a California licensed real estate broker and investor, who claimed "Realtytrac and (F)oreclosure.com are the same company."

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