It's harder for noninvestors to buy foreclosures (© Andy Dean Photography/Alamy)

© Andy Dean Photography/Alamy

It's getting more difficult for noninvestors to buy foreclosures in some parts of the country, as lenders shift their strategies on how to deal with distressed inventory.

When homebuyers consider a foreclosure, they're usually looking at real-estate owned properties, in which the lender has taken back and is selling the property. But REO sales have been shrinking for a few reasons.

First, more properties are selling at auction, typically the first opportunity a lender has to sell the property, and where most buyers are investors. Buying a foreclosure at auction often requires full payment in cash, and the buyer often doesn't get the chance to inspect the property before buying it. Both are turnoffs for a homebuyer looking for a place to live. (Bing: How many foreclosures are there in your area?)

"Anecdotally, we're hearing from investors that the lenders are more aggressively pricing the opening bid at the auction to attract more bidders," said Daren Blomquist, vice president of RealtyTrac, an online foreclosure marketplace. In a more typical market, the lender sets the opening bid at what it's owed on the property, he said.

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Selling at a trustee's sale or sheriff's auction gets a property off the lender's books before it becomes an REO. Lately, many investors are willing to bid on the properties at auction, as many see opportunities in rehabbing foreclosures and renting them out or selling them.

Second, there have been more short-sale transactions, so more distressed properties are being saved from foreclosure, statistics show. A short sale occurs when a lender accepts less than what is owed on the mortgage as payoff from the homeowner.

Read:  How foreclosures affect buyers and sellers

"The longer the foreclosure timeline, the larger the severities for the lenders," said Sam Khater, senior economist for CoreLogic, a provider of consumer, financial and property information. "The foreclosure is the worst outcome for everyone involved — the borrower, the lender (and) the community."

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From the lender's perspective, one benefit of short sales is that the house doesn't have to sit vacant because the seller often remains in the home until it's sold. Legally, a short sale is also safer.

"It's become a lot more risky for lenders to foreclose — and costly, as well," Blomquist said. "You have the risk of being sued later on for improper foreclosing because of the questions that have come up about paperwork and documentation. And the cost to maintain the property is a consideration that lenders have to take, and one of the trends we're seeing is more municipalities are imposing fines on lenders if they're not properly maintaining (foreclosed properties)."

By the numbers
Recent statistics back these trends:

  • REO sales fell 12% in the fourth quarter of 2011, compared with the fourth quarter of 2010, RealtyTrac said.
  • REO inventory is down 37% since the peak in September 2008, CoreLogic said.
  • Sales of "pre-foreclosure homes" were up 15% in the fourth quarter, compared with the fourth quarter of 2010, RealtyTrac said. These are homes in default or scheduled for auction, and they are often are sold via short sale.
  • There are more short sales than REO sales in 20% of the top 100 markets that CoreLogic tracks. Markets where short sales are surpassing bank-owned sales include San Jose, Calif.; Bethesda, Md.; and Palm Bay, Fla., Khater said.

Some of these trends are also appearing in the greater Phoenix area.

"February was the fifth consecutive month more properties sold to third parties at auction than properties going back to lenders," said Fletcher Wilcox, real-estate analyst for Grand Canyon Title Agency in Phoenix, in a monthly report.

Part of that is because of increased investor demand in the area.

"There is demand for single-family properties that is just incredible," Wilcox said. "We have Canadian investors, local investors, people from San Francisco wanting to invest."

In February in Maricopa County, where Phoenix is located, 1,825 properties were sold to investors at auction, compared with 1,093 that did not find a successful bidder and became REOs, according to Wilcox's analysis of local records.

Meanwhile, 1,510 properties were sold via short sale, a 52% increase from February 2011, he said.

Consider short sales
For REOs that do hit the market, cash bids often will beat offers from buyers who may need a Federal Housing Administration-insured loan, for example, Wilcox said. Many times, a cash sale means a quicker sale.

The best opportunity for noninvestor buyers interested in buying a distressed property may be to consider a short sale, Blomquist said.

The good news: Lenders seem to be improving the short-sale process, making it more efficient, he said.

More pre-foreclosure listings on RealtyTrac, for example, will specify that the bank has approved a short-sale price, Blomquist said. One thing that had made short sales difficult to close was that they were often listed at low prices to attract a lot of offers, but lender approval took months.