Fighting foreclosures: Homebuilders point to pitfalls

Homebuilders trying to fight off customers’ attraction to cheap foreclosures are doing more to show buyers that the good deals can come with pitfalls.

The companies are increasingly trying to woo buyers like Arizona couple Katie and Mike Zwanziger, hoping that warnings about unknown repairs, limited selection and haggling with banks might help them recover from the most dismal year for new home sales in more than 50 years of record-keeping.

The Zwanzigers were ready to move to a larger home and were enticed by the number of resales and foreclosures in the area they liked. But after several weekends of hunting, the physical therapists from the Phoenix suburb Gilbert decided to look at a new development.

“And we got in there and found out that, truly, we spent maybe $50,000 more and got the exact house we want, the layout we wanted, the backyard we wanted,” said Katie Zwanziger, 31. “So we could be happier with just a little bit more money.”

Many national builders are using some form of marketing to try to make that point and beat back the quiet competition from lower-priced foreclosures and short sales — transactions in which homeowners sell their properties short of the outstanding balance owed on their mortgage.

In the Pikes Peak region, foreclosures and short sales have made up an increasingly larger share of homes sold each month on the resale market, which, in turn, poses stiff competition for homebuilders.

In February, there were 448 single-family home sales in El Paso and Teller counties; 25 percent of those sales were distressed units, according to Pikes Peak Association of Realtors’ figures assembled by Rick Van Wieren of Re/Max Properties in Colorado Springs. During the same month five years ago, distressed units made up just 8 percent of sales, according to Van Wieren’s figures.

Against such competition, local builders are striving to maintain their market share, but it’s been tough. In 2010, single-family building permits totaled 1,404 in Colorado Springs and El Paso County — a 27.1 percent gain over 2009. But even with that increase, the pace of homebuilding is far below levels reached during the last 10 years, when annual permits peaked at a record 5,314 in 2005.

Part of the battle is over price. Since distressed properties often sell at bargain-basement prices, buyers then expect similar discounts when they look at new homes and traditional resales, Van Wieren said.

“It (a distressed property sale) sets a price expectation in the market that denigrates the pricing of other units,” he said.

Some builders are fighting back. Miami-based Lennar is pushing its “Buying a New Home vs. a Foreclosed Home” Web page. The page lays out benefits of new construction — like home warranties, energy efficiency, and customization options — while highlighting potential risks of buying a foreclosed home. Lennar no longer builds in Colorado Springs but maintains a presence along the northern Front Range.

Michigan-based Pulte Group, which builds townhomes in Colorado Springs, uses similar tactics in its advertising, as does Shea Homes of California, which has developments in the Denver area. Shea promotes new homes with a “foreclosure cost calculator” on its website that lets customers calculate potential costs.

Builders point out numerous drawbacks to foreclosures, such as hidden defects, and the potential of dealing with disgruntled former owners or evicting a current tenant.

Jay Walther, president of startup Springs builder Reunion Homes, said a recent buyer strongly weighed a new Reunion home against a foreclosure. The company stressed its energy-efficient homes that will result in lower energy bills, along with 2-by-6 exterior walls that make for better construction and its new-home warranty.

And, Walther said, buying a new home meant no costly repairs or unexpected problems.
“They didn’t have to clean up the foreclosure mess,” he said.

The couple wound up buying the new home.

Reunion hasn’t launched a marketing campaign against foreclosures like some of the national companies, yet it’s mindful of the competition created by distressed properties, Walther said.

“We’re just actively marketing our compelling value across the broader market,” he said. “Our consumers are shopping that against foreclosures, against regular resales and against new-home competition.”

Ken Peterson, Shea’s vice president of sales and marketing, said, “there are hundreds of people that purchased homes from us that have been lured in by low prices on foreclosures, have tried to purchase those homes and have been outbid by investors. Or, they waited months to get an answer back on ‘can I get this short sale, can I get this foreclosure,’ only to discover that they didn’t get that home.”

Those homebuyers not willing to take on the risks would be better off buying a new home, the companies argue.

The Zwanzigers don’t disagree. The foreclosures in their preferred neighborhood left them unimpressed.

“We’d see them online, they look beautiful and nice and clean, and then you get in there and they were trashed,” Katie Zwanziger said.

She and husband Mike, 29, “took a chance” and looked at a nearby Shea Homes development, expecting them to be too pricey.

Now, the couple are watching as Shea Homes builds their new 3,100-square-foot home. They’re able to choose details such as colors, flooring and cabinets.

Homebuilders say they’re hopeful that as more customers turn to them instead of the overloaded foreclosure market, they’ll be able to show the value in new construction.

Nationally, new-home sales numbers for 2010 were dismal. Only 321,000 new homes sold, a drop of 14.4 percent from the 375,000 homes sold in 2009 and a peak of 1.28 million in 2005, according to the Commerce Department. It was the fifth consecutive year that sales have declined after hitting record highs for the five previous years when the housing market was booming.

The top 10 homebuilders took huge hits, going from 289,000 homes sold in 2005 to just 85,000 last year, according to statistics compiled by Builder Magazine. Sales for market leader Pulte fell by 82 percent during that period, going from 46,000 to 17,000 last year.

Builders, both locally based and national, are adjusting the homes they build to meet the lower prices of existing homes. They’re getting cost cuts from subcontractors hungry for work and slimming down material and labor costs by putting in different windows, kitchen and exterior treatments, or cutting out stone facings.

“Our average size hasn’t changed as much as our prices have,” said Dennis Webb, vice president of operations at Tempe, Ariz.-based Fulton Homes. “We can still build a 2,500-square-foot house but make it $150,000 less than the other 2,500-square-foot house.”

For Shea Homes, drawing buyers also means a focus on energy efficiency. The new homes it is building include beefier insulation and more-efficient windows.

“Our homes are better today than they were a few years ago, and that’s just because there this cycle of research and development that’s going on in homebuilding, and those things that were out of the reach of many consumers two, three, four years ago, they’re now more affordable,” said Shea’s Peterson. “So we have the ability to add some of those features in our homes that truly differentiate that home from any other home out there.”