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Builders' ads argue foreclosures aren't bargains

Homebuilders trying to fight off customers' attraction to cheap foreclosures are doing more to show buyers that the good deals can come with pitfalls.
Image: Katie and Mike Zwanziger leave their new home after checking on its progress in Gilbert, Ariz.
Katie and Mike Zwanziger chose this newly constructed home after shopping for deals in foreclosures. "We'd see them online they look beautiful and nice and clean, and then you get in there and they were trashed," Katie Zwanziger says of the bank-owned residences.Matt York / AP
/ Source: The Associated Press

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 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 of 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.

More than 4 percent of the homes in the Phoenix area were lost to foreclosure last year, according to a report from Arizona State University's business school. Statewide, foreclosures topped 70,000, part of a wave of more than a million repossessions nationwide in 2010.

That has left plenty of inventory available for buyers and not much room for new home sales since the peak of the building boom in 2005, when about 60,000 new homes were built in the Phoenix area. Last year, the number was about 7,000.

Lennar Corp.'s website is fighting back with a "Buying a New Home vs. a Foreclosed Home" page that lays out the benefits of new construction — like home warranties, energy efficiency, and customization options — while highlighting the potential risks of buying a foreclosed home.

PulteGroup Inc. uses similar tactics in its advertising, as does Shea Homes and Phoenix-area builder Fulton Homes. Fulton and Shea both promote new homes with a "foreclosure cost calculator" on their websites that lets customers calculate potential costs.

Although foreclosures have helped metro Phoenix home prices drop 50 percent from the mid-2000s, homebuilders point out numerous drawbacks such as hidden defects and the potential of having to deal with disgruntled former owners or evicting a current tenant.

"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," said Ken Peterson, Shea's vice president of sales and marketing. "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 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 her husband, 29, "took a chance" and looked at a nearby Shea Homes development, expecting them to be too pricey.

Now, the couple is watching as Shea Homes builds their new 3,100-square-foot home. They're able to choose details such as colors, flooring and cabinets to make the home their own. On Tuesday, they were choosing new carpet.

Home builders 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 new home builders 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 just 17,000 last year.

Builders like Fulton were hit hard because land values plummeted after the housing collapse, and they were left with thousands of overpriced lots.

Fulton, which is now in bankruptcy reorganization, had between 14,000 and 15,000 lots and has sold off nearly all of them, said Dennis Webb, vice president of operations at Tempe, Ariz.-based Fulton Homes. The company has refocused on a much smaller marketplace after selling about 2,200 homes in 2005. Last year, it sold about 500.

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 some 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," Webb said. "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, which has a major presence in the Phoenix market, drawing buyers also means a focus on energy efficiency. The new homes it is building now 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 home building 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."