Most people are under the assumption that all foreclosed homes are bargains.
Well. . . YES and NO
YES if you are looking for a home priced under market value.
NO if you are looking for a home in super great condition at a give-away price.
Who is the Most Likely to Default on a Loan?
….The homeowner with a 10%-20% equity? …..Or the family that only puts 3½% down, then watches helplessly if market values decrease.
The simple fact is, there are fewer foreclosures in upscale neighborhoods. If a homeowner with 10%-20% equity in his home loses his job, he will most often try for a loan modification, or if necessary, put the house up for sale. At the very least, he usually has enough equity to pay the selling costs, walk away with a few dollars in his pocket, and keep his credit intact.
On the other hand, the homeowner with little to no initial investment may have no equity. And without enough equity to cover selling costs, he is more likely to throw in the towel, and walk out leaving the bank holding the note on a property that is often worth less than the loan balance itself.
How is List Price Determined on a Foreclosure?
Long before putting a foreclosure on the market (and throughout the legal process), the bank’s Asset Manager will order several BPO’s on the house… BPO standing for “Broker Price Opinion”.
They hire experienced Realtors like myself who prepare for them a detailed analysis of the subject property in comparison to similar houses in the neighborhood that are currently ‘For Sale’ as well as ‘Solds’ within the last 6 months…. Very similar to an appraisal. The BPO also takes into account repairs needed and overall condition of the property, and values are adjusted accordingly.
Once the Asset Managers have their BPO’s in hand, they know both the condition of the property and its fair market value. They then list the property with a Realtor at a discounted price to attract a quick sale. After a month to six weeks without an acceptable offer, they may drop the price. But at all times, they are focused on the bottom line – their goal is to mitigate losses for the Bank as much as possible.
Keep in Mind, Bankers Aren’t Stupid
Because of the BPO’s, the Asset Managers for Banks already know about the damages, estimated repair costs, and the AS IS value of a property. . . Plus comparable values of the surrounding neighborhood. So the buyer who looks at the discounted list price, and then starts subtracting the cost of repairs, is just asking for a rejection of his offer.
Making an Offer that Will Get Accepted
While banks need to get their foreclosed properties off their books, they are not in the business of giving houses away.
If you offer full list price and ask them to cover a portion of your closing costs, you will probably get a YES. Or if you are willing to pay your own closing costs, you may be able to bid somewhere below list… But seldom both. Since they are already discounting the house, they are not terribly receptive to lowball offers. This is when you need the expertise of an experienced Realtor who will analyze the list price, neighborhood values, and days on market to determine if a reduction is in order.
What if the Property is in Really Poor Condition?
Whether financing with an FHA, VA, RD, or Conventional loan, lenders are not going to invest their money in a house that is not in livable condition. In those cases, the buyers’ options are cash, private financing, or an FHA-203k loan. (Home Path if buying a Fannie Mae foreclosure)
Post-Katrina, these type rehab loans were quite common. There were many foreclosures on the market that had the flooring, cabinets and sheetrock removed (flooded and gutted). So if you are lacking cash, don’t despair. I can refer you to several lenders who are experienced in handling renovation type loans.
Even if the property is technically in livable condition, but not up to your standards or tastes, consider using a Homepath or 203k loan to simply upgrade the home at the time of purchase. You may decide to buy a discounted foreclosure, install a new kitchen and flooring, and roll all the costs into one 30-yr mortgage at a very low interest rate.
Use an Experienced Agent to Handle Foreclosure Purchases
One thing about dealing with foreclosures, they are quite different from the usual home purchase. For one thing, you are not making an offer to a person who may be more flexible and willing to negotiate price and terms; you are dealing with a corporation that looks at each transaction as just numbers on a page.
It is also important that your agent knows how bids need to be handled depending on who owns the foreclosed property. The property owner could be the VA, HUD, Fannie Mae, or a long list of individual banks working through Asset Mangers…. And each one has their own protocol pertaining to how offers and contracts are to be handled.
For example, in dealing with HUD, once they accept an offer, the buyer has only 72 hours to have his complete package to their office in Denver or his offer is dropped and the property is available to the next bidder. I have several times placed backup offers on behalf of my clients and received the bid simply because another agent failed to comply with HUD’s strict time constraints.
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In closing, let me just say I can provide you both the professionalism and experience you need when purchasing foreclosures.
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