To begin with, for the most part, there is no equity in these properties. Today’s foreclosures are a product of several years of inflated home values and high financing. Banks are discovering they are saddled with loans on houses that are worth less than the notes and they need to get as much money back as possible. That means banks are aiming for market value.
If you want to get the best deal, you have to go to the bank auction. In doing so, you assume the most risk as you are purchasing the property “as-is” and it is up to you to clear the title of additional liens and issues. In addition, they require a greater cash commitment. Your willingness to take the risk, buys you the best deal.
If the bank can’t get the property sold at auction, it becomes an REO listing (Real Estate Owned). In other words, it’s the bank’s problem and they need to get rid of it. Assuming the note is greater than the value of the property, the bank wants to recover as much loss as they can for the property and they want to move it as fast as possible.
Banks are not interested in helping a company build wealth by listing their properties exclusively in a private website. They want the best offer they can get and that happens by listing the property where the most people can access the information freely. Listing the property with a realtor and placing it in an MLS is the best way that can be done. And lucky for you,
Property Condition
Oftentimes, but not always, property owners are very angry that they are being foreclosed on so they retaliate by taking everything that isn’t nailed down. That includes all appliances and A/C units. I’ve seen properties where the owner removed the hardware from the kitchen cabinets and all the water faucets/fixtures. It is quite rare for a property to be in “move-in” condition, though they do exist. The worst the condition of the property, the lower the asking price.
Banks are getting smart and they are offering relocation assistance to homeowners in an effort to prevent them from stripping out the property.
You should have money put aside to cover the cost of repairs and appliances just in case.
Expectations.
Keeping everything in mind that I’ve explained up to this point, what can you expect as a return from an REO? That depends on your needs. Is this going to be your homestead or an investment property? How much of it are you financing?
The greater the number of requirements you have, the more difficult it is to get a good deal. If you have kids, you are probably trying to find a house in a great neighborhood with good schools. You are probably far less flexible regarding the geographical area and the move-in condition of the property.
If it’s an investment property that you are purchasing to lease out, then you don’t care where it’s located as long as you can be assured it will lease out at a reasonable rate.
Then of course there is resale value. Unfortunately, I don’t have a crystal ball, so I’m not able to determine what the resale value of a property will be 5 years from now.
Price strategies
When you find an incredible deal on HAR for a property that is in foreclosure, you have to act very quickly; and you have to be ready to make the best offer you can. And oftentimes, that means offering more than the asking price.
You’re probably thinking that defeats the purpose of getting a deal. Remember, the bank is trying to get the best price in the shortest amount of time. So the listing agent might be setting up a bidding war in order to make that happen. You will still most likely be able get the property at below market value, but probably only about 15 – 20% below.
Reality
Here’s the reality of the situation. If as a realtor, a bank were to approach me to list a foreclosure where the bank only had to recover $100k but the market value of the property was actually $150k - $200k, would I list it? Or would I buy it myself and then turn around and list it at market value? Would I not be on the phone calling my investor clients and letting them know about the property? And how would that property have made it past the auction block?
I’m skeptical of people who claim that they have access to information about properties that meet the scenario I just described. Because as I said, the banks want these properties off their books fast.
Summary
I don’t want you to be discouraged as I’m sure you are seeking a foreclosed property because you want a good deal. We are in interesting times and property values are about as low as they are going to be for a while. A foreclosure just seems like the best way to get that rock bottom price. I’m here to tell you that there are good deals to be had whether the house is in foreclosure or not. Limit your “must haves” and you increase your chance of getting a good deal on your purchase.
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