Posts Tagged ‘bargain prices’

What’s so Scary about an REO?

Happy Halloween everyone! And if you’re wondering what’s the scariest thing on most home buyers’ minds today, you’ve come to the right place for an answer. Although most buyers are excited about the opportunities REOs (foreclosures – REO stands for Real Estate Owned by a bank, for the uninitiated) present in today’s real estate market, especially in the greater Sacramento area, I find that many are also concerned about buying a home that can have many unseen problems which may not show up until long after escrow closes. Today, I am here to address some of their concerns. Boo!

How a Home becomes an REO
As explained earlier, an REO is a foreclosure. When you buy a home in California, unless you pay cash for it, chances are you will have to finance the purchase. A home is financed in much the same way a car is financed – you sign legal documents called “a note” for a loan. The lender gives you the money which you agree to pay back with interest over a term of (usually) 30 years. If you default on the loan, the lender can then take the home back and sell it to someone else. The legal process of taking the home back for default on a note is called foreclosure. Although the process in California includes a trustee who is given the note and who is notified by the lender to begin foreclosure proceedings in the event of non-payment the basic idea remains the same: default on the mortgage and lose the home.

The lender is required by law to send a homebuyer who has defaulted on the loan a Notice of Default. This notice is recorded at the county clerk recorder’s office in the county where the property is located and is a document of public record. This means that anyone with an interest in the property may see it. The notice states when the lender is planning on foreclosing, ie. the date of the trustee’s sale and the outstanding amount the homeowner can pay to cure the default and stop the trustee’s sale.

Usually, as you can imagine, the default is not cured and the trustee auctions the property to anyone who will buy it. If there are no buyers at the trustee’s sale, the house becomes a foreclosure and is referred to as an REO – real estate owned by the lender.

What you should Know about an REO as a Homebuyer

Most lenders are not in the business of real estate; they are in the business of finance. And so, the house acquired by a bank through a foreclosure is usually put back on the open market. To come up for a sales price for the property, the bank hires a Realtor® and asks for a BPO – a Broker Price Opinion. The Realtor® appraises the property based on similar properties also known as “comps” and offers to list it. Since most foreclosures are fixers, they are usually placed on the market for a substantially discounted price.

As a home buyer of a bank owned home, your concerns are justified. An REO is usually a fixer. The most obvious reason for this being the family that was foreclosed upon was low on finances. If they didn’t have enough to make their mortgage payments, chances are there are quite a few things about the house that went unrepaired. This is also called deferred maintenance. Deferred maintanence can be a small problem, like a leaky faucet, or can hide bigger problems, like a leaky faucet that rotted the bathroom sub-floor.

You should also be aware that as a purchaser of an REO, you don’t receive full disclosure about the house. The bank is not required to provide you with a Transfer Disclosure Statement, partially because the lenders have never been in the home and are unaware of what exactly is wrong with it. They are also unaware of other problems a property may have, like boundary line disputes, and are unable to let you know if, say, there has been a death on the property.

How to Resolve your Concerns

Does this mean you are left completely at the mercy of Chance when you decide to buy a foreclosure? Sure, the price is deeply discounted, but does that make up for everything else? While that may be a question only you and your pocketbook might be able to answer, here is the most important pointer to take the sting out of potential problems: Always, always, always get the inspections!

Brokers recommend a variety of inspections, including pest, roof, septic system and a complete home inspection. Disregarding any of these inspections can be a big mistake on the part of a homebuyer. While most banks will not repair any items listed as potential or real problems during these inspections, you can get an idea of how much work is involved in making the home as habitable as you want it and decide if the asking price is worth the risk and work involved. The price you pay for the inspections (approximately $1000 for all included) is well worth its weight in gold.

You, The Smart Homebuyer

Okay, great! So you got the inspections done! The home seems structurally sound, but it looks like the roof can’t be certified. Can you knock off $10,000 from the asking price because the lender won’t put a new roof on? Not so fast! You should take into account the fact that the lender has already figured deferred maintenance into the price of the house. While there is no overt harm in making a lowball offer, you should also apply the comps in the neighborhood and balance them against your own timeline and budget for a house. Also remember that escrows today take longer (45 to 60 days as opposed to the 30 days from a while ago) because lenders are more careful about checking documentation.

With so many bargains out there in foreclosures, if you are serious about buying a home at a deeply discounted price, chances are you will find what you are looking for. So, go ahead. Get the facts, look hard and deep and don’t be scared to make an offer when you find the right one!

Ask the Broker: Why has that house been on the market so long?

My recent video about how to sell a home fast in any market was driven home today by a question I got from a buyer who previewed some homes with me yesterday.

The home they asked me about was an absolute keeper, at a price that beat out all the comps not only for its neighborhood, but for any other comparable neighborhood in Sacramento County.

In fact, this was one of a few homes that was such a screaming good bargain that two buyers had asked me about it, and I was really thinking I should post it here but didn’t want to have a conflict of interest with those buyers.

Their question was about whether I could call the agent to find out why it had been on the market so long. Well, I was happy to do that, and knew that while I was looking up her number I could look up the listing history, knowing that the price change would probably tell the tale.

Here’s what I found:

image

If You Don’t Understand Why The Price Is So Low, Blink

Darn, pending sale — I’d have to tell the buyers that. But there’s more of a tale here.

Of course, the buyer doesn’t have this info readily available, so their question was perfectly natural, “Why has it been on the market approximately six months?” From a Realtor® point of view, however, this isn’t a $299,000 home that’s been on the market for six months, but a $299,000 home that sold after ten days.

In the MLS, the actual pending date is 10/3, but it was entered on 10/4 as you can see above. The price was dropped from $325,000 to $299,000 on 9/24, and now there are three offers on it. 9/24 to 10/3 is ten days.

The price it started at, $395,000, is actually almost justified by the current sold comparable sales. But $299,000 is where it needed to be to finally get it done, in a slow Fall with few buyers.

Fortunately for my buyer, it turns out that there is still a possibility of making an offer on this one, so I let them know that — we even have a pretty good idea about what we need to offer.

The Market Within The Market: What’s Being Sold Here, Anyway?

There are several morals to this story:

  • Some buyers are waiting for market prices to come down another 25% or so, and some buyers are out there buying homes that are already reduced 25% or so.
  • If you wait until the market comes down, then you get to compete with a lot of buyers. If you wait until there’s a good bargain on a house you want now, you get to compete with fewer buyers. If you think sellers won’t see you coming ten minutes after all the buyers come back and start adjusting prices upward, then you make the classic mistake of thinking yourself the only greedy party to the transaction.
  • A lot of people are selling you the market, and if you’re buying a market, then you shouldn’t buy a house. The question a smart buyer asks is “am I buying a market, or am I buying a house?” There are great buys in bad markets, and dumb buys in great markets.

I’ve actually been counseling my buyers to consider some other homes that are lower priced than this, because in their situation it makes more sense and I don’t want them to get overextended. Now the trick is to find them the perfect $340,000 home that’s priced at $260,000.

In fact, instead of writing about the market, which is kind of depressing, I think a really good article series would be “bargain of the day” (or week, or whatever). In his response to Jim Kramer, Gary Keller notes that there is a “market within a market”. As I say above, there are great buys in bad markets, and dumb buys in great markets. Keller makes a similar point.

Whether you’re buying now or later, buy well. If you’re not buying at all, that’s cool, too. If you are, call, and we’ll go bargain shopping.