I am contacted by buyers pretty much daily who think that foreclosures are the pot at the end of the rainbow. They envision buying a home for pennies on the dollar. That simply is not the case these days.
How Far Under Market Value can I Expect to Pay for a Foreclosed Home?
Not much.
First of all, this isn’t your grandfather’s real estate market. In years past, homes with equity would be auctioned at the courthouse…because they had equity. The big question was how much was owed on the loan.
Fast-forward to today and foreclosed and other distressed homes make up a significant portion of active listings and the majority of them were purchased for more than they are currently worth. They don’t have equity; in fact, they have negative equity. You can see how that’s a problem.
That brings us to today’s market when REO (real estate owned aka foreclosed) properties are rarely purchased through the courthouse, and, instead, they are most often listed at or close to market value. I wish I had access to statistics on actual market value to sales price, but that’s not information readily available.
I can only speak to the market value to sales price question anecdotally based on my experience and the experiences of several Realtors I’ve spoken with. We’ve all found that most REOs and short sales are currently selling for between 90%-100% of market value.
List price does not necessarily equal market value, but the following statistics do demonstrate the average percentages between list price and sales price.
I generated a statistics report on REO home sales from the last 12 months (April 2015-March 2016) and the following shows the closed price (how much the home sold for) to list price (the asking price) ratios.
|
Sale Price in thousands |
Close Price to List Price Ratio |
|
$0 – 100 |
100.0% |
|
$100 - 150 |
100.0% |
|
$150 - 200 |
100.0% |
|
$200 - 250 |
99.6% |
|
$250 - 300 |
99.4% |
|
$300 - 350 |
98.5% |
|
$350 - 400 |
98.7% |
|
$400 - 450 |
97.7% |
|
$450 - 500 |
95.4% |
|
$500 - 600 |
96.9% |
|
$600 - 700 |
98.1% |
|
$700 - 800 |
|
|
$800 - 900 |
100.0% |
|
$900 - 1,000 |
|
|
$1,000+ |
As you can see, a great deal of these properties are purchased at or very close to the asking price.
Short sales go for a little lower on average, but still not very much. In contrast to REO properties that can close relatively quickly, short sales require waiting, typically about 3+ months for an approval. That waiting time before an answer makes buyers less likely to pay full market value,but you can see that it's still close. See below.
|
Sale Price in thousands |
Close Price to List Price Ratio |
|
$0 – 100 |
97.6% |
|
$100 – 150 |
99.3% |
|
$150 – 200 |
100.0% |
|
$200 – 250 |
98.8% |
|
$250 – 300 |
98.3% |
|
$300 – 350 |
100.0% |
|
$350 – 400 |
96.7% |
|
$400 – 450 |
94.8% |
|
$450 – 500 |
96.0% |
|
$500 – 600 |
100.0% |
|
$600 – 700 |
99.3% |
|
$700 – 800 |
98.5% |
|
$800 – 900 |
96.4% |
|
$900 - 1,000 |
93.0% |
|
$1,000+ |
80.0 |
Ugly Stuff
There are also several practices that are being used in the sales of some (not all) REO and short sale properties that I am not at all fond of.
Fire Sales
Sometimes, REO homes are listed under market value at a price low enough to excite potential buyers. That doesn’t mean the house will sell for that list price. In fact, it’s typically quite the opposite. That's right, the winning bid is OVER the asking price.
Case in point: A home recently went on the market in a nice neighborhood for only $67,000. Similar homes in that neighborhood in good condition sell for more than twice that amount. Buyers flocked to the home all day every day for the next several weeks and the bank held offers, calling for “highest and best.” The big catch here was that the home was in terrible condition – there was no air conditioning system, no appliances, tons of damage, a roof that needed replacing immediately and more. This was not your average fixer-upper; this was downright intimidating. It also required a cash sale and offers with inspection contingencies weren't being considered. Yes, true story.
Imagine the difficulty of explaining to buyers that there was no way that the asking price would bring the winning bid. I did the best I could while hoping the buyers (who’d just met me) didn’t think I was just trying to pad my commission. They wound up offering a little over $80,000, fully aware of the great expense required to rehab the home.
Guess how much the home eventually sold for? $114,000 (over 70% higher than the asking price!). Was it still a great deal at $114,000? That’s questionable considering how much work it required. After the cost of renovations, the buyers would have spent only slightly less than what they would have to buy a home in the area in good condition. On the positive side, they would spend far less than they would have to buy a house in good condition and then make major renovations, but it certainly isn’t this fairy tale of buying a $300,000 home for $50,000. Not even close.
Buyer Premiums and Other Buyer Costs
Some banks and investors charge fees to the buyers of foreclosed or short sale properties. These fees range from about $3000 to 10% of the sale price, though I have most commonly seen 5% lately. In other words, if you purchased a property for $200,000, then your total purchase price before your other closing costs would be $210,000. If you consider purchasing a property this way, read through the seller’s disclosures carefully and calculate all fees when budgeting and comparing listings. Perceived savings get eaten up quickly with a 5% buyer's premium. Personally, I think that foisting that cost on buyers is unethical.
Closing Costs
Some banks and trusts are still paying the seller's side of the closing costs (as they should!), but many are not. There are many that now require that the buyers also pay the seller's closing fees like doc stamps, etc. Those fees add up quickly and must be considered in the buyer's end cost for the home purchased.
Online “Auctions”
One of the sale types that typically charges a 5% buyer’s fee is an online auction, which is nothing like the in-person auctions you’re envisioning. They simply collect as many closed bids as possible during a period that usually lasts at least a couple of weeks and then they choose the best bid. As with any buyer fees, they must be carefully figured into all budgeting when making decisions.
Oddly enough, some listing agents are even using auction terms for short sales. The short sales still can easily take 3+ months for approval, with no guarantee of approval at all, but you go through the auction part first before the privilege of all that waiting. Oh, and you also pay an additional 5%. That’s not to say that you couldn’t come out on top in such a sale, but you’d have to get the house at a low enough price to make up for the cost and the wait.
These tactics for creating urgency (like using online auctions or fire sales) benefit the seller and put the buyer at a disadvantage.
Home Condition
The biggest savings on foreclosures is often a result of their poor condition. Of course, this is still advantageous to both resident and investor buyers willing to take on repairs and renovations, but they are still paying close to market value based on the home’s condition. There are certainly savings, sometimes more significant than others, just not the pennies on the dollar kind.
Who is getting homes for pennies on the dollar?
Investors able to purchase a portfolio of homes (several foreclosed homes, some at better value than others) are able to buy homes at much lower prices than us average folk. They are buying in bulk, so they get the best deals.
So, are foreclosures/REOs and short sales not worth it?
That’s not true either. There are still great opportunities out there and some of them are REOs and short sales. Many people do well in these transactions and save money. The following are some items I prefer for my buyers:
No auction/holding offers
In this situation, the buyer can submit an offer and, if it’s too low, the bank will counter the offer, thus allowing the buyers to counter back and arrive at an agreeable price. Counter-offers usually have at least a 24 hour grace period for responses, so the buyers can make calm, strategic decisions.
This is in stark contrast to auctions, fire sales and holding offers, which are all situations that require buyers to bring their “highest and best.” These are not the worst tactics, and if the buyers are very excited about the property, then we submit our highest and best strategically. However, the disadvantages to the buyer are obvious.
Inspection Contingencies
Unless you’re a contractor or seasoned investor, buying a house without a formal home inspection is a bad idea. Most banks prefer (and some require) a short inspection period of only 5 days, but 5 days is enough time to get your inspections done before you have to commit to the accepted offer. In an as-is contract, the buyer can be released from obligation within the inspection period for any reason.
Sales that do not allow for an inspection contingency obviously are much more risky. And even if the buyer is granted access to inspect before making an offer, that buyer would be spending money on an inspection not even knowing if he or she will have the winning bid.
No Buyer Fees
There are closing fees associated with all real estate transactions; however, I do not like my buyers to be charged auction fees, loss mitigation fees or any such expensive and unfair fees. If you do choose to buy a house with such fees attached to the sale, you must be careful to include those fees in your budget, as well as be sure that your mortgage lender will allow you to include them in your mortgage if necessary. The house would have to appraise at least at the value of the sale price + the fees for that to happen. Some mortgages do not allow buyer fees, regardless of the sale price or value of the home, so it’s important to check with your loan officer about those details.
The Skinny on Finding the Best Deals
Evaluate your buying goals carefully. Are you a resident buyer who wants to design your home to your taste and purchase with the lowest mortgage possible? Are you investing in a property to flip or one to rent? What are the market values and housing trends in your preferred area(s)?
There are great deals on regular sales all the time, so don’t discount them. If your Realtor has set you up with a search of properties in your area and price range, then you will get a mixture of regular sales, REO’s and short sales all within those MLS listings. Your best bet is to keep your eye on all of them to find your best deal. There are many reasons for regular sales to sell for as low or even lower than foreclosures: job transfer, life estate, divorce and more.
There's nothing wrong with shopping for foreclosures and you do have the potential for a great deal, but it's important to recognize that it's become a buzzword with mythical attributes. Banks have made the process more and more challenging as well. The clearer picture you have of the market, the better your chance of meeting your real estate goals.
If you do enter into a special sale, be sure that you read the fine print and work with a Realtor who will carefully outline all the important details for you.
Please note that there are still actual foreclosure sales of properties directly through the courts. Hillsborough County, for example, uses a closed bidding online auction system to sell properties directly to the public. They do not guarantee free title and the homes can come with a multitude of issues to be addressed by the buyers. Buyers are also responsible for all fees and closing costs. Since so many loans are higher than the values on these homes, most wind up getting listed on the MLS for sale as REO properties. Using that process, clear title is conveyed and buyers are able to use traditional mortgage financing. If you're interested in learning more about cash foreclosure sales direct to the public, you can visit The Hillsborough County Clerk's Foreclosure page.
If you'd like to be set up with your own personal MLS portal and receive a mix of listings (REOs, regular sales, etc.), contact me today and I'll get you set up!
