Since 2006 foreclosures have become a significant part of the everyday real estate transaction, not just because someone may or may not have bought one, but the presence of so many drove down the prices of the homes that were not foreclosed on as a matter of competition and comparison shopping.
Should I buy the home at auction? A large percentage of the homes that go to auction, have more owed on them than the home is worth, so in most of those instances there are no formal/competitive bidders, and the home reverts back to the original lender (also eliminating most underlying liens). If you happen to come across a home that will be up for bid at the courthouse steps, and you have determined that there will be equity available if you get it for a fair price, at or above what is currently owed on it, you will also need to be a cash purchaser. There are no homes being sold at the courthouse steps that are going to be available to you as you are going through a loan process and utilizing standard inspection contingencies.
So after the bank takes the home back…..depending on the home, the area, and the market, there can be weeks to months before the home may go on the market. With small exceptions (local banks most often), there is no practical route for you to go down to the bank and say “hey, noticed you took that home on Elm back last week, how much do you want for it?” Just does not work that way, although it would be nice. The person initially handling their recently acquired asset has no idea what the home is worth, and is not willing to make any decisions at that point. They have REO (Real Estate Owned) Departments that will handle the disposal of these properties. The people in those departments have built relationships with real estate agents in each market they have homes in and work directly with them to determine what needs to be done with the home before it goes up for sale, where to price it competitively, and when it should go on the market. They do not, as a rule of thumb, negotiate with unrepresented buyers, nor directly with real estate agents that they do not already have a trusted established relationship with. Once again, there are a few exceptions to this, most notably very small local banks where all decisions are made right inside that local branch.
OK, so now the bank has the home, has it ready to sell, sets a price, and it goes on the market and you want to buy it. What is the rule of thumb? There is none. As with all sellers, it depends on where they initially decided to price the home and how long it has been on the market. In many instances a well-priced bank repo will have several offers on it, almost always some will be over the list price. What does the bank want to see? Price mostly, and then what type of financing. Two offers identical for price and closing date, but one offering conventional financing, while the other offers FHA or VA financing will probably give the advantage to the conventional buyer. Contingent on selling another home, or your grandma seeing it when she visits in two weeks will probably not work in these scenarios. Best way to decide what to offer is to decide what the home is worth to you the buyer, make your best offer, and be ready to accept whatever the outcome is. What work will the bank do after the home inspection? Usually none, but that does not mean you should not make your offer contingent on a professional inspection unless you had an opportunity to do plenty of due diligence prior to writing the offer. Are there exceptions? Yes. If you discover something over the course of the inspection, that is so significant that you reasonably believe that someone representing the bank would say, “wow, we had no idea. If we do not address this at this time, we will have to address it later before we sell this home to another buyer.” Examples of this can be previously undiscovered mold, a significant leaking roof, failed septic system, major electrical problems that could cause serious harm to someone. Examples of what they will not be concerned about are broken windows, leaking hot water tank, un-serviced furnace, minor electrical issues like ungrounded outlets, knob and tube wiring, stove does not work, roof is due to be replaced in the next few years, settled sidewalk, etc. Bottom line is that the banks do not have a little handyman driving around the country with a little van to fix all these minor issues. When you make an offer on a foreclosed home, be prepared to buy it as-is, choose a price that will leave you a cushion to accept most of the likely items to come up on an inspection, but still do the inspection so you know what you are buying.
Paperwork? One of the worst things about writing an offer on some foreclosed homes is that you may be pushed into negotiating verbally. You will always put an offer in writing to begin with, hopefully with your own agent, not one representing the bank. And that written offer will be sent to the bank’s real estate agent. From there it can get a little less conventional. In most real estate transactions, offers are in writing and all counteroffers should be in writing, this is for several reasons. But with a foreclosure, sometimes that person at the bank chooses to respond with a phone call or email to their agent, and that message is forwarded back to the potential buyer. This can go back a forth a few times. In essence these become verbal negotiations. Not ideal. Your options? Walk away, they will probably just wait to pursue another buyer. Or, just accept it, trust your agent, and hope that they can work well with the other real estate agent and hope that in short time your verbal negotiations will be cemented in writing so the terms are legal and binding. Banks will also have their own addendums that may not present the most favorable terms to the buyer. An example is that they may charge you a fee for every day past the anticipated closing date that you do not close on time, usually due to delays from your lender. But what penalties for the seller/bank if they can not close on time? None, of course. Your options? Again, walk away, they will probably just wait to pursue another buyer. Or, just accept it if the home seems worth it. These are decisions you need to make when pursuing what many see as a good opportunity to purchase a better than average priced foreclosure.
HUD Homes? In some areas of the country there are lots of HUD homes available. This is most often a computerized system for the bidding process. Some other lenders as well have gone towards the computer bidding process. There is little to no personal input for these offers, all mathematical, a formula that HUD uses based upon their initial appraised value of the property, how long it has been available, and the net dollar amount to the seller after closing costs and real estate fees are accounted for. In short, if a HUD home comes up for sale for $150,000, and you decide to offer them $140,000, with them paying 3% of your closing costs, they will just say ‘no’. No counter offer will be forthcoming from them. When might they sell it to you for $140,000? In weeks or months after no one else has brought a better offer and they have reduced the price themselves to a dollar amount closer to your $140,000 figure. Also, when they do reduce that price, they will have an open bidding period again for several days to solicit the best offer so your competition may increase as well.
Foreclosed homes can be a great opportunity for many buyers, some are in great shape and can be smooth real estate transactions, others may need more work than will be possible to get the loan to secure the property, your real estate agent should be able to help you identify the differences. Foreclosed homes offer a greater opportunity to build equity, most often true ‘sweat equity’, but also as a rule of thumb they sell for what they are worth, no more and no less. As with other homes for sale, contrary to what some of us see on late night TV, $150,000 homes are not likely to sell for $75,000. Foreclosed homes listed with a bank for $100,000 are not likely to accept $60,000. Banks and their real estate agents list homes for what they honestly believe they should sell for. To presume that they will sell a home for a fraction of what they have been led to believe it is worth is to forego the theory that banks are in the business of making money, not losing it. Yes, over 2 months, or 4 months, or 6, that $100,000 listing may get reduced to $65,000. Then you get to write your offer for $60,000, but do not be fooled to believe that they are ready to give it away until some other factor (normally time on the market) tells them they will not get $100,000 for it.