Foreclorues Priced Too Low, Too High and Just Right

There are three ways banks price foreclosed properties.  And this means you need to know how the property is priced, why and what you are going to do.  Here is a discussion of what to expect with Foreclosures priced Too Low, Too High and Just Right.

1 - Price Too Low

Too Low - Sellers that get bad information from the appraiser and real estate agents, will either price too low or too high. Some sellers price low because they are up against a clock when it comes to selling properties. Don't fall into the trap of offering less on a foreclosed home that is priced too low. These homes receive multiple offers. We just finished one where we had 12 offers. Of the 12 offers 8 of them were higher than the listing price, 2 of them were lowballs and 2 of them were at the listed price.

Offering More Than List Price - If you are an investor, then you have the luxury of making offers on many properties until you get lucky, so you may not have to offer more, because you can wait. I tell my investor clients to make their offers based on the numbers after calculating rent and expenses. It is a pure black and white decision.

If you are going to live in the home, you need to consider when you need the home and how much you want this home. If you need a home fast, and you love the home you are looking at you will need to offer more than list price on homes priced too low. But even more important is FINANCING. If you are a cash buyer, you have a huge advantage over buyers that still need to finalize financing. I've seen banks sell homes for 20% less than the highest offer, simply because the guy offering 20% less was all cash with no financing contingencies whatsoever.

Do Your Homework - When you do offer more than list for a home, make sure you have spent time with your real estate agent discussing comparable sales in the neighborhood and whether the local market is increasing or declining in value. This latter issue is huge. If you are considering a market that is declining in value, I often advise clients to rent for 6-12 months. If you are in a market that is increasing in value, you must consider beefing up your offer.

Smiles or Tears - The saddest thing we see, is when a buyer has their heart set on a home, but they refuse to offer more than list price. Here's a perfect example. I was working with a couple that thought I was trying to "rip them off" because I was urging them to offer $82,565 on a home foreclosure home listed at $77,000. And here's why . . .

The listing agent had already acknowledged that there were multiple offers. The listing agent can NOT tell me or anyone else what the offers are. All she could do is tell me there were other offers. My clients only wanted to know what the other offers were so they could offer more.

My clients also wanted to know how I came up with $82,565, so I explained. After reviewing comps in the area and taking into consideration my clients' immediate need for a home, I thought $82,500 was a fair offer. I boosted it up $15 just in case someone else came up with that same round number I did. By the way, we always recommend our clients offer just a little bit more than any round number . . . just in case there is another identical offer.

Deal or No Deal - Finally, my clients decided to use another real estate agent because that agent put together a contract at the $77,000 list price. I think you already know what happened. There were 7 offers on this property. My former client's offer was the lowest. The home sold for $82,000, and there was one offer at $84,000. If they had offered $82,565 as I suggested, they would have been living in that home now.

2 - Priced Too High

Maybe the first bit of advice for foreclosed homes priced Too High is . . . walk away. But there are other options. Some banks will price a property too high because they want to be able to account for it on their books at an artificially inflated price. Other banks do this because they do not want to sell these properties and incur the expenses that go along with selling a property where they may wind up with 10 cents on the dollar of the original loan. It is a complicated process and Washington is at the heart of it by allowing so many exceptions and very little regulation of the banking industry when it comes to these loans. In any event, Buyer Beware applies here, but I would also add Buyer Opportunity.

Do Your Homework - Once again, this is the most critical step. You cannot do this alone because you do not have the access to records that a sharp real estate agent does. You may have access to the tax records of the area so you can look up what the property was sold for previously, but you don't have all of the additional facts real estate agents have through the MLS system historical data. So my first bit of advice is to hire a sharp, full-time real estate agent . . . that has experience with foreclosures.

Make An Offer - Now that you feel comfortable with the price you want to offer, be sure put together a well drafted offer that the bank can seriously consider. This means, above all else, provide as much information and detail as possible. If you have a lazy agent or one that does not really understand the legal issues of drafting an offer . . . get another agent or don't waste your time submitting an offer.

Financing - Your most powerful lowball offer is one that requires no financing. I have often seen banks accept 10-20% less than best offers because the lowball was a sure thing. If they accept a higher offer that has a financing contingency, the bank risks the deal falling apart if the buyer's financing does not come through.

When a deal falls apart, it just cost the bank time and money in dealing with the offer. And now they must put the home back on the market. In declining markets, this means putting the home back on the market at a lower price. So not only did they lose time and money during the contract period, but when they do eventually sell the home it will be at a lower price. If the next potential buyer also failed to get his financing approved, the process repeats. This can get very expensive for a bank.

Ducks in a Row - If you are like most buyers, you do require financing. If you have your "ducks in a row" you will be fine. I recommend all of my buyers get pre-approved through a reputable mortgage broker. I cannot stress that enough. If you are using a friend to get you a worthless pre-approval letter, you are wasting your time . . . and you are only fooling yourself. If you would like to use the mortgage broker we recommend for our clients, please email me Mike3@MikeMorgan.us and I will reply with the contact info.

With a solid pre-approval letter in place, you have two choices to make. One, you can submit your offer contingent upon final approval of your financing. Two, you can entice the seller with a significant down payment and no contingency for final approval. The second option is very risky. If you do not receive final approval of your financing, you lose your contract deposit. However, sellers will look at these offers as stronger because you are putting your money where your mouth is. By the way, there are ways around losing your deposit, but I must save that or another article.

Submit the Offer - You finally have a very clean and very detailed contract. You also have a rock solid pre-approval letter. You want to submit both. When you select a closing date, try to make it less than 45 days and at least 5 business days before the end of the month. If there is a close decision, banks will be more willing to accept an offer if they can get a property off their books before the month closes.

After the Offer - If your offer is rejected, at least your name is in the hat should the seller decide to lower the price. If the listing agent is on the ball, they will contact you when the price is lowered. Better yet, your agent should have this listing on an auto-watch where the MLS system will notify your agent as soon as the price is changed.

3 - Priced Just Right

This might sound like the easiest of options, but the same basic principles outlined above, apply here.

1 - Do Your Homework

2 - Hire an Expert . . . not a part-timer or a friend

3 - Have Your Ducks in a Row

Poker Time - My only advice to those buyers that think a property is priced Just Right . . . is to put on your poker face and think about what other buyers are thinking. Once you feel you understand the market and a feel for what other buyers might be thinking, it is time to develop your offer.

Two Choices - Offer more or offer less. Matching the listed price is never an option for one simple reason . . . it is the obvious, and it is what inexperienced real estate agents will recommend to their clients. At the very least, offer a few hundred dollars more than the list price . . . just in case there are other offers at list price.

Success Story - One of my clients submitted an offer of $185,412. It was one of those oddball numbers I came up with. The list price was $185,000 and there were two other offers - one at $185,000 and one at $185,100. I had a good chuckle when I found out, because the agent that offered $185,100 was sharp enough to go a bit higher, but not sharp enough to think it through a bit more. Guess who got their Dream Home? My client, because she was willing to "think outside the box" after thinking about who and what were in the box.

Offering More or Less? - Once you determine the property is priced right, it is truly up to you whether to offer more or less. If you must have this home, offer more and maybe kick it up a notch. If this is just one of many homes or you are an investor with patience, go ahead and offer less. There will be more properties. The difference here is whether this is a property for you or a home.

For additional information, please email or call me - Mike3@MikeMorgan.us or (772) 285-4672