We’re in a buyer’s market, right?

Millions of foreclosed homes + too few qualified buyers (supply exceeds demand) = prices falling dramatically = Buyer’s Market. That’s the conventional wisdom, and I bought into it myself, until recently.

And why not? For those few who can still get a loan, there are bargains galore, right?

The answer is an emphatic...  

                                                 It depends.

If you’re willing to clean, disinfect, rehab and repair an abandoned “fixer” -- sold “as is” -- in spite of graffiti in the bedroom and a “hardwood floor” that bounces like a trampoline, then yes, this is a wonderful time to buy. Or, if you’re an investor with a good construction crew, a strong stomach, and the belief that you can fix-and-flip faster than prices can fall, then yes, this is a remarkable, historic opportunity.

Better yet, if you have $400,000 in cash sitting in the bank ($1 - $6 million is better), then indeed, this is an ab-fab time to buy. (I just sold a 4600 SF Hollywood Hills home to a cash buyer for half of what it would have sold for three years ago.)

Yes, ma’am, if you’re one of these happy people -- it’s a buyer’s market.

But for the rest of us, here’s the reality…

You visit dozens and dozens of listed homes, and discover three types:

1) 60% are REOs, “real estate owned” by the bank (foreclosures). The pool is algae-green and filled with minnows (to keep the mosquitoes down) and the house, to put it nicely, “needs work.”

2) 30% are short-sales, houses that are worth less than their mortgage(s). The “owner” is listing the property, but the true seller is the bank -- and getting their approval can take 6-19 months (or never). Finally, last and least…

3) 10% are deluded homeowners still trying to sell their home for 2006 prices. Since the rest of us live in 2009, their average Days On Market (DOM) is 185 and climbing. By refusing to price correctly, they are essentially buying their own home.

But wait… A miracle!  

You just found a well-priced REO in decent condition! You make an offer…

And suddenly discover the truth -- you’re smack in the middle of a Seller’s Market.

Fifteen other people made an offer on the property.

Most of the offers were above list price. The winning bid was significantly above list.

What just happened?

1) Ghost Inventory - Although banks own literally millions of foreclosed homes, they’re keeping most of them off the market. They know that if they dumped their entire inventory at once, prices would drop dramatically, and they’d recoup even less on already troubled assets. So they control the supply by releasing homes slowly, in dribs and drabs.

2) Feeding the Frenzy - Smart REO agents are pricing REOs very aggressively, often 10% below what they expect to sell for. (See How to Create a Bidding War in a Buyer’s Market.) They set a deadline, ask for “Final and Best” offers -- no negotiating -- and stop accepting offers once they’ve got a dozen or more in hand.

The winning bid is from a frustrated buyer who lost the last six bids, and is determined not to lose this one. So he blows away the competition with a $470k offer on a $400k REO. If he’s paying cash, you never had a chance. If she’s putting 20-30% down on a conventional loan, she’s second in line.

If you’re putting down less than 10% and offering less than full price…best of luck.

Gosh, that sure sounds like a Seller’s Market to me.    ;>}

P.S.  Thanks to Metrocities/Prospect Mortgage's Dan Harrington for helpful insights on this.