I almost hate using the words on the blog because Google is going to find out and people are going to come rushing in for short sale and foreclosure information... But, what they heck...
There is a very common misconception that the only way to get a deal is to buy foreclosures or short sales. And, in real estate, a short sale is one where the bank agrees to accept less money to release the loan than the current owner owes on the house.
Now, I understand the basis of the misconception. But it is still not true.
There are some great bank owned and short sale deals!
In fact, I reviewed four properties in November that were all foreclosures and looked to be deals at their listed price. But, there are plenty of deals that are NOT lender owned or shorts as well.
Here is what it comes down to. I had a "seller" call me last year looking to list his property. He owed $225,000 on it, and had refinanced it during the boom. He got a bass boat and a Suburban... maybe a big screen TV. He was looking to sell, and wanted me to list it for $250,000. The problem was that there wasn't a single home around him that had sold for $210,000... But, he needed $250k to make the deal work. So... one of four things was going to happen:
- He was going to stay put. The numbers weren't adding up, so selling wasn't an option.
- He could bring money to the closing to make up for the shortfall.
- He would talk to his lender about a short sale, where they would take a market price for the house, and write down the additional balance on the loan.
- He would get foreclosed and the bank would get the property... then they would sell it.
In the first case, there would be no listing... so, not a deal.
In the second case, he isn't going to be looking to be generous...
In the third case, the bank would be trying to maximize the sale price for the house. EVERY dollar they write down is a dollar they lose. It isn't like they are sitting back uncaring about their financial losses. In this case they will often get independent appraisals of the value of the house.
In the fouth case, they will also get independent estimations of value. they will get BPOs (Broker Price Opinions... which are basically agents estimates of a reasonable sales price), appraisals and look at the loan value. In MOST cases, they will try to clear the loan balance... or let it sit for a little while. Again, just as with a short sale, every dollar they write down is a dollar lost.
Obviously that isn't their goal...
The bank's goal is to make money, not lose it. But, sometimes they are willing to lose some now rather than sit on a property... especially when they need the money (yes, banks sometimes NEED to raise capital). So, as with the properties I previously highlighted, they will "dump" properties in order to raise cash.
But what about other sellers?
Now, let's talk about other sellers. Some are stuck, like the guy I mentioned above. But, let's say that we have someone that bought their home in 1974 for $46,000. They have paid of the mortgage, and the house is worth around $325,000. Sure, two years ago they could have sold for $360,000... but that was then, and they realize that is not realistic now. They also have a few choices"
- Price it at $360,000, and see if anyone bites.
- Price it at $325,000, and see how long it takes for a bite.
- Price it at $300,000, and see how many bites.
No we get down to seller motivation. If the seller is motivated, they will price it lower to attract more buyers and get it sold faster.
So, this is where we sit. Foreclosures and short sales are no really more likely to be "deals" than are other properties. And there is another issue that pops up with "distressed sales" (foreclosures, short sales and similar types of properties). We call it deferred maintenance. That means that when you can't make the house payment, you probably aren't changing your HVAC filters, much less replacing the roof or doing other maintenance items.
That needs to be factored in to ANY buyer decision. What will the house need to make it right?
The bottom line is that foreclosures and short sales CAN be a good value... or they may NOT be. It depends on the property. Everything in real estate comes down to the same concept... It all depends on the property.