How much should I offer on a bank owned property?

Real Estate Agent with Keller Williams

Many people have contacted me about how bank owned (REO) properties are priced and how much they should offer for purchase.

There are no hard and fast rules but here are some generalities.

Is the price based on the amount owed at the time of foreclosure?

Some supposed "gurus" have been claiming the banks base their list price and what offer they will accept on how much is owed. One "guru" had even researched (allegedly) over 200 transactions and came up with a number. He claimed 73% of the amount owed on the mortgage is what the bank would accept as an REO (bank owned property). Well, his results may have been accurate but the relationship between the amount owed and the eventual sale price was spurious. At that time, the market was about 25% below what the market was at the time these properties had sold. The same research done today on recent sales would reveal a much lower number.  You could probably find data that would reveal that the sale price was related to the tax assessor's value. Enough properties in your sample would come up with an AVERAGE. But, an average does not mean there is a relationship.

Logically, this makes no sense either. Some properties I have sold had well over $300K owed on them, but are now selling for less than $100K.

The price is NOT based on amount owed. If you are looking to make an offer on bank owned property, do not get wrapped up in how much was owed. It rarely has anything to do with what the bank will accept.

Additionally, some of the certificates of title and/or the rights to the property have been sold at a discount already. Therefore, the new investor has less at stake than the original one.  In short sales, the same theory applies. If you are dealing with the original note holder, then the amount owed certainly is a consideration, but nothing more. The note may have been sold at a discount and the new investor has less at stake.

The Bank will take 85% of the market value?

There is no hard and fast rule. Variables include time on market, time of year, what was paid for the original portfolio, condition of the property, whether the buyer is paying cahs, how much money is being put down, local unemployment, and how badly the seller needs cash.

Banks are pretty much like any other seller except they don't have a mortgage. They have hundreds and in some case thousands of properties to sell. In a declining market, the faster they sell the less they lose. They also have holding costs - taxes, lawn care, utilities, maintenance, etc. To counter this they need to keep their marketing time reasonable. They are not like some regular sellers who throw their property on the market at an inflated price "to see what happens."

I have seen bank owned properties sell for as little as 50% of market value to as much as 120% of market value.

Every transaction is different. I strongly suggest that buyers use an agent that has handled REOs or short sale properties on a regular basis. This does not mean using only the listing agent. I have seen listing agents on short sales that did not have a clue what they were doing. In their defense, I didn't have much training prior to my first short sale but I did get it done. I have seen experienced REO agents value properties as much as 250% above what the property eventually sold for.

I will not put information into a blog that tells you how I do it. I will tell you that you need a good agent that can tell you what his/her opinion of value is of the property you are interested in. This does not mean they print out a bunch of listings and hand them to you. They need to do research to back up what they tell you and explain it in detail.

You may find that the property is UNDERPRICED already. I have repeatedly been in situations where I have advised investor buyers to pay full asking price becasue it is a great deal. My buyers would go against my advice and try to get the property for 3 or 4 % under asking. Then, a smart investor will come in and offer 3 or 4% OVER asking price and get the deal. They knew it was worth 40% more than asking price and wanted to knock all the wannabes out of the game. My buyers ended up kicking themselves for being greedy and letting a great opportunity pass them by.

Sometimes REOs are way overpriced. One thing your Realtor should be able to tell you is the ask/sell ratio in the area you are looking. Banks list their properties above what they will take, just like anybody else. Knowing what the recent trend in the specific area you are looking in can be great information.

On any property, it is worth what someone who can pay for it, will pay for it. If you find any property, not just bank owned or short sale, and it is priced higher than you are willing to pay, there is a way to get it. It is called negotiation. Price, terms, and timing are important. There are certain things that motivate any seller and that is what you or your Realtor need to focus on. When the deal presents itself you need to move quickly. Set a price and don't go over it. There are too many deals out there.

"Wait long, strike fast."

Phil Hanner
Concord Real Estate


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