This is GREAT information and it really demonstrates how banks structure their prices when listing their Foreclosure properties.....
Part 4 of Distressed Properties are NOT Black Holes!, a six part series.
REO List Price Considerations
Most BPO forms ask the agent to indicate what a property will sell for within 30 days and within 90 - 120 days. In setting a price, the bank considers:
- current, local market conditions including active inventory, average days on market, etc.
- shape of the property;
- how much of a loss it has already taken on the original mortgage and the foreclosure process;
- amounts paid for trash-out and any work required to make the home safe and secure, i.e., winterization;
- carrying costs (insurance, taxes, bare-bones maintenance, utilities, etc.) during the time the REO is listed;
- the commission it will pay both agents - a fixed percentage in my experience.
Based on these factors, the bank also looks at its internal situation. How many REOs are they carrying? How quickly does the bank need to "unload" the property? Let's remember that most banks are "for profit" organizations; many report to shareholders. Nevertheless, an REO list price is usually a good deal.
Stealing an REO
Interested in getting a foreclosure for 70% or less of list price? Ain't gonna happen!
The list price is typically a huge bargain already. The bank really DOES know what a fair offer is, based on hard data for local market conditions. The list price takes the shape of the property into account, so don't expect another discount based on bad condition. The bank will not take lowball offers seriously and may not even counter one.
The bank knows that most homes in an area the average sold price is XX% of the list price - in my Sussex County, NJ, market area, this ratio is 95%. While a bank might accept slightly less than the average ratio, my experience shows that this percentage gives one a great idea of what number the bank will accept.
I've found REO banks to be even less flexible on price than non-corporate sellers. Why? Because they know their list price is a steal, which is why buyers come in droves to look at REOs.
Non-Money Components - Your offering price is just one factor
- Closing Date: If you want to purchase an REO, offer to close in 30 days. Yes, I realize this is quick but it has a dollar value! Banks want the REO off their books, especially if the closing will be prior to the end of a financial quarter.
- Paperwork: Complete and submit every piece of paper the bank has requested. Most banks have their own forms and want them used. For my REO listings, I can load them in the MLS for any agent to readily obtain. Banks will reject offers that are missing the required paperwork.
- Down payment: Some banks specify a percentage of the price as minimim earnest money. In every case, I suggest the "good faith deposit" be at least 1.5% of your proposed purchase price. Show the bank you are a serious buyer. A strong second deposit (post-contract, before closing) will also sway the bank in your favor.
- Mortgage: A few banks want a shot at your loan and insist they do your pre-approval, even if you have no intention of using them for the loan. (Remember, it is their property and they can make whatever rules they want...) Even without any imposed requirements, a pre-approval from a "brand name" will strengthen your offer. Sure, you can actually then get your loan from "My Cousin Vinnie's Finance Center in Podunk" but a name-brand might just be that little added extra that gets your offer accepted by the bank.
Here is why I earn the big bucks (ROFL)
A tip I use to help my buyers "steal" an REO.
Banks tend to have a very aggressive price-reduction strategy. They want to sell the REO quickly even if they will not consider offers far below the list price. Many banks drop the price almost monthly, assuming no offers are being negotiated. Waiting until the price drops where you want it to be could mean someone comes in ahead of you -DON'T RISK LOSING A PROPERTY YOU REALLY WANT OVER A SMALL DOLLAR AMOUNT.
But in considering your offer, you should know WHEN the last price reduction took place, the frequency between all price changes and the percentage of each. If it is a new REO listing, I can often determine a particular bank's reduction pattern by examining another local REO listing owned by the same bank. So, if a bank habitually reduces its list price 5% every 32 days and the current price came about 27 days ago...
(Fellow agents - I know this tip is could mean more work, if you're not already doing this. Some of you might use MLS systems that do not permit you to research historical data to gather a price reduction history. My personal perspective is that I'll continue to do all I can to get my buyer the best deal possible AND submit an offer that will fly.)
- Part 1 - Distressed Properties are NOT Black Holes!
- Part 2 - Short Sales can be a great thing despite Timeframe & Lowballs
- Part 3 - So You Want a Foreclosure: Bank-owned Properties - REOs
- Part 4 - Want to Steal a Foreclosure? Get the REO facts. (this page)
- Part 5 - Why You Want to Consider a Foreclosure. Advantages of REOs for Buyers
- Part 6 - Pitfalls of Foreclosures. Disadvantages of REOs for Buyers