Buying Foreclosures in the Pittsburgh Area
PART 3 OF 3 - FORECLOSURE PRICING
In this final part of the series on buying foreclosures, I'd like to discuss the topic of how foreclosures are priced. Some people are under the impression that you can buy a foreclosure for pennies on the dollar. This is very rarely the case and usually leads to wasted time and effort and disappointment for buyers.
Lenders will price a foreclosure based on a number of factors. These include the money owed on the mortgage and any other outstanding liens such as mechanic's liens or unpaid property taxes. The lender has other expenses as well, such as legal fees as part of the foreclosure process, clearing the property of debris, and the cost to market the property.
According to Freddie Mac (Federal Home Loan Mortgage Corporation), the average cost to foreclose on a loan is in excess of $50,000, and the average loss on sale at foreclosure is 20 percent to 25 percent of the loan's value. This is why lenders will usually work with owners to avoid foreclosure if the owners notify the lender ahead of time that they are in financial trouble. This is also why lenders are not willing to sell these properties at bargain-basement prices.
Before placing a property on the market, the lender will have an appraisal performed to determine market value. The pricing is then based on how much is still owed on the property and the current market value, while taking into consideration the cost of work needed to put the property into good condition.
For example, a home that would normally sell for around $100,000 and needs $30,000 worth of work would probably list for around $70,000. Even at a sale price of $70,000 it's more than likely that the seller is losing money on the deal.
The average Sale Price to List Price (SP/LP) ratio in Allegheny County in 2007 was 90%, which means these properties sell at an average of 90% of the listing price. However, this ratio can vary widely by area. Below is a sample of SP/LP ratios based on 2007 statistics taken from the West Penn MLS:
McKeesport - 86%
Monroeville - 96%
Hampton - 96%
Murrysville (Westmoreland County) - 97%
All of which is to say is that the belief that a buyer can put in an offer which is 30% of the listing price and expect to even get a counter offer is, for the most part, a myth.
So, how can a foreclosure be a good buy? If you're prepared to do all or most of the work yourself or if you know a contractor who is willing to give you a break on prices, then there are some good deals lurking out there. Even if you pay the going market price for repairs you still could save some money.
If you're patient, you can also wait for price reductions made by the seller if the property sits on the market for a while. But with this approach you run the risk of losing it to someone else.
You should team up with a real estate agent who can show you a foreclosure before you submit an offer and who can perform a Comparative Market Analysis, which will provide an estimate of the property's market value.
When you look at a foreclosure in person, have someone with you who is experienced with recognizing problems and estimating repair costs, if at all possible.
At this point you should be able to determine whether or not a purchase would work for you.
Ken Belferman can be reached at 412-372-1050 x340, by e-mail, or thru his web site at http://www.pittsburghhomesrus.com
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