Foreclosure Basics Part 2 (How Banks Set Price, Crazy Deals vs Good Deals)
Posted 02-19-2009 at 08:55 AM by GregTraub
Crazy Deals vs Good Deals
If you’re looking to get a good deal on a foreclosure home you are starting in the right place. Banks are the quintessential “Motivated Seller” and are willing and able to sell the properties they own for less than what other sellers are asking. However, if you are looking to get a CRAZY deal on a foreclosure, think again. Those late night TV infomercials teaching you how to buy foreclosures for 20-30 cents on the dollar are just there to sell you their products. The individual buyer has about a Zero chance of acquiring a property that far undervalue, such deals certainly exist, however they are limited to those that can purchase Tens of millions of dollars worth of properties at once, in cash, and without the ability to cherry pick the best properties from the junk. So unless you’re a hedge fund or extremely high net worth individual, forget the TV gurus. For the normal buyer like you or I, the only bank owned homes available to us are also available to everyone else and will be sold to the person willing to pay the most for it. If you like a property it’s likely someone else will as well.
How banks set price
Like any seller, the bank that owns the home wants to net the absolute most they can from the sale of their property, but there are a great number of differences in how a bank sells their property and how you or I would sell our property. The main difference being that they have never seen the property nor do they usually even live in the same state as the property, so determining local market conditions is difficult for them to say the least.
The first step banks do, is order something called a BPO or Broker Price opinion. A BPO is basically an opinion of value given by a real estate agent, not an appraiser and the bank will usually order 2-3 of these to get an accurate range of value and will usually discount the property at the lower range in order to sell the property quickly. Many times properties are already priced aggressive enough to attract multiple bids even in today’s market, so within the first 15-45 days a bank is likely not to approve a sale price for much less than they are asking. So low baller’s, don’t waste your time.
On a side note, banks ALWAYS hire a local agent to list, market, and sell their properties. Do not think you can simply call a bank and ask them to sell their properties directly to you. They will simply refer you to the agent they have hired to sell the property, and if they haven’t listed it yet….guess what, they will, and until they do, it’s not for sale! Also know that the listing agents for the banks are always paid the same whether you go directly to them or have your own representation with a buyer’s agent. So always use a buyer’s agent, not only does it increases your chance of getting the property because we know how to get your offers in quickly and cleanly (the listing agents sometimes are so swamped with listings they do not have the time or inclination to hold a buyer’s hand through the process).
Something you must also keep in mind when dealing with bank owned properties is that the person that makes the final decision of what price to list a property, as well as what offer to accept is usually not a person at all, it’s a computer. I’m not saying there isn’t an actual human being that has input in the sale, but banks have shareholders, regulators, and investors to answer to, so having a computer system to make all their decisions for them is a way they prove fair dealings, and that they are looking out for the best interests of those involved. An employee simply inputs numbers into a system and the computer recommends a decision. The decision maker does have some latitude, but they also have bosses to answer to for their decisions, this is another reason why bank properties are usually priced at good deals already. Most banks prefer receiving multiple offers so they can easily justify the sales price they accept, receiving the highest and best price is much more convincing to a boss if a property is sold for 10K more than asking with multiple bidders, than if a property sells for 10K less than asking with only one bidder.
Part 3 of my foreclosure postings include what a lis pendens means, what a foreclosure auction is, the differences between a short sale and an REO, and which one is a better deal.
If you’re looking to get a good deal on a foreclosure home you are starting in the right place. Banks are the quintessential “Motivated Seller” and are willing and able to sell the properties they own for less than what other sellers are asking. However, if you are looking to get a CRAZY deal on a foreclosure, think again. Those late night TV infomercials teaching you how to buy foreclosures for 20-30 cents on the dollar are just there to sell you their products. The individual buyer has about a Zero chance of acquiring a property that far undervalue, such deals certainly exist, however they are limited to those that can purchase Tens of millions of dollars worth of properties at once, in cash, and without the ability to cherry pick the best properties from the junk. So unless you’re a hedge fund or extremely high net worth individual, forget the TV gurus. For the normal buyer like you or I, the only bank owned homes available to us are also available to everyone else and will be sold to the person willing to pay the most for it. If you like a property it’s likely someone else will as well.
How banks set price
Like any seller, the bank that owns the home wants to net the absolute most they can from the sale of their property, but there are a great number of differences in how a bank sells their property and how you or I would sell our property. The main difference being that they have never seen the property nor do they usually even live in the same state as the property, so determining local market conditions is difficult for them to say the least.
The first step banks do, is order something called a BPO or Broker Price opinion. A BPO is basically an opinion of value given by a real estate agent, not an appraiser and the bank will usually order 2-3 of these to get an accurate range of value and will usually discount the property at the lower range in order to sell the property quickly. Many times properties are already priced aggressive enough to attract multiple bids even in today’s market, so within the first 15-45 days a bank is likely not to approve a sale price for much less than they are asking. So low baller’s, don’t waste your time.
On a side note, banks ALWAYS hire a local agent to list, market, and sell their properties. Do not think you can simply call a bank and ask them to sell their properties directly to you. They will simply refer you to the agent they have hired to sell the property, and if they haven’t listed it yet….guess what, they will, and until they do, it’s not for sale! Also know that the listing agents for the banks are always paid the same whether you go directly to them or have your own representation with a buyer’s agent. So always use a buyer’s agent, not only does it increases your chance of getting the property because we know how to get your offers in quickly and cleanly (the listing agents sometimes are so swamped with listings they do not have the time or inclination to hold a buyer’s hand through the process).
Something you must also keep in mind when dealing with bank owned properties is that the person that makes the final decision of what price to list a property, as well as what offer to accept is usually not a person at all, it’s a computer. I’m not saying there isn’t an actual human being that has input in the sale, but banks have shareholders, regulators, and investors to answer to, so having a computer system to make all their decisions for them is a way they prove fair dealings, and that they are looking out for the best interests of those involved. An employee simply inputs numbers into a system and the computer recommends a decision. The decision maker does have some latitude, but they also have bosses to answer to for their decisions, this is another reason why bank properties are usually priced at good deals already. Most banks prefer receiving multiple offers so they can easily justify the sales price they accept, receiving the highest and best price is much more convincing to a boss if a property is sold for 10K more than asking with multiple bidders, than if a property sells for 10K less than asking with only one bidder.
Part 3 of my foreclosure postings include what a lis pendens means, what a foreclosure auction is, the differences between a short sale and an REO, and which one is a better deal.
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