This article was featured today in the Washington Post - Where We Live Real Estate Blog
I’m always hearing from buyers who want to focus their search on foreclosures. Foreclosures can be a great deal, especially for those with deep pockets and remodeling expertise. But for the average homebuyer, if the price seems too good to be true, it probably is.
As an agent who has listed foreclosures, I can assure you that the banks aren’t giving these properties away. On the contrary, quite a bit of care and analysis goes into the pricing of foreclosures.
After a foreclosure takes place, the bank typically obtains a Broker Price Opinion (BPO). This is a detailed analysis of a property’s market value completed by the listing agent. The bank also orders an independent appraisal. If the two aren’t in sync, the higher valuation is used as recommendation for the list price. If the two suggested list prices are more than 10 percent apart, a third BPO is performed by an unrelated real estate agent. The listing agent also estimates the cost of necessary repairs and factors that in to the BPO.
As the listing agent, I’m asked to price the property to sell within 120 days and I can be fired by the bank for recommending an unjustified list price. Listing agents can also be fired for overpricing properties. If you see a property priced very low, it will probably yield multiple offers that will bring the price back up to market value.
Once the list price is set and the property is on the market, there is typically little, if any, room for negotiation during the first 30 days the home is on the market. Every bank has its own timeline for price reductions, and this timeline is not necessarily shared with the listing agent. Reductions usually happen every 30 days after the listing agent completes another detailed BPO.
Active investors troll the foreclosure listings daily and many of them make non-contingent cash offers within hours of a property being listed. Cash makes a small difference with banks when negotiating price, but it can really give you an edge when there are multiple offers and other buyers require financing. This is where the average buyer who needs financing will find himself at a disadvantage.
Sometimes you’ll see a foreclosure listed at what seems like an unbelievablely low price. Although intriguing, these properties often need so much work in repairs that they can’t be financed. Cash investors often snap up these properties.
Fannie Mae-owned foreclosures are often a good option for the average buyer. Many times Fannie Mae makes repairs prior to marketing the property. With their mission of enabling affordable housing, Fannie prefers owner-occupants over investors.
One memorable Fannie Mae foreclosure I listed was in Alexandria near Franconia Road. The basement was covered in floor to ceiling fuzz — way beyond black mold. It was literally growing on the floors, walls and ceiling. The appraiser had to come back with a bio-hazard mask. The bank spent $20,000 to gut the basement and treat the mold. Because the home was in a desirable neighborhood and it sat vacant for nearly a year, once it was cleaned up it sold in four days for over the asking price.
Sometimes banks are less likely to accept a lower offer but willing to pay closing costs. Fannie Mae almost always pays the buyers’ closing costs. They usually offer various closing cost incentives — paying about 3 percent to 3.5 percent of the price of the contract sale price — which saves the buyer easily thousands and sometimes tens of thousands of dollars. Banks will negotiate closing costs but don’t pay them as routeinely as Fannie Mae, in my experience.
Foreclosures can be great buys for fist-time buyers and investors ,but keep in mind that an enticing price isn’t always a slam dunk.