REO's -- not quite the bargains you would think

General Real Estate Investing
1

So I ran a quick search just out of curiosity on REOs (real estate owned by banks, after foreclosure) to see what kind of deals are happening in my local area – Tidewater, Virginia. According to the MLS, the average list price of an REO is $177,305 and the average sale price is just $171,800.

Not quite the bargains you would think, especially considering all the news of foreclosures and a souring economy.

Does this surprise anyone? Is it about the norm for your area? Anybody making a killing lately on these? I would have thought that this would be prime time for getting a great deal on an REO property since the banks are even more desperate than ever to get them off their books. Not so, at least here.

Thoughts?

2

The average price for properties on the MLS (including REOs) are always going to be retail. That doesn’t mean that there aren’t any good REO deals to be found. Finding a great deal, for pennies on the dollar, is always going to require more effort than just looking for the average deal on the MLS.

Good Luck,

Mike

3

I hate agreeing with Mike… But he is right on…

If you want to get the “Good Deals” and dont know how to do a Short Sale you better be calling the REO agents and start networking with them… As a Broker I know the good deals go within the 3 days the MLS allows an agent to hold a listing… My rule of thumb is if it isnt sold within the first 5 days it is not a deal.

Now that doesnt mean that you can not negotiate with the lender later after it sits on the MLS for a while…

Michael Quarles

4

Yeah, I know there aren’t many deals to be found on the MLS, I was just using it as a way to track sales of REOs to see if anyone else was getting a good deal on them. According to the stats, they’re not much of a source for bargains. They seem to fall right in line with the non-REO sales.

5

Up until this year, the banks have just been sending a crew in to clean their foreclosures up a bit and listing them on the MLS. They’ve always gotten full price, or close to it, for them.

We’ve never had very many REO’s in this area. We’ll see what the future is about to bring us, but historically, about 10% off was about the best that could be done. There are lots of “notices” but still not too many going through the foreclosure process.

All the REOs that I’ve seen locally are not properties that I would want to own. They are all the type that make you wonder what the bank was thinking when they loaned money secured by that.

The nice properties where the owner can’t make the payments get sold long before the foreclosure and, occassionally, the owner will let them go for a very good price.

Still, the market is changing so we will see.

I am expecting the REOS that are coming up to be mortgaged to the hilt. Not impossible, but it is harder to get a bargain than it is if you can find a seller in trouble who has some equity that he is willing to trade for a bail-out.

6

In Las vegas, REO capital of the world, many REOs are going at 40% and 50% of sale price from just a couple years ago. They still are selling slowly, because there is about a 20 month supply of empty homes sitting out there, with lots more REOs on the way.

7

It really all depends on what market you are investing in. I have found phenominal REO deals on great homes in great neighborhoods listed on the MLS.

8

I am not sure this tells us anything. What is the average sale price for non-REO properties that are comparable to the REOs that have been sold?

9

Seems pretty straight forward to me. I took the average LP vs. SP of REO properties to find out if there was much of a difference when compared to the average LP vs. SP of non-REO sales during the same time period. Goal was to see how much more of a bargain REOs were than non-REOs. That was my search criteria. If you have different, more elaborate search criteria, the answer might not be as descriptive as you like.

Avg. non-REO list price $272,140; avg. sale price $265,867 over the same period of time (365 days).

10

All you have demonstrated is that the average sale price of an REO property is 96.8% of list price, while the non-REO properties are selling for 97.7% of list price. This tells me that the agents listing the properties are probably doing a good job of estimating the value of a property in the marketplace, regardless of whether the property is an REO.

Using the numbers you provided, one might be tempted to say that the average REO is almost $100K cheaper than the non-REO. If I just took these numbers at face value without looking at the specs for the properties behind the numbers, I could make the case than REO properties are terrific bargains as long as you are willing to ignore that there may be drastic differences between the two groups of properties.

What you need to do is compare the sale price of an REO property to the sale price of a comparable property that is not an REO. You need to find at least three comparables for each REO that is sold. The difference in the sale price of the REO and the average comparable sale price would suggest the potential discount to retail that you might expect from an REO.

Until you isolate a couple of properties and compare the sale prices, you can’t make any conclusions about whether REOs are good deals or not.

Let me give you an example. There are a few REOs in a condo complex where I already own. If I look at the comparable non-REO sales for this complex over the last six months, I would see that the average sale price for a 2/1 unit was $139K. When I look at the REO listings that are currently on the market, the average asking price is $109K. For the most part, all the condos in this complex are essentially identical – all have the same number of bedrooms and baths, all have the same amenities, all have substantially the same appointments. Small variances in the number of sq ft and a couple $ difference in the association fee do not translate into a variance in sale price.

If a non-REO property sells next week for $137K while an essentially identical property sells for $105K, then you might conclude from this single sample that the REOs are selling for a 23% discount. Get more samples and you get a better estimate of the disount you might expect from an REO property.

11

Let’s see if I can’t shed some light on how foreclosures work, at least in this area of Texas and what is the best way to look for a REO (Real Estate Owned) could be.

First, when a bank acquires a property that is going to be a REO, one of the first things they do is to have it appraised. Yes, that is correct. They hire an appraiser and have them give them an estimate as to the value of the property.

Let’s say the appraisal comes in at $100,000. The bank, which can now make a profit on the property, may list the home for $104,900. That’s right, they may list the property for more than it’s worth.

If the home sits on the market for let’s say 30 to 45 days, the bank may review the home with the help of the listing agent. They will look at such things as the number of showings. They will look at any offers that have been submitted. They may make a decision to reduce the price. They may reduce the price to $99,900 or some other number that is acceptable to the bank. If the home hasn’t sold within the next 30 to 45 days, the process may repeat itself again. This process may continue until the home sales.

Of course, there are other options. If the home hasn’t sold, the property may put the home up for auction with a company like Hudson and Marshall. There’s a problem for investors with an auction as this is NOT an absolute auction. There is a reserve on the home.

Using our example above, the reserve might be $92,500. If someone bids $88,000, the bank may take that offer. It is the banks decision. If the bank decides not to accept the offer, they may list the home with either the same previous agent or with a different agent.

It is not uncommon for a bank to list the property again at, or near, the previous listed price.

A lot of the banks do consider offers from investors. I have heard that several of the banks will not consider any offers that are not at lest 85% of current list price. Note, that I said consider, not accept.

I’ve run some of the numbers in the Dallas area and have found that even today, most of the “accepted” offers are within about 4% of the “current” listed price. And yes, this does mean that the listing agents are doing their job.

One aspect that I tell people who call on a foreclosure looking for a deal is to look at it this way. If the home was a good deal, I’d buy it. I also tell the following story.

If I agreed to work with a client, and let’s say that I made 3% commission, I don’t, but let’s pretend, I’d make $3,000 on $100,000 home. But if I could purchase the home for $65,000, put $15,000 in the home, and thus I’d have $80,000 in the home, and then sell it for $100,000, I’d make $20,000. I follow that up with the following. If I agreed to work with you, I’m a honest man, I will not purchase the home out from under you, but you know what, there are 25,000 agents in the Dallas area. Let me ask you a question. Did you get a Christmas card from all of those agents? Naturally, the answer is no. I then add, I will not purchase the home out from under you, but half of those agents watch the market for deals and if it’s a deal, they’ll buy it before you.

Next, I add that if it’s a real good deal, I’ll never see it as the REO agent will purchase the property before it ever hits the marketplace.

So how does one purchase a REO property at a good price? In fact, does that happen at all? Yes, it does happen. The way I find most of my deals is actually quite easy. I do a search and receive an email on homes that match my search criteria each and every morning. I may search for homes between $75,000 and $150,000. That’s fairly easy and most people can pick up on that. I also add things like 3 bedroom, 2 bathrooms and at least a 1-car garage. I may search for a home with 1200 square feet or more. But now comes the most important part. I search for homes that have been on the market for 180+ days. Homes that have been on the market for more than 180 days have several things that I like attached with them. First, the current market has rejected these homes. Second, banks are usually tired of these homes. They are now ready to deal on these properties. This, at least in my opinion, are where most of the best REO deals can be found.

In closing, it should be noted that the above is not an exact science. If it were easy, everyone would be doing it. This takes work, but think of it like this. If one can find just one home a month at a profit of $10,000, one can make $120,000 a year………

I hope this helps someone and good luck………

Ken Tate
(a.k.a. Mr. Real Estate)