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)