So You Want to Buy A Foreclosure and Get A Steal

One of the hottest markets in Florida, particulary the Tampa Bay markets, is bank foreclosures. Foreclosures have steadily accounted for between 25% to 35% of the sales units in the four counties of Hillsborough, Pinellas, Hernando and Pasco. The purpose of this blog is to help understand what to expect regarding price when shopping for a foreclosed home.

In addition to the hot foreclosure market is the short sale homes which is another part of the distressed housing market. "Short Sale" is the term that identifies a home that is for sale by the owner for a list price that is less than the homeowner's current mortgage balance. Our blog today is focused on foreclosures and we will return with another blog on "How To Find A Good Short Sale."

Before we get into analyzing prices of foreclosed homes, we have have to understand a little about how a bank determines the price they will list the home.

Once a bank forecloses on a property, the bank now owns the property. The term the banks use is REO, short for Real Estate Owned. That term, in a way, is a misnomer since the bank really does not want to own real estate. Rather, they would like to sell the foreclosed home as quickly as possible and put the money they receive, from the sale, back to work in a new loan.

So, rather that sit on a foreclosed house and try to get top price or even market price, the bank will put a list price of 10% to !5% below the current market price. In order to determine that price, the bank will order a BPO or Broker Price Opinion and the house will then be discounted based on the condition of the house, sales activity in the neighborhood and a host of other variables.

Why is this important for you, the buyer to know? Because many buyers are quickly disappointed when they find a house for, say $150,000, and they expect to make an offer for $125,000 and think they are doing the bank a favor to take it off their hands.

Am I saying that REO's are not a good deal? Not at all! There are many good deals, some great deals and some notoriously terrible deals. So let's illustrate what we mean, taking the components of just two of the many variables. Let's look at price range and days on market as two significant variables that will effect the kind of good deal you can get.

Take a look at these two houses:

A B

Size: 1,225 Sq ft Size: 1,298 Sq Ft

3 Bedroom 2 Bath 3 Bedroom 2 Bath

List Price: $106,900. List Price: $105,000.

Sale Price:$109,000. Sale Price: $95,300.

Days on Market: 2 Days on Market: 38

Both of these houses are located in Riverview, FL. Both close in age, both had similar taxes. The only significant difference, without visiting the property and taking personal observation, is the days on the market. Once house "B" began to "sit" a while, the bank settled for less of a price. As a matter of fact, $13,700. less!

What significance does time on the market take? Apparently a lot. Each bank and house has a tipping point. But, generally a bank will drop the price between 30 and 40 days or will be more open to all offers.

We did a study for the month of September 2009 of foreclosures focusing on List Price versus Sale Price and here are some observation for you to digest:

• Total of all sold single family homes during period: 975
• Total of Foreclosed Homes: 228
• Number of houses sold at or higher than list price: 123
• Banks received on average 98.5% of the overall list price.

Did you catch that last item? Banks are getting their asking price.

So why is everyone clamoring for foreclosures if the banks are pretty much dictating the price? Because they are already pricing the homes at a bargain to begin with. Review a post by Florida Certified Residential Appraiser Jon Tipton on our site showing the actual numbers by listing classification of owner (traditional), Short Sale (3rd party approval) and REO. Here is what Jon reported in his blog. So you can see from the pricing per square foot, even at the banks asking price, they are priced the lowest.

So why wouldn't everybody just buy a foreclosed home? And that gets to the root of the blog. Supply and demand is why. There are not enough foreclosed properties to go to every buyer and as a result, the banks pretty much get their asking price.

So now that we have established that REO's are a great deal, can we still get a great bargain? YES!!

Take this next comparison:

A B

6 Bedroom 4 Bath 5 Bedroom 4 Bath

List Price: $309,700. List Price: $410,000.

Sale Price: $290,000. Sale Price: $395,000.

These two houses sold within a couple of months of each other. The house on the left, of course, is a foreclosure. The house on the right is an owner occupied home and these houses are on the same street. They both closed close to the same amount days on market.

So what does this tell us? Again, it is supply and demand. Where the previous examples were more influenced by first time home buyers, this last set of homes has a limited number of buyers. As a result, when the bank received and offer on an already depressed market price, the bank jumped on it. Likely there was some negotiation involved to arrive at the final price, but there is no question this buyer got a steal. Even if they would have paid full list price, they would have had a deal. But, their agent skillfully pulled another $20,000 off of the bank's list price.

So What Have We Learned?

• Foreclosures are a deal.
• Some deals are steals.
• There are some that are bad deals.
• Homes in the first time home buyer price range have competition, but are still great deals.

Be sure to make a Realtor® a part of your team. Some buyers take this complicated and risky process on their own shoulders. Buyers NEVER pay for an agents services. The agent is paid by the bank. What it will cost you, is not getting an expert to help you find your property. Make sure you have an agent that knows the foreclosure market.

Would you like a copy of this study of the foreclosure market for the month of September? Click this link, Free Tampa FL Foreclosure Report, and we will email you the complete list of foreclosed homes sold in September with addresses, list price and sale price.

Rick Frissell~ Florida's Beautiful Homes

813.340.6828 Cell