Current real estate markets nationwide have created countless opportunities for buyers looking to purchase real estate priced well under market value. Many buyers have turned to short sales, foreclosures and bank owned (REO) properties hoping to be able to purchase real estate for pennies on the dollar. The buzz in distressed real estate has been perpetuated by urban legends; someone’s brother’s, friend’s, uncle’s, co-worker’s dog who bought a home at 10 cents on the dollar. This buzz is further fueled by late night infomercials filled with testimonials of people who "bought a $500,000 home for $12" and then try to sell you the secret program that teaches you to do the same. This article is intended to give you the straight scoop and also tips that will help get you a good deal.
How Low Will They Go?
People have a major misunderstanding of what they expect to accomplish when trying to purchase distressed or bank owned property. I emphasize trying because those same people end up never buying anything.
So how low will the bank go on a short sale or REO? If you’re hoping for a number, you can stop reading. If you’re hoping to steal the property, you can stop reading. If you’re hoping to buy property for 50% of market value, you can stop reading. If you’re hoping to wait and buy the property for less by dealing directly with the bank, you can stop reading.
There are four things you need to understand: 1) The bank only accepts short sales when they believe it’s in their best interest! 2) Banks do not voluntarily accept losses. 3) Banks will always try to limit their losses. 4) Banks know the fair market value of the property.
These four are in no particular order. If they were, number four would probably be number one. I talk to people on a daily basis who want to make offers so low, I can only assume they think the bank has no idea what the property is worth. Don’t be so naive. The bank has a legal obligation to get the highest amount possible for any property. The bank can even be held liable for the difference if they are negligent in approving a sale that is too far under fair market value with no justification. Stories of someone picking up a property at 50% of market value are either urban legend or missing critical factors that played a part in the purchase.
You Can Get Good Deals In Distressed Real Estate
Yes you can. Just be realistic. If you think you can purchase real estate at a 50% discount, you’re not realistic. There isn’t one single situation, no matter how desperate, that would cause an owner to sell their home for 50% under market value when an experienced Realtor can sell that same house for 30% under market value in the same amount of time under the same conditions. Anyone who tells you they did is leaving out part of the story. However, it is very possible to buy distressed homes at a 25% discount. Anyone who tells you a 25% discount isn’t a good deal, doesn’t know real estate or investing in it and you’d be better off steering clear of the real estate advice they have to offer. As a matter of fact, a 25% discount on anything you buy, whether it be gasoline, groceries or a car, is a great deal.
I see so many people that won’t buy unless they can get it for no more than 60 cents on the dollar. They pass on property that’s 25% under market value. Big mistake, here’s why:
Let’s assume there are 10 properties with market values of $100,000 each. 9 of these homes can be purchased for $75,000 each (25% discount) and one at $50,000 (50% discount). This is a fair ratio for illustration purposes. In the real world, it could easily take you more than a year to wait it out for the 50% discount. It’s very possible that you never find something discounted that much.
Investor A buys the 9 homes for $75,000 each
Investor B buys the 1 home for $50,000
Assuming a 5% annual appreciation for each property, this is what each investors real estate portfolio would look like 5 years later:
Investor A’s Equity = $473,653 ($100,000 original FMV x 5% annual appreciation x 5years - $75,000 purchase price x 9 properties)
Investor B’s Equity = $77,628 ($100,000 original FMV x 5% annual appreciation x 5years - $50,000 purchase price x 1 property)
Investor B’s strategy to wait for the great deal cost him nearly $400,000. He made the mistake most amateur investors make; focusing on only one thing - discounted value. Investor A created wealth through leverage. Professional real estate investors know that leverage trumps discounted value every day of the year. Leverage is so powerful, had Investor A bought all 9 properties at full market value ($100,000), he still would have equity of $248,653 or triple Investor B’s investment with a 50% discount. In this market, you can buy real estate at a 25% discount all day long and maybe never find the 50% discount.
Top 10 Tips For Purchasing Short Sales and Bank Owned Property
1. Be realistic. Reread the tale of two investors above if you still don’t understand how being unrealistic can and will cost you dearly.
2. Get off the fence and get in the game. If you’re waiting for the market to drop, reread the tale of two investors above to remind you of how much waiting can cost. Learn more about timing real estate markets here: Secrets for Timing The Real Estate Market
3. Know the true market value of your target property.
4. When making an offer, be able to support the amount of the offer. Pulling a low ball number out of thin air isn’t going to work. If you don’t understand why, reread the four things you need to understand in bold type above.
5. In a short sale, the bank will only accept your offer if it’s a better alternative to foreclosure. This means that the bank will take the fair market value of the property in its current condition, subtract the costs of foreclosure and selling it as an REO, and the "fudge factor". The "fudge factor" covers the costs that will accrue if the bank has to take the property back at foreclosure and includes lost opportunity, risk of vandalism of the vacant property after foreclosure, declining market risks and time to sell as an REO. The "fudge factor" will be the only area the bank will be willing to negotiate. This is the supporting amount mentioned in tip #4.
6. In REOs, the bank can be more "motivated" during certain times of the year. They will generally be more likely to entertain low offers at the end of the month, quarter and year. The banks want to get real estate off their books and these calendar targets can create motivation. But remember, be realistic. Just because it’s nearing the end of the year, doesn’t mean the bank is going to jump at an offer that’s ridiculous.
7. Having access to REOs before they are listed can give you a big advantage. How do you get this information? Here’s one way: Idaho REO Bargains
8. Don’t get emotional or stuck on any property. Real estate investing should be run like a business. Keeping emotions out of it allows you to make rational decisions.
9. Understand and accept the risks involved with these types of properties. To get the good deals, you will have to accept risks involved with them.
10. Retain the help of an expert Realtor with experience in these types of properties to help you. Don’t think you can do it yourself. That mindset can cost you thousands. Besides, as the buyer, you don’t pay for their services.
Michael Hon
Broker - MBA, GRI
Certified Short Sales Specialist
Iron Eagle Realty
208 919 0458
Michael.Hon@IronEagleRE.com
