More About Repos: Avoid Rookie Mistakes

Sign Of The Times - Foreclosure
Image by respres via Flickr

What’s the main attraction in a repo [REO=real estate owned, foreclosure]? Why price, of course. PRICE, PRICE, PRICE. Typically, repos can be priced as much as 30% below the market value of similar homes.

What’s the number ONE rookie mistake in buying a repo? Lowball offers. A lowball offer immediately identifies a buyer who has no idea about foreclosures. Buyers are already “stealing” a property in buying a foreclosure at the list price. Why do so many think they can offer 30% to 50% LESS than what the bank is asking? These very buyers are then “shocked,” “stunned” and out of the game when the word comes back that the property turns out to have 5, 10, 20 or even more offers.  If that property was the dream home, then it will be “the one that got away” because buyers had not done their homework or,possibly, were working with a rookie agent.

Here’s how banks come up with their prices for properties foreclosed upon and then offered for sale. Before foreclosure, the bank typically orders a drive-by BPO[broker’s price opinion] in which an experienced real estate agent takes pictures of the property, which is usually still occupied, from the street and then prepares a comprehensive analysis of the property’s current worth. The agent takes three active listings and three recent sold properties of approximately the same age, square footage, style and location to come up with a potential market price. During and after the foreclosure process, the bank orders up to seven BPOs at the varying stages, reflecting a declining market and, eventually, a vacant property. After the property is vacated and cleaned up, the bank also orders interior BPOs.

What this all means is this: the bank has a very good idea of the value of the property. The list price of a foreclosed home in then put at some point BELOW the normal market value. After all, as mentioned in a previous post, the buyer is not getting any disclosures. The bank will not do any repairs. Often, the bank will not do a termite clearance. The bank provides no home warranty. The buyer cannot talk to the bank to negotiate any little part of the transaction. So, the buyer gets a great deal on price.

If you want to be a successful repo buyer, make reasonable offers. 30% below an already 20%-below-market price is not reasonable.

Here’s another rookie mistake. Some buyers habitually make offers with the idea that after a home inspection, they will renegotiate the price or demand that repairs be made. If this is your strategy to get a repo even cheaper, quess what? It won’t work.  Banks offer their properties AS-IS. ALL banks offer properties AS-IS. If the property has no toilets or the walls are punched in, that’s how you will get it. You cannot do a home inspection and “discover” no toilets and then negotiate with the bank.The bank has already factored no toilets into the list price.

Here’s why this strategy will not work. First, the bank has already sent out contractors, agents, locksmiths, handy people, cleaners  to inspect the property and report back. Repos may be damaged, but they are always clean of debris. All traces of the previous occupants’ detritus have been removed. The repo will be clean, swept and neat, though faucets, lighting fixtures, A/C  compressors and the like may be missing or damaged. The locks will work and the property will be secure.  Second, except under very extraordinary circumstances nothing your home inspector can discover will move the bank to repair anything. Unless something has happened since the property was put on the market–a hurricane, tornado, flood, etc–that has substantially altered the condition of the home, the bank will simply move on to the next buyer or put the home back on the market.

The last rookie mistake was already mentioned in a previous post. Don’t figure you can make your offer and show proof  you can do it later. Make sure you have your ducks in a row BEFORE making that offer to the bank. You MUST have a pre-approval from a reputable lender to accompany your offer. In most cases, you cannot get it later.  Even if you are paying cash and banks, like everyone else, love cash, you still must show PROOF OF FUNDS. That can be a bank statement, a letter from your stock broker or whatever. Most repo sales agents operate on volume and have a fairly bureaucratized sales procedure demanding all parts of the offer, including proof the buyer is viable, be done at the time of the offer. Even most standard sales require this today. Sometimes, banks also require pre-qualification with a particular loan rep at a particular bank. A sucessful repo buyer must provide that pre-qual before making the offer.

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One thought on “More About Repos: Avoid Rookie Mistakes

  1. Pingback: Posts about Real Estate Agent as of May 1, 2009

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