Over seventy percent of the people that visit our Houston real estate website find us while searching for foreclosures. And it makes sense: The prospect of finding a great deal at a discount intrigues everyone. But I thought it would be helpful to a prospective buyer embarking on the roller coaster ride that is purchasing a bank foreclosure to get an insider’s preview of what it’s like in the “trenches” these days. That way, you can set the right expectations and anticipate some of the curveballs that might come your way. This picture I’m about to paint for you may dispel some of the media propagated myths about the foreclosure market that often make home buyers lives miserable.
The bank foreclosure market is a Seller’s market
I know what you’ve heard. “We’re in a great free-for-all buyers market with banks just giving homes away at ridiculous prices”. Let’s get the most important myth out of the way right away. The current state of the bank foreclosure market is a Seller’s market. That means there are more buyers (demand) than properties (supply). The ultimate evidence of this is bidding wars. Since the year started I am yet to find a foreclosure property that didn’t have multiple offers on it. Bidding wars and multiple offers means most properties will sell at or (most probably) above asking prices. The moment there’s buyers competing for a property all the negotiating leverage goes out the door and it becomes a matter of “who will get the property” rather than “at what price”. Prospective buyers have to be prepared that it may take 4-5 offers before they get one under contract. In other words, if you want to ride Space Mountain, there will be lines.
Carpet and Paint goes without saying
There’s always exceptions to every rule of course, but if you’re going to buy a bank foreclosure be prepared for at least some cosmetic work. Banks aren’t stupid – they know the fair market value of properties as they have seen what comparable properties sold for in that neighborhood. More often than not, the reason why they agree to discount the price of the property is to account for any work that they have no interest in doing themselves. So getting a home below market and cosmetic repairs go hand in hand. There are cases when banks handle those repairs on the front end by repainting the property, changing carpets and installing new appliances. But it those cases, the price they end up asking for is pretty close to the retail value of the home. If you are planning on purchasing a foreclosure property in Houston be prepared for repairs in the neighborhood of $5,000 – and under most loan programs these repairs cannot be rolled into the loan so the Buyer has to make prior arrangements to have that money saved or some other alternative.
It’s not what you start with, it’s where you end up
When you’re caught up in a competitive bid, it’s easy to throw caution to the wind and just make sure that you beat the other guy. But in the end that’s not in your best interest. Think about this scenario: There’s a bank foreclosure selling for $100,000 and sales comparables show a fair market value of $130,000. The home will need about $10,000 in repairs to be brought to top condition. You make an offer only to discover that there’s another Buyer that wants to beat you to that $20,000 in built in equity. Inevitably your nostrils flare up and you make it your life’s mission to deny this guy the property and bid $110,000 thinking you still have room. But the purchase price is just the beginning. By the time you are done with the repairs you end up with a $120,000 property worth $130,000 and a happy Home Depot. Hardly something life-changing. When deciding on an offer price, take into consideration where you will end up by the time everything is done not just the acquisition price.
Banks take their sweet time
If there’s a principle the understanding of which will save you immense amounts of aggravation is that banks operate slowly. Generally, it takes 48-72 hours to get an answer from the Bank when you submit an offer or negotiate the price. This is in part because the bank’s asset manager that makes decisions on their properties is probably handling hundreds of properties a day so it’s just a matter of them getting to the one you’re trying to buy. Even after an agreement has been reached, the 48-72 hour turnaround times apply to getting the contract signed by the bank. Once the contract is in place, then the deal moves faster as it’s up to your mortgage company not the bank.
Does it make sense to purchase a bank foreclosure in Houston? It depends: On the deal, on the Buyer and their situation. But one thing’s for sure: if you are planning to undertake the journey, the tips above will have you better prepared.