Tips for Buying Foreclosures

Every home buyer wants to score big and buy that bank foreclosed home, many of which are under-priced. However, when banks price these properties under the comparable sales, multiple offers often occur. This means you could be up against a lot of competition for that foreclosed property.

It's not unusual for these properties to receive several offers. Sometimes the banks will throw out all but two offers and then ask the selected buyers to resubmit what is called "highest and final" offer. It is important to make your offer shine above all the rest. Here are a few tips to help you select the right price and terms.

1) Get the Property History

Ask your agent to find out the bank's purchase price on the Trustee's Deed or Sheriff's Deed. Generally, it is noted on the document itself, which you can get from the tax rolls or a title company. Compare that price to the price the bank is asking.

Look at the amount of loans that were once secured to the property. Somewhere between the original mortgage balance(s) and the foreclosure sale price is the amount the bank will accept, if the home is under-priced.

2) Determine Comparable Sales

In many case, the list price has little bearing on the value of the home. The price you want to focus on is the market value; this is the price that carries the most weight. If you are up agianst competing offers, other buyers will offer more than list price.

• Look at the last three months of comparable sales,  a mini CMA, for that neighborhood to determine how much this REO is worth.Focus on using only the homes that closely resemble the REO regarding square footage, number of bedrooms, baths, amenities and conditions.
• Look at the pending sales. Ask your agent to call the listing agents of those pending sales to try to find out the accepted price on those listings.  Keep in mind though that some will not be willing to share this information.
• Look at active listings. Those are most likely the listings other buyers will use to formulate a price because they are the only ones that those buyers actually tour.

3) Analyze Listing Agent's REO Solds

Most REO agents work for one or two banks. Some listing agents are exclusive lisitng agents for REOs, and they do not list any other type of property. Since REO agnets deal in volume, they typically apply the same pricing principles to all of their lisitngs.

• Ask your agent to look up the lisitng agent on the MLS.
• Run a search using that lisitng agent's name to find the last three to six months of that agent's listings.
• Pull the history of those listings to determine the list-price to sales-price ratio. If most of those listings are selling, for example 5% over the list price, you may want to offer 6% over the list price.

4) Ask About Number of Offers

If there are no offers on the REO home, you can probably offer less than list price and get your offer accepted. However, if there are more than two offers, you will most likely need to offer above the asking price.

If there are several offers, bear in mind that some of those offers might be all cash. Banks like all cash offers. If you are obtaining financing, then you may need to increase the price on your offer to be considered.

5) Submit Preapproval Letter

It goes without saying that you don't want a prequal letter. You want a preapproval letter. Get preapproved from your choice of lender in advance.

Moreover, get preapproved by the lender who owns the property. Do not expect to use this lender for your loan, but submit the preapproval letter from this lender, along with the letter from your own lender. Banks don't trust other lender preapproval but trust their own department.

6) Don't ask for Repairs or Inspections

Sometimes banks will pay for repairs, but typically will not agree to do so at the offer stage. If there are problems found during a home inspection, renegotiate after your offer has been accepted.

7) Shorten the Inspection Period

If the other buyers ask for 17 days, for example, to conduct inspections, and you ask for 10, you will be deemed the more serrious buyer.

8) Offer to Split Fees

Some banks will not pay transfer fees, for example: If the buyer offers to split those fees, the bank will feel more amenable to accepting the offer. Same thing for escrow fees.

Many banks negotiate discount fees for title insurance. If the bank will pay for the owner's policy, the ALTA policy might cost a bit more. But it's still a good idea to let the bank choose title if you want your offer accepted.

Consider the Appraisal Consequences

If you offer over list price, bear in mind that the appraisal will need to substantiate that price. If you find yourself dealing with a low appraisal, you have options, so don't despair. Remember, the bank will most likely run into this same problem with the next buyer who obtains financing.