Foreclosure prices seem high

20 Replies

Looking for a first FLIP opportunity.  I have noticed that foreclosure properties in the Maryland area seem very high for being a foreclosure.  Why are houses that require work/more risk priced at or above market value?  Any suggestions on what I can read to get tips on finding my first rehab effort?

Here is a recent thread on the REO pricing issues, and the OP isn't too far from you either.

I'm assuming that what you're calling a foreclosure is a REO property that's being unloaded by the foreclosing lender. If that's the case the lender is likely trying to get as much out of the property as they can to recover some of their losses. I will tell you ahead of time that I've not purchased a REO yet but the strategy I would follow would be to go ahead and put your bid in for whatever works in regards to your numbers on the property. If it's a fairly new listing the bank will likely reject it. Watch the property listing and eventually they bank will drop the price. Every time they do, go back with your bid (maybe even more frequently than that). Eventually the bank will either get a buyer at their price or will settle for yours. I know it's a long process but when you're dealing with a REO that's just how it goes. Best of luck!

@Matt Devincenzo   thanks for referring me to the other thread - I am not allow, I thought I was doing something wrong, but I think the banks are getting smarter and then competition tougher.  Think I entered this business too late.  But, I plan on adapting and seeing what else I can do instead.  Was thinking maybe I need to look at a buy and hold strategy and then I can possibly deal with a larger price.

@Jim Viens yes I was referring to an REO - still new at this. I lost a house last week that I bid on that had these numbers: $235K asking price, comps were around $300K fully decked out in the same neighborhood. I estimated about $40K rehab needed to match that. I put a bid in at $215 and I knew that was high based on the 70%*ARV-rehab=$170. I'm not a realtor so closing costs get you as well as other holding costs, etc... I still overbid and lost since I want to get into a rehab for the experience. I think the 70% rule most original rehabbers follow may need to move up to a 80-85% rule. That is slim profits and you better do excellent estimates of rehabs or you will loose for sure.

@Edward A.  

I have found since sat year that banks are overpricing the houses and than slowly dropping the prices. The key is just to wait and see what happens. While short sales are becoming much fewer we have also had a lot of luck with those although the pickings have been slimmer. We are buy and hold, but a lot of people have had luck through wholesalers and "driving for dollars". We have had a lot of luck with find a good realtor. She has referred us to properties that are off the market or giving us advice on low balling. 

Wow. That is high. Like I said, I've not bought a REO yet (although I have looked at a couple). That being said, if the REO market is that inflated you'll likely need to go after off-market deals. I'm currently in the middle of a direct-mail campaign targeting both owner-occupied and absentee owners in my area. I've gotten a few calls (about 4 now) that haven't panned out but I've only just started the campaign. It's much easier to negotiate the price you need with a homeowner that just wants out from under the house than it is a big bank that wants as much as they can get. I'd also suggest doing some "driving for dollars" in your area to see what beat-up, run-down properties you can find and contact the owner to see if they'd be willing to sell. Just remember...if a strategy isn't working for you, change up. Cycle through until you find something that will. Hang in there and keep at it! :)

Thanks Jim - great advice

@Elizabeth C. I agree, I found a great realtor who works hard, but she says she hasn't done much in REO since there were more on the market a few years back. One thing I worry about is that she is getting tired of me asking about different properties so I am starting to use the tools to do my own research. I need to try "driving for dollars" idea, but I bet a lot of them are bank owned and just sitting. I know of two in my neighborhood that several of us neighbors have asked about and they will not work with anyone - they are holding and keeping house maintained.

@Jim Viens    how many letters did you send out to get 4 calls are they yellow letters and just shot gunned or are they targeted... ?  Letter campaigns need to have commitments that run into years.. and like anything in this bizz it is all about consistancy and hopefully one does not run out of money sending out mailers before they make a deal.. Not much different then paying for a guru class on your credit card. both have about the same success rate frankly

I think it's important to know why the banks are "over pricing". It's not necessarily because they are unknowledgeable about market prices (although they are at times), legislation was passed to make banks market properties in a way to protect the foreclosed consumer against a huge unnecessary deficiency judgement. Therefore they must start high and eventually come down over a period of time.

In addition to investing, I am also a REO real estate agent for several large banks. I don't always understand their rhyme or reason for doing things, but understanding the legislature binding them lets me know to be patient and keep that lead as a warm lead. Check back on it every so often. It will come down if it is not priced right for the market.

@Edward A.  

Just a word of caution to you Edward based on your thought of narrowing down your margin to 15-20%.......make sure your rehab estimates are spot on and make sure you have been meticulous as possible with your estimated holding costs and closing costs.  Any omission or under estimate, not to mention the possibility of something "unseen" in the rehab process will eat up that margin quickly.  And there are ALWAYS things that go wrong/unseen in a rehab (thus build in contingency $ to your rehab est.)

Stick to your own rules of investing based on your risk tolerance.  Don't get caught up in bidding wars.  

Good luck, be patient.  

@Heather C.  

Are you responsible for the BPO Heather?  Correct me if I'm wrong but doesn't this play a large part in determining the asking price for the bank?  I mean I understand if the BPO comes in at $40k and the bank is looking to recoup $80k, then there has to be a meeting somewhere in the middle, I would assume?

Also, let me know if maybe I should start a thread on it's own regarding this topic.  I don't want to hijack Edwards thread. 

A few observations. First, many people (and this is not directed at anyone in particular) aren't paying attention to the market cycle. Regarding "Why are houses that require work/more risk priced at or above market value?" I'd contend that the sellers are pricing these properties consistent with the market, and the market really doesn't care about the needs or expectations of an individual buyer. An simple exercise is to look at the last 100 (or 50 or whatever) closings of Bank(*) owned property and use simple metrics to determine if they are close to market value. Hopefully you can have your realtor help. Put all these in a spreadsheet or MLS report: Discount/premium to list price (as percentage), date listed, DOM, price reductions, etc. Then decide if your premise (no more REO discounts) is correct.

Second, you display the classic signs of a motivated buyer. That's a red flag. These are your words: "Think I entered this business too late." , "...maybe I need to look at a buy and hold strategy and then I can possibly deal with a larger price." , "...I think the 70% rule most original rehabbers follow may need to move up to a 80-85% rule." , "I still overbid and lost since I want to get into a rehab for the experience." By acquiring a bad deal, you will get a bad experience. The market is like a river. I'd suggest not swimming against the current. Either find a deal source that is not the MLS (I call it the Maximum Listing Service since that is what it is) or wait on the shores of the river and save your energy/capital. Swim against the strong current of the current market cycle and you may drown. You may be able to find an eddy or pool to play in (off-market deals), but attempt to cross the river at your own peril.

(*) Bank includes any financial institution, and GSE property if you have the statistics

The BPO does play a part; but unfortunately its at the end. This typically happens when the BPO is much lower than the mortgage amount foreclosed out. Example: I have a current property with an ARV of $179k, the mortgage foreclosed on was about $165k It has been trashed, wiring ripped from the wall, etc. My BPO was $95k based on the condition, market, etc. However the bank has just lowered the price from $150k to $129k. I've even had offers at $120k (owner occupant) but they won't take it. Its been sitting vacant for over a year and my listing since Feb.

Its frustrating to say the least.

@Heather C.  

Yes that must be frustrating for you. I get frustrated on a weekly basis dealing with banks. True example - I offered $175k on a REO back in Oct 2013. Bank didn't take it. I checked back on the offer every couple weeks for about 2 months and then gave up. I came across the same listing in April 2014 (6 mths later) and it had been sold for....guess what price??? If you said $175k you would be absolutely correct. I was pretty irritated. This is not an isolated example either. Banks can sit on properties for a very long time, they have deeper pockets than I do.

Thanks for weighing in.

Edward ,  I just got back from camping in Woodbine , at Rambling Pines . If you are looking in your area , its nice , but far from jobs . I saw a lot of houses for sale , vacant while running the back roads . 

Are there any local wholesalers in your area that may have possible deals? If not, direct mail marketing may be your best bet. However, don't get antsy if the numbers don't work. Also, don't forget to try places such as: county tax auctions, probates, and absentee owners, as others have noted.

Originally posted by @Matthew Paul:

Edward ,  I just got back from camping in Woodbine , at Rambling Pines . If you are looking in your area , its nice , but far from jobs . I saw a lot of houses for sale , vacant while running the back roads . 

 Thanks Matthew - right near there - I will check.  Many commute from this area to Baltimore or Washington for more home for the dollar.  Appreciate the lead.

@David Ward   You and others have mentioned many good ideas.  I think I will try to develop a good business plan and then be patient - that is basically what I am hearing.

I am glad now that I stuck to our plans on the first house we bid on, seems like my gut feel of developing a solid plan and being more patient will be best.  

@Chris Martin   You maybe right that I am motivated - its though more of an excitement since I decided enough reading books and studying numbers - time to jump in and do my first transaction.  So, I am motivated, but not too anxious that I will over pay - at least I hope not.

hey man, I am in the same market as you. But undersatand markets.differ in different areas.  I live in Sykesville so I feel your pain but you may have to look in other areas. I am currently looking into Westminster being that southern Carroll is over priced for REOs but only because people want to move here and they are willing to pay the banks. It may be worth expanding your "farm" area

Sounds like a good idea. @Edward A.   And always remember you make your money when you buy, so if you don't buy right then you don't make money; or even worse - end up with a net loss. Good luck! 

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