Each foreclosure sale is different and requires a lot of details to be handled when buying a foreclosed (REO) property. Depending on many factors such as location, sub-division, local market, supply & demand, condition, time of the year, multi-offer vs. single offer, etc the suggested offer price varies greatly. Consult with your real estate agent regarding purchasing an REO or a foreclosed property.

There are many differences when purchasing an REO (foreclosed) property. Though, not all of them should negatively impact your decision, but you need to be informed and be aware of the differences. 

In order to come up with a reasonable suggested offer value for foreclosed properties we need to understand differences between an REO foreclosed property and non-foreclosed properties and put some values on those differences.

Due to the size, I have gathered and explained these differences in a separate article.

For more information and detail explanation of each difference please visit http://www.texasfivestarrealty.com/Foreclosure_Things_You_Should_Know.asp  or clink on the picture below.

For those of you that would like to get an idea and interested in a “Rule of Thumb” formula, I have calculated the purchase price range as follow:

0.75 * ARV – RC =<     Purchase Price     =< 0.90 * ARV – 1.20 * RC

 Where;
ARV    = After Repaired Value

RC       = Repair Cost

 For detail information, reasoning and Mathematics behind this formula, please visit my page at:

http://www.TexasFiveStarRealty.com/How_Much_Should_I_Offer_for_REO_Properties.asp

Example: There is an REO property listed for $170,000 for last 8 days in the MLS. After viewing and inspection you find out this house needs some minor plumbing’s, painting interior, and carpeting replacement throughout the house. Due to the natures of the repairs, they cannot be done all at the same time. It is estimated to take about 4 weeks and cost about $10,000 to bring the house in a move-in ready condition comparable to the similar house in the same neighborhood which was recently sold for $206,000.

As a “rule of thumb”, utilizing our formulas we will have the following range for offer:

After Repaired Value (ARV)                           = $206,000
Repair Cost  (RC)                                           = $010,000                 
Adjusted Repair Cost = 1.2 * $10,000            = $012,000

 

Maximum Offer = 0.90 * ARV -1.20 *RC = 0.90 * $206,000 - $12,000 = $173,400
Minimum Offer = 0.75 * ARV - RC = 0.75 * $206,000 - $10,000 = $144,500

$144,400 =< Suggested Offer Price =< $173,400

For more information on Foreclosure Process and purchasing foreclosed (REO) property, please visit http://www.TexasFiveStarRealty.com/Foreclosure_Process.asp

For a current list of foreclosed (REO) properties in North Texas, please visit http://www.TexasFiveStarRealty.com/List_of_Foreclosures.asp

Definition: REO or Foreclosed Properties:

First, let’s define what exactly an REO or a foreclosed property is:
When the property is not sold in the auction at the court step, as described in the article foreclosure Process, it goes back to the lender, and if that lender is a mortgage company/bank it becomes known as REO (Real Estate Owned - by the bank) property.  Based on some historical data and observations, only about 3%-5% of all scheduled auctioned properties are sold to the audiences at the court step of the Counties (e.g., in Collin County of Texas). This means, more than 95% of those properties go back to their respective lenders or banks.

Please note that this article suggests offering prices for an REO or foreclosed property (after the bank repossesses the property). For foreclosure buying process at the court steps in Texas, please visit http://www.TexasFiveStarRealty.com/Foreclosure_Conduct_of_Sale_in_Texas.asp

 

For the most up-to-date list of REOs foreclosure in North Texas please visit http://www.texasfivestarrealty.com/List_of_Foreclosures.asp

Second, let’s identify differences when purchasing an REO or a foreclosed property:

In most parts, purchasing a foreclosed (REO) property and the process of offering, counter-offering and negotiations will be somehow different than regular (non-foreclosed) sales. There are many lender’s specific rules and requirements that require purchaser to follow.

Disclaimer: Please note that following is a summary list of differences that I have collected during my years of experiences in real estate and I believe the REO purchasers must be aware of them. This list should be used as a guideline and for informational purposes only and may not be complete.

This is a summary list of differences without explanation here due to the size. For more information and detail explanation of each item please visit http://www.texasfivestarrealty.com/Foreclosure_Things_You_Should_Know.asp

Third, let’s put some values for these differences when purchasing an REO or a foreclosed property:

Group 1: No Hard Dollar Value, but could have negative psychological impact on a buyer. Depending on a buyer’s attitude, expectations and tolerance, these could be problems or no problems at all.

1.    Banks may require Pre-approval or pre-qualification letter from a specific lender,

 

2.    Banks may require To use their preferred Title company,

3.    Banks may require To use their own forms and addendums in addition to or replacement of the standard forms.

 

4.    No Seller Disclosure Notice is required.

 

5.    Property is usually sold “AS IS” Condition,

 

6.    No Warranty, If Repairs done by Bank:

7.    Bank usually takes longer time than regular sale to respond.

 

8.    To submit offers online through their websites,

 

9.    No Option Period and No Unrestricted Rights,

 

10.  Utilities may not be turned on.

 

11.  Inspection Periods and Limitations

 

12.  Non-Negotiable exact pre-defined amount for earnest money.

 

13.  Owner Occupancy Certificate may be required.

 

14.  Special Warranty Deed Instead of General Warranty Deed

15.  Waivers of Buyers Rights

 

16.  Seller's Sole Discretion

17.  Non-Timely Negotiations Hear Back

18.  Non-Guaranty Acceptance of Contract or Counter-Offer

 

Group 2: The following could have Some Hard Dollar Values

19.  Property Tax Proration. 

 

20.  Prior Year’s Exemptions. 

 

21.  Additional expenses to Buyer due to fixing and repairing.

22.  Multi-Offer Situation,

 

23.  Limited Seller Closing Cost Contributions

 

24.  Late Charges and Choosing the Realistic Closing Date

 

Group 3: Loss of Time and Money after Closing

25.  Loss of Time and Money During the time to make the house move-in ready

This has a major cost involved if and when the foreclosed house requires repairs and maintenance. The more repairs, the more cost required. Let’s say the house needs some plumbing work, carpet replacement and paint inside the house. Let’s say you got estimates totaling $7000 and 1 month time needed for all these repairs.

This means extra cost, as explained below, for the 1 month that you are repairing and waiting the house to be ready, paying mortgage, etc., but cannot use the use,

25.1.      You are paying Mortgage payment without using the property. 1 month mortgage payment is approximately about 1% of the purchase price. Please see for more detail and accurate information about mortgage payment vs. value of the house.

25.2.      You pay 1 month utility bills (Electricity, water, gas, etc), but not using the house. This could cost a couple of hundred dollars to thousand dollars depending on the area, utility companies, and season.

25.3.      Cleaning and make the house ready to move-in

Group 4: Loss of Money due to Holing (for investors only)

Investors intending to buy the foreclosed property, fix it and sell it for profit (flipping) encounter additional charges after making the house move-in ready as follow:

26.  They have to market it, listed with brokers to sell the property. Though the cost of listing and commissions is not fixed and is different from area by area and broker to broker, but let’s say for example this cost is 3%-6% of the purchase price.

27.  Up to a couple of months ago in our North Texas area, It used to take 3-4 months to sell the house. This is an additional 2%-4% of the purchase price for holding the property until it sells. Note, this 3-4 months holing time is different from area to area and from a season to another.

28.  Paying utilities (electricity, water, gas, etc.) for 3-4 months while holding the property. This could be a couple of thousand dollars. 1%-3%

29.  When Investor sells the property, (s)he has to pay another closing cost (Title, survey, etc…). The closing cost for seller is estimated about 1%-2% of the sell price.

The additional cost for investors due to holding the property to sell is 7%-15%. We use 10% in our case study.

How much should we Offer?

1.    First we need to have a good and reliable CMA (Comparative Market Analysis) of the neighborhood and the sub-division.

2.    Find the value of the property that is move-in ready and it is as much as possible to our subject property.

3.    Determine the ARV (After Repaired Value) of the foreclosed property.

4.    Determine the Repairs Cost and time (RC).

For individual owner occupant buyer

5.    For individual owner occupant buyer, adjust the estimate of Repair Cost (RC) by a factor to take care of your time finding reliable contractors, negotiating and monitoring their work. This factor depends on your personal knowledge and experience with the repairs needed, e.g, 1.20 – to 1.50

6.    Use a percentage of ARV for all inconvenience and additional cost incurred listed in items 1-24 above. We use 10% as a typical number for homeowner occupant.

7.    The Maximum Offer price would be as follow:

After Repaired Value = Purchase Price + Adjusted Repair Cost + Expectation of Good Deal

Expectation of Good Deal = a percentage of ARV for all inconvenience and additional cost incurred listed in items 1-24 above = 10% * ARV

è After Repaired Value =>  Purchase Price + 1.20 *Repair Cost + 10% After Repaired Value

è Purchase Price =< 0.90 * After Repaired Value - 1.20 *Repair Cost

 

PP =< 0.90 * ARV – 1.20 * RC

For Investor Buyers

8.    For investor buyers, they have usually personal knowledge and experience with the repairs needed and they know and work with their group of contractors. We usually don’t adjust the repair cost.

9.    Investors do flipping as a business and expecting a profit. Their profit margin vary from 10%-30% depending on the condition location, etc. of the property.

10.  There are some rules and restriction on investors flipping the house from FHA that investors cannot gain more than 20% of what it cost them to purchase the property and bring them in a move-in ready to sell (including purchase price, repair cost, closing cost, commissions, etc.). We use this guideline to come up with minimum offer price for an REO property.

11.  The Minimum Offer price would be as follow:

After Repaired Value = Purchase Price + Repair Cost + Profit

Cost of Purchase = Purchase Price + Repair Cost + Buyer’s Closing Cost

Buyer’s Closing Cost = estimated about 2% of the Purchase Price

è  Cost of Purchase = 1.02 * Purchase Price + Repair Cost

Sale Proceed = Sale Price - Cost of Sale

Cost of Sale = Two Commissions + Seller’s Closing Cost

Two Commissions = estimated 6% of the Sale Price, 

Seller’s Closing Cost = estimated about 1.5% of the Sale Price

è  Sale Proceed = Sale Price – 7.5% Sale Price = 92.5% Sale Price = 92.5% ARV

è  Sale Proceed = 92.5% ARV (After Repaired Value)

Profit = Sale Proceed - Cost of Purchase

Profit should be <= 20% of Cost of Purchase (per FHA rules)

Sale Proceed - Cost of Purchase <= 0.20 * Cost of Purchase

è Sale Proceed <= 1.20 * Cost of Purchase

è Sale Proceed <= 1.20 * (1.02 * Purchase Price + Repair Cost)

è (1/1.20) Sale Proceed <= 1.02 * Purchase Price + Repair Cost

è (1/1.20 *1.02) * 0.925 * After Repaired Value <= Purchase Price + Repair Cost * 1/1.02

è 0.7557 * After Repaired Value <= Purchase Price + Repair Cost * 1/1.02

è Purchase Price => 0.7557 * After Repaired Value - 0.98 * Repair Cost

For simplicity we are using the formula as:

      Purchase Price => 0.75 * After Repaired Value - Repair Cost

 

                                  PP >= 0.75 * ARV - RC

Summary of Calculations:

0.75 * ARV – RC =<     Purchase Price     =< 0.90 * ARV – 1.20 * RC

Example: There is an REO property listed for $170,000 for last 8 days in the MLS. After viewing and inspection you find out this house needs some minor plumbing’s, painting interior, and carpeting replacement throughout the house. Due to the natures of the repairs, they cannot be done all at the same time. It is estimated to take about 4 weeks and cost about $10,000 to bring the house in a move-in ready condition comparable to the similar house in the same neighborhood which was recently sold for $206,000.

How much should we offer?

Each foreclosure sale is different and requires a lot of details to be handled when buying a foreclosed (REO) property. Depending on many factors such as location, neighborhood, local market, supply & demand, condition, time of the year, multi-offer vs. single offer, etc the suggested offer price varies greatly. Consult with your real estate agent regarding purchasing an REO or a foreclosed property.

As a “rule of thumb”, utilizing our formulas we will have the following range for offer:

After Repaired Value (ARV)                           = $206,000
Repair Cost                                                     = $010,000                 
Adjusted Repair Cost = 1.2 * $10,000            = $012,000

 

Maximum Offer = 0.90 * ARV -1.20 *RC = 0.90 * $206,000 - $12,000 = $173,400
Minimum Offer = 0.75 * ARV - RC = 0.75 * $206,000 - $10,000 = $144,500

$144,400 =< Suggested Offer Price =< $173,400

 CONCLUSIONS:

There is no absolute or fixed suggested offer price that can be hold true for all foreclosure transactions. Each foreclosure sale is different and requires a lot of details to be handled when buying a foreclosed (REO) property. One thing is for sure, not all foreclosed properties are “Good Deals” nor are all “Bad Deals”.

Depending on many factors such as those explained earlier, purchasing an REO property may or may not turn out to be a “Good Deal”.

Also, there are many other regular sale properties in the market that could be "Better Deal" than REO or foreclosed deals and should be considered in your search of "Good Deals".

There are many differences when purchasing an REO (foreclosed) property. Though, not all of them should negatively impact your decision, but you need to be informed and be aware of the differences. 

It will require a patient and informed Buyer to have an REO transaction close successfully.

·        If you expect your home to be completely nice, clean, move-in ready, a foreclosure property may not be for you.

 

·        If you expect to move-in quickly or get quick responses (e.g., within one or two days), a foreclosure property may not be for you.

 

·        If you expect the Seller to make major or cosmetic repairs before you move-in, a foreclosure property may not be for you.

 

·        If you have time to wait a longer time and don’t mind to repair/fix problems yourself or deal with contractors to repair/fix problems for you to bring the foreclosed home to a move-in ready house and you have reasonable expectation such as 10%-15% below the market of comparable house, then a foreclosure property may be for you.

 

Each foreclosure sale is different and requires a lot of details to be handled when buying a foreclosed (REO) property. Consult with your real estate agent and/or your real estate attorney for questions regarding purchasing an REO or a foreclosed property.

As a rule of thumb, suggested offering price falls in the following range:

0.75 * ARV – RC =<     Purchase Price     =< 0.90 * ARV – 1.20 * RC

For more information on Foreclosure Process and purchasing foreclosed (REO) property, please visit http://www.TexasFiveStarRealty.com/Foreclosure_Process.asp

For a current list of foreclosed (REO) properties in North Texas, please visit http://www.TexasFiveStarRealty.com/List_of_Foreclosures.asp

Contact us about your Real Estate Questions