How to Buy Foreclosed Properties

Up till now, I’ve been a flipper of high-end properties.  That may change given the upheavals in our economy and it’s possible I may move into the foreclosure market.  These properties are also called “bank owned property” or “REO” for “real estate owned”.  You’ve probably been hearing a lot about “short sales” too, but that’s something different and I’ll get into that in a separate posting.

In the interest of full disclosure, I have not yet bought a foreclosed property but it’s not for lack of trying.  I’ve been shut out of six offers in recent months because I didn’t know the nuances of the game.  Here’s what I’ve since learned:

 

Banks are dispassionate

When buying from an owner, there is lots of emotion that guides the strategy of the offer and the subsequent negotiations.  When buying from a bank, the property is just a number on a very long list and the bank has no emotional ties to the house whatsoever.  Your offer is reviewed by a bank employee who is following strict policies and procedures.  Your offer either falls within their acceptable parameters and the deal kicks into gear, or it doesn’t and your offer is ignored.  There’s no negotiation so any efforts to try to outsmart the bank are wasted.

 

Understand how the price was determined

Banks are overwhelmed with properties and it’s getting worse by the day.  They do not have the wherewithal to inspect each property or the money to spend $400 or more for a proper appraisal on each and every one.  Instead, they often outsource to a real estate broker for what’s called a “BPO” – a Broker’s Pricing Opinion.  This broker may or may not visit the property – they may establish the price merely by doing some quick desk research and going by gut feel.  (As a former appraiser, I can tell you they also called me for an opinion.)  Since the property is one in a very large portfolio, nobody cares enough to re-think or second-guess the BPO.  I know from having worked with real estate agents and brokers, they will do everything they can to prop up the prices so they will generally come in high – higher than a certified appraiser would.  Even though the banks know this, they’d still rather start on the high side than leave money on the table, so the high estimate is accepted.

 

Know when the price starts to move downward

I made a lowball offer on a foreclosed house while it was within 30 days on market and my offer was ignored.  About 90 days later, it sold for much less than my offer.  What happened?  I was aggressive too soon.  When a foreclosed house is first listed, the bank will be the least flexible on the price.  Once the listing hits 30 to 60 days on market, the bank may start accepting offers that are within 10-15% of the asking price.  At 90 days, they may lower the price and accept offers within a wider margin.  So pay attention to how many days the house has been listed by watching the “Days On Market” or “DOM” on the MLS listing.  And be sure to check the listing price daily – if it drops, it’s time to make your move.

 

Know your market to spot the bargains

Frequent readers of JetSetRnv8r know that my Golden Rule is to buy where you know – know the prices, know the buyers, know the trends, etc.  If you’re an expert on the area, you’ll know if the price on a new listing is high, reasonable or low.  In their rush to get the house listed, the bank may have accepted a BPO which is too low and that should set-off alarm bells in your head.

 

If at first you don’t succeed, try, try again

If the bank doesn’t respond to your first offer within a week at most, don’t wait, they are not going to respond.  Like I said earlier, they do not negotiate so no response is a clear “no thanks”.  Raise your offer a few points and repeat every four to five days until you have a deal.

 

Look for more postings to follow as I wade deeper into the foreclosure pool.  And I invite my readers to contribute their experiences in this burgeoning new market.

 
 

 

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What Does the Wall Street Bail-out Mean For You*?

* By “you”, of course, I mean “me” – unless you’re also a Beverly Hills real estate investor and flip-artist.

 

October 3 2008   Excuse me for not posting for a couple weeks, but I’ve been glued to every and any news source I can find to follow the meltdown of our financial system – and staving off my own emotional meltdown in the process.  Regardless of your politics, there’s plenty of blame to be shared across both sides of the aisle and this has been a long-time coming.  Like many of us, I’ve been hearing dire warnings from friends on Wall Street for over a year and dismissed them as kill-joy doomsayers like the crazy guy on the street-corner with the “The End Is Nigh” sign.  Let’s just hope he’s not right, too.

 

The silver lining to this gloomy black thunderhead of a cloud is that this could usher in a whole new era of better government, better oversight, stronger regulation and a newer, stronger, more vibrant and sound economy that opens new opportunities for all of us.  Or not.  We’ll start to find out a month from now.

 

Preparation plus opportunity equals success.  It’s an old saying with many taking credit for it but it’s true and timely.  Every change – no matter how painful – brings opportunity for those who are able to identify it and adapt to take advantage of it.  The real estate business will fundamentally change.  “Flipping” houses may or may not be a viable strategy at least for the near future but plenty of opportunities will exist – some we may not even have thought of yet.

 

The bright spot in the otherwise dreary real estate market up to now has been the high-end.  As the American middle-class weakens, the world’s rich have been getting richer as evidenced by the over-the-top demand for ultra-luxury goods including million-dollar cars and diamond-encrusted human skulls.  The very top-end of the real estate market in the select areas of Beverly Hills, Bel Air and Malibu (“Bevairbu”) has remained strong with a few clever realtors having their strongest years ever.  Houses in $10 to $30 million range in Bevairbu have been selling briskly to all-cash buyers.  When you’re not applying for a loan, you don’t care about mortgage rates.  And you can rationalize paying prices above appraisal values.  This explains the McCourt’s $19 million purchase of a crumbling beach shack on Malibu’s Carbon Beach next door to the Lautner-designed house they bought for over $33 million.  The number of sales of homes over $15 million in Beverly Hills and Bel Air increased over the last 12 months (ending October 1 2008) to a five-year high with more sales than ever getting near or above asking price in fewer than 70 days on market.  Remarkable, given what’s been going on everywhere else.  And positive sales trends in Beverly Hills is reported in a separate posting here.

 

Is that party over?  Too soon to tell for sure.  The world’s super-rich may be too insulated to be affected.  Most of these buyers are foreigners – Russian oligarchs, Middle Eastern oil barons or members of exiled political regimes.  They may be drawn more than ever to the relatively stable market of Los Angeles’ Westside in an increasingly unstable world.

 

My advice for the near term is to move into rental properties, building a portfolio of small homes in solid middle-class neighborhoods with a minimum of a five-year time horizon while keeping an eye on the sales activity in the usually recession-proof Bevairbu. 

 

For more about investing in this tumultuous market, read “Amid the Chaos, Is This Any Time to Invest in Real Estate?

Check back in a few months to see how my advice holds.

Real Estate Sales Trend Report — Beverly Hills

August 24 2008   Despite the daily drumbeat of grim news about the real estate market, a bright spot remains in Beverly Hills.  While researching comps on one of my houses, I was startled to discover the following trends from the past 12 months:

 $ Although the number of sales were down, the median price was up.

 $ The average price-per-square-foot increased.

 $ Among houses selling at or above full asking price, the price-per-square-foot increased substantially.

 $ Average days on market (DOM) was virtually unchanged.

 $ Among houses selling at or above full asking price, the DOM decreased.

 

There were some less sunny trends:

 $ The number of sales at or above full asking price declined from 20% to 17% and out of those, the number that reduced the list price (LP) from the original list price (OLP) increased from 17% to 24%.  Not surprising.

 

Here are the numbers for the 12 months ending July 15, 2008:

 

 

2008

2007

2006

Number of sales in Beverly Hills:

190

264

 

Median price:

$3,625,000

$3,115,000

 

Low

$749,000

$769,000

 

High

$23,000,000

$35,000,000

 

Number of sales at or above full asking price (LP):

33/17%

52/20%

 

No. of sales at/above LP reduced from original price (OLP):

8/24%

9/17%

 

Average days on market (DOM):

89

85

 

Low

0

5

 

High

447

309

 

Average days on market (DOM) at/above LP:

43

59

 

Average price per square foot:

$906

$889

 

Average price per square foot at/above LP:

$1,001

843

 

Low

$436

$456

 

High

$1,981

$1,483

 

Contemporary/mid-century/architectural sales at/above LP:

10

7

 

 

 For more about the high-end market in Los Angeles and investing in the current tumultuous market, read “What Does the Wall Street Bail-out Mean for You?” and “Amid the Chaos, Is This Any Time to Invest in Real Estate?“.