Monday, July 7, 2008

Buying Short Sale Homes, PART 1

photo credit to I Can Has Cheezburger

This is the 1st in a series of articles about buying metro Phoenix area short sale homes. Parts 2, 3 and 4 are coming in the next 3 days.

Many, many potential buyers in the Phoenix market lately want to look at "short sales", "foreclosures" or "bank owned homes". Often they're not quite sure what these terms mean exactly, but they know the 10 o'clock news (or their brother's cousin's baker's tailor) says short sales & foreclosures are a spanking good deal.

See here for the differences between REOs, bank owned, short sales, foreclosures and pre-foreclosures. Regardless of type, the secret to buying one of these homes is organization combined with an open mind and a lot of patience.

This article talks about buying short sales. Lender owned homes are a different ballgame and I'll address those soon.


I showed some vacation homes to Canadian investors recently. Like all buyers, they wanted to "be in a nice neighborhood." Found and showed them a smoking deal on a lender owned home listed at $375,000. It needed serious work. The former owners took bathroom cabinets and countertops, all appliances, and even the bathroom mirrors with them on their way out the door.

Buyers and I reviewed the sold comps together and agreed that - when refurbished - the home was probably worth about $500,000 on the open market. We also ballparked the cost of needed repairs and agreed that it would cost about $40,000 to bring the home to its former standard.

$375,000 plus $40,000 equals well below market value of $500,000.

The Buyers told me they really wanted this home. I explained that bank sales aren't like regular private sales. We'd be dealing with a bank clerk who'd rely on internal bank regulations and an independent appraisal to determine market value. We'd also be highly unlikely to get a counteroffer. The bank would either accept our offer or never reply at all. I encouraged the Buyers to consider their highest, best offer and call me in the morning so I could draw up their offer.

Next morning, the Buyers told me to offer $341,000 (91% of list) but privately told me they'd "go a little higher." Again I tried to remind them to give it their best shot right out of the gate. They declined, saying, "we want to see if we can get it for less first."

Miraculously, we got a counteroffer from the bank about 3 days later. They asked for full list price of $375,000 and intimated they had multiple offers on the way into their offices. Again, the Buyers and I reviewed the recent sold comps and we all agreed the place was worth about $440,000 to $460,000 in current condition and about $500,000 post-rehab.

Buyers instructed me to counter the bank's counter at $352,000 (or 94% of list price). Within hours, the bank said we lost the bidding war. About a month later the MLS showed the home sold to buyers who paid $363,000 (97% of list price). Ouch.

Buyer Lessons

  1. Listen with an open mind.
    Discuss sold comps with your Realtor until they make sense and you agree, then take them as gospel.

  2. Don't play chicken with the bank.
    Offer your highest and best right up front. You may not get the deal but you'll know you tried. The buyers in this example might very well have secured the home if they'd offered their highest & best of $352,000 right away, before other Buyers had a chance to make offers and the bank had a chance to pit bidding Buyers against each other.

  3. Trust your Realtor.
    If s/he has comps that seem trustworthy, and you agree with her estimates of repair costs, and no other red flags about the deal appear, trust your Realtor when she advises you that full list price is still a great deal.

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