Where to Find the Best Deals on Properties
There are many properties that come onto the market for a Buyer to consider. They break down into three major categories:
1. Equity Sales - these are properties where the Seller has equity in the property. This means that any outstanding debt related to the property (mortgages or liens) are less than the value of the property. If the home value is $100,000 and the amount linked to the home is $50,000, the home has $50,000 equity. The Seller will receive funds at the closing.
2. Short Sales these are properties where the Seller has no equity in the property and is asking the mortgage holders to accept less money than is owed. If approved by the lender, then the lender satisfy the mortgage of record, Buyer have a clean title and the Seller normally released of any remaining debt.
3. REO/Bank Owned Properties - these are properties where the lender has completed a foreclosure action and now owns the property. They have now listed the property with an agent and want to sell it at the best price they can get. Careful attention should be paid to the title to these properties as a "bad" foreclosure may lead to you purchasing a property with a clouded title.
Finding the best deals in all 3 categories requires doing research prior to placing an offer. The list price posted is set by the Seller and may not reflect the value. As in pricing of most properties the Seller should review comparables in both the Active and Sold properties in the same area with similar features. Adjustments should be made for variations. Don't assume this was done appropriately. Do your own research and make your offer based upon this information. They may have actually set the pricing too low and you may get a bargain. The other factor to watch for is how long a property has been on the market. A property that has been on the market for a long time can mean it is either overpriced or there are physical problems with the property. My suggestion is to always have a competent inspector conduct an inspection of the physical property as well as a complete title examination done prior to committing to a large non refundable deposit.
Let's focus on getting the best price on each type of sale:
The Seller wants to walk away with as much cash in his pocket as possible so the net amount left over after the sale is the key element. Typical costs are Real Estate Agency commissions, documentation tax stamps, closing settlement fees, title insurance and recording and wiring fees. If you keep in mind these costs to the Seller you may be able to increase the net to him and inspire him to accept your offer by paying or negotiating some of these for him. There also may be significant tax implications for the Seller that you may be able to reduce by structuring a purchase to his advantage. Maybe he can hold some of the paper (meaning he holds a note for some of the money to purchase the property). You may suggest that he contact his tax advisor to see the best method to assist him in this area. You may pay more for the property but as they say "it is not the price as much as the terms" that really matter.
The Seller does not typically care what the final sale price of the property is as long as his lender that is approving the sale releases him of the debt left over after the sale. There may be some tax implications for him to accept a lower amount however in most cases the Seller is "insolvent" and would be excused of any taxes to be paid on the released debt (also called the deficiency balance). This is an IRS ruling but insolvency needs to be declared - it really means that one’s expenses are more than one's income and typically most people doing a short sale qualify. Because the Seller really does not care what the list price is set at, the Realtor handing the sale will set the price based upon the best guess of the market value of the property. Once an offer is made and signed by the Seller it will be submitted to the short sale lender with many other documents from the Seller to justify the approval. The short sale lender then conducts an analysis of the value base upon many factors and comes back with a decision. This decision is usually either an acceptance of the offer made or a counteroffer. They typically do not just decline the offer even if it is a very low offer. I suggest that you determine the value to make an offer using your own research of market value and then take 65%-70% of that number to start the bidding process. If you can get your offer in quickly after the property comes into the market the better chance you will have. Cash offers with few contingencies are normally accepted over offers needing financing with many contingencies. Short inspection and closing time is exciting to the Seller and short sale lenders, assuming the Seller's home is vacant, or he (or tenant) can move out quickly. However, understand that even the best offer may still take some time to get a response from the lender. Patience is the ultimate virtue in these matters.
The Seller is the bank or investor who took back the home after the legal foreclosure action was completed. No matter what they paid for the property they want to rid themselves of this bad asset as soon as possible. These people are not in the real estate business and do not want to hold property for any long period of time. It means they would need to spend money for security, maintenance, repairs, taxes, insurance, marketing, etc. They will rely on a Realtor to do the marketing and list the property for the value that they recommend along with their internal research departments' input. Similar to short sales, I suggest that you determine the value to make an offer using your own research of market value and then take 65%-70% of that number to start the bidding process. The completion from investors for these types of properties is significant since these properties are typically in worse shape than an equity or short sale since the person foreclosed on may have left the house angry and potentially destroyed many elements of the home. Investors like these type of homes since they can have their contractors go in quickly and make repairs (though usually not high quality) and flip them quickly for a nice profit.
When a property has finished the legal action and is being transferred to the party that is bidding for it at the public auction there is an opportunity for a purchase at that time (i.e. at the foreclosure sale). In the majority of the auctions the first mortgage holder is the Plaintiff and usually buys back the property and then gives it to a Realtor to sell. In some cases it may be a second mortgage holder, a HOA or a lien holder that is the Plaintiff and in those cases you do not want to consider buying it at auction since there are other liens to be satisfied before you will have a clean title to the property. Special care must be given prior to bidding on any property at the foreclosure sale.