Author Topic: Why would a foreclosure be cheaper?  (Read 3688 times)

ChpBstrd

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Why would a foreclosure be cheaper?
« on: December 20, 2016, 09:35:07 PM »
I'm watching foreclosures in my market. They seem to sell for a lot less than comparable properties. Granted, they sometimes have a cracked window, missing appliance, hole in the wall, or general dirtiness, but the discount seems totally disproportionate.

Example: http://www.zillow.com/homedetails/5-Lawrence-Dr-Little-Rock-AR-72205/345888_zpid/
Asking price is about 30-40% less than retail value, even after you drop in $5k of cosmetic repairs and used appliances.

Example 2: http://www.zillow.com/homedetails/5904-Valerie-Dr-North-Little-Rock-AR-72118/298232_zpid/
Asking price is about 25-30% less than retail value and it looks ready to rent or resell.

My question is what makes foreclosures so unattractive that deals such as this are not immediately snatched up, and instead, take months to sell? What's the catch? Why aren't investors fighting over the chance to flip these for a 10-20% ROI within the year?

Double closing costs / commissions to do the flip? Title issues? Risks of long term vacancy like mold? Undisclosed issues like HVAC, roof leaks, or plumbing ripped out? Ineligibility for some mortgages / insurance?

Drifterrider

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Re: Why would a foreclosure be cheaper?
« Reply #1 on: December 21, 2016, 08:59:50 AM »
From my experience.

Sellers virtually never give you any disclosures.  They don't know the information and are not on the hook to disclose anything (in most jurisdictions).  It is very much "buyer beware".  Most often, sellers will give you NOTHING in the way of closing help, repairs or credits for repair.  Private sellers usually will.

Otherwise, most sellers (depending on the jurisdiction) are REQUIRED to make disclosure on all things from Radon gas to buried fuel tanks. 

Some people are angry at getting foerclosed so they damage the property thinking they are harming the bank.  I've seen concrete flushed down the toilet (can you say large plumbing bill).

A foreclosed property is not always a good deal.  The VA routinely wants you to have completed your inspections in seven days.  Private sellers are more flexible.

I've bought one from the VA.  Transaction went smoothly.  I just rescinded an offer on a foreclosure from a bank.  The home inspection revealed some very expensive repairs to be made so this deal became a bad deal.

Never be afraid to walk away.  No deal is better than a bad deal.

Also, a lot of foreclosures will ask for cash only (which they can't legally enforce) but they will ask for proof of funds.

sokoloff

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Re: Why would a foreclosure be cheaper?
« Reply #2 on: December 21, 2016, 10:06:07 AM »
What drifterrider said, but also in a lot of cases, the owner (the bank) doesn't stand to profit more from a significantly higher price, but does stand to profit a bit from a faster sale.

Suppose I buy a $200K house, 20% down and take out a mortgage for $160K. I pay for a while and the ending balance is $150K and it's worth $240K when it's foreclosed. If the state law provides that the bank can recover their $150K plus some fees and any excess goes to me, there is little difference to the bank between a sale price of $180K and $225K as they stand to get back their $150K plus fees.

On top of that, the longer they sit on it, they're taking risk, paying insurance and taxes, and have their money tied up unproductively.

Combine that with the lack of disclosures and frankly, aggravation in dealing with the bank REO department, and foreclosures don't bring full market price.

Drifterrider

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Re: Why would a foreclosure be cheaper?
« Reply #3 on: December 21, 2016, 10:32:54 AM »
What drifterrider said, but also in a lot of cases, the owner (the bank) doesn't stand to profit more from a significantly higher price, but does stand to profit a bit from a faster sale.

Suppose I buy a $200K house, 20% down and take out a mortgage for $160K. I pay for a while and the ending balance is $150K and it's worth $240K when it's foreclosed. If the state law provides that the bank can recover their $150K plus some fees and any excess goes to me, there is little difference to the bank between a sale price of $180K and $225K as they stand to get back their $150K plus fees.

On top of that, the longer they sit on it, they're taking risk, paying insurance and taxes, and have their money tied up unproductively.

Combine that with the lack of disclosures and frankly, aggravation in dealing with the bank REO department, and foreclosures don't bring full market price.

+ 1 M

ChpBstrd

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Re: Why would a foreclosure be cheaper?
« Reply #4 on: December 21, 2016, 02:09:18 PM »
What drifterrider said, but also in a lot of cases, the owner (the bank) doesn't stand to profit more from a significantly higher price, but does stand to profit a bit from a faster sale.

Suppose I buy a $200K house, 20% down and take out a mortgage for $160K. I pay for a while and the ending balance is $150K and it's worth $240K when it's foreclosed. If the state law provides that the bank can recover their $150K plus some fees and any excess goes to me, there is little difference to the bank between a sale price of $180K and $225K as they stand to get back their $150K plus fees.

On top of that, the longer they sit on it, they're taking risk, paying insurance and taxes, and have their money tied up unproductively.

Combine that with the lack of disclosures and frankly, aggravation in dealing with the bank REO department, and foreclosures don't bring full market price.

I thought foreclosing banks always got 100% of whatever they can sell it for. I'll have to research this to see what the laws are in my area. Let me know if you have search terms.

I'm skeptical, but intrigued. Knowledge has a way of leading one to opportunity, and away from danger.

Bobberth

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Re: Why would a foreclosure be cheaper?
« Reply #5 on: December 21, 2016, 02:34:03 PM »
I've seen the banks play the game of listing at a low price, everybody comes to look at it, call for highest and best offers, and it's under contract for FMV in about a week. There was a 2 family that was listed for $60k that was a screaming deal. When all was said and done, it sold for $110k.

ChpBstrd

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Re: Why would a foreclosure be cheaper?
« Reply #6 on: December 21, 2016, 03:19:05 PM »
I've seen the banks play the game of listing at a low price, everybody comes to look at it, call for highest and best offers, and it's under contract for FMV in about a week. There was a 2 family that was listed for $60k that was a screaming deal. When all was said and done, it sold for $110k.

Good point, and exactly why I'm watching these through close.

marty998

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Re: Why would a foreclosure be cheaper?
« Reply #7 on: December 21, 2016, 03:22:43 PM »
What drifterrider said, but also in a lot of cases, the owner (the bank) doesn't stand to profit more from a significantly higher price, but does stand to profit a bit from a faster sale.

Suppose I buy a $200K house, 20% down and take out a mortgage for $160K. I pay for a while and the ending balance is $150K and it's worth $240K when it's foreclosed. If the state law provides that the bank can recover their $150K plus some fees and any excess goes to me, there is little difference to the bank between a sale price of $180K and $225K as they stand to get back their $150K plus fees.

On top of that, the longer they sit on it, they're taking risk, paying insurance and taxes, and have their money tied up unproductively.

Combine that with the lack of disclosures and frankly, aggravation in dealing with the bank REO department, and foreclosures don't bring full market price.

I thought foreclosing banks always got 100% of whatever they can sell it for. I'll have to research this to see what the laws are in my area. Let me know if you have search terms.

I'm skeptical, but intrigued. Knowledge has a way of leading one to opportunity, and away from danger.

Down here the bank is required to get the best price possible. The foreclosed owner gets the difference.

Usually the people who get into difficulty though are the ones where the house is worth less than the loan (negative equity) so there is nothing left.

In this case the bank will still come after you for the difference.

$200k

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Re: Why would a foreclosure be cheaper?
« Reply #8 on: December 21, 2016, 08:03:34 PM »
Title issues are always important.  Make sure that the foreclosing lender is the senior lienholder.  Make sure you get a title policy too.  If there is an unrecorded mortgage or deed of trust against your property and they seek to foreclose, you'll need to defend against it via the title insurance, or your own out of pocket costs for attorneys fees.

This has the potential to be as damaging as everything else said in this thread. 


sokoloff

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Re: Why would a foreclosure be cheaper?
« Reply #9 on: December 21, 2016, 08:06:18 PM »
I thought foreclosing banks always got 100% of whatever they can sell it for. I'll have to research this to see what the laws are in my area. Let me know if you have search terms.
Try "overage" or "surplus" as additional search terms.

Drifterrider

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Re: Why would a foreclosure be cheaper?
« Reply #10 on: December 22, 2016, 05:35:32 AM »
What drifterrider said, but also in a lot of cases, the owner (the bank) doesn't stand to profit more from a significantly higher price, but does stand to profit a bit from a faster sale.

Suppose I buy a $200K house, 20% down and take out a mortgage for $160K. I pay for a while and the ending balance is $150K and it's worth $240K when it's foreclosed. If the state law provides that the bank can recover their $150K plus some fees and any excess goes to me, there is little difference to the bank between a sale price of $180K and $225K as they stand to get back their $150K plus fees.

On top of that, the longer they sit on it, they're taking risk, paying insurance and taxes, and have their money tied up unproductively.

Combine that with the lack of disclosures and frankly, aggravation in dealing with the bank REO department, and foreclosures don't bring full market price.

I thought foreclosing banks always got 100% of whatever they can sell it for. I'll have to research this to see what the laws are in my area. Let me know if you have search terms.

I'm skeptical, but intrigued. Knowledge has a way of leading one to opportunity, and away from danger.

Down here the bank is required to get the best price possible. The foreclosed owner gets the difference.

Usually the people who get into difficulty though are the ones where the house is worth less than the loan (negative equity) so there is nothing left.

In this case the bank will still come after you for the difference.

One of the benefits of living in the US:  some states are non-recourse states.  This means that the most they can take is the house, and nothing else.

On the other side of that, you could be liable for income taxes on the difference of what is owed and what it was sold for.


SeattleCPA

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Re: Why would a foreclosure be cheaper?
« Reply #11 on: December 22, 2016, 08:14:28 AM »
My question is what makes foreclosures so unattractive that deals such as this are not immediately snatched up, and instead, take months to sell? What's the catch? Why aren't investors fighting over the chance to flip these for a 10-20% ROI within the year?


My experience (which amounts to buying a second home in Palm Springs and then helping a daughter buy her first condo from Fannie Mae) is that the discount is real and large but also makes total sense.

You bear more risk as other posters have explained. You end up working harder to complete the transaction as others point out.

BTW, I think you'll find that a house or condo purchased out of foreclosure (even if last owner hasn't intentionally beat the place up) will be way more work to renovate than one might guess. The house we bought had been stripped of anything of value (AC, light fixtures, appliances, etc.) Further, due to being vacant for months, those little maintenance issues that could have been fixed for peanuts become pretty costly (leaks in plumbing, unwatered landscaping, etc.)

All that said, I think one can make a profit in this area... but also think that commenters saying you need to be careful are totally right.


NoNonsenseLandlord

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Re: Why would a foreclosure be cheaper?
« Reply #12 on: December 23, 2016, 12:45:20 PM »
All my properties have been from a foreclosure in one way or another.

Most often, it is a maintenance issue.  There is generally a lot of deferred maintenance. The property doesn't show as well.

Do not shy away from them, just understand them.

Uturn

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Re: Why would a foreclosure be cheaper?
« Reply #13 on: December 23, 2016, 02:08:32 PM »
All three of my houses have been foreclosures.  There are good deals out there, but you are going to see a crap ton of junk.  Like most things in life, if you want it now, it will cost more.  Bank foreclosures can really be a pain with higher risk, therefore lower cost.

Banks are in the money lending business, not the real estate business
The REO officer is a banker, not a realtor
You are negotiating with someone who is trying to make this quarter's books look good, not make a good deal on a house

Let's say someone bought a $200k house, 20% down.  The bank loaned $180,000.  At 4% over 5 years, the bank pulled in around $28,000 in interest.  To the banker trying to clear houses off his books (which he wants to in order to stop his holding costs), he only needs to recoup $152,000.  He is not concerned about the fact that other houses in that neighborhood are now worth $225,000, he is concerned about the $152,000 and the liability of holding a house. 

**After reading this again, my math is way off, but the principle is sound and I don't feel like fixing it**

« Last Edit: December 23, 2016, 09:55:22 PM by Uturn »

Cassie

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Re: Why would a foreclosure be cheaper?
« Reply #14 on: December 23, 2016, 02:17:53 PM »
WE bought a foreclosure from a bank 5 years ago. For about 6 months they tried to sell for a higher price but when people got the inspection they backed out. They then lowered the price to 52/k for 24 hours and asked for cash only, no inspection, highest and cleanest offer. People were lined up around the block to see it. Because my DH is a civil engineer with a PE and environmental license he knew what needed to be done and what it would cost. They had 6 offers and we bid 60/k. I had a feeling that everyone else would stay in the 50's and we got it.  WE could not move in for 4 months. Now we have 70k in improvements inside and out and it is beautiful. The home is now worth 300k. My DH did all the work himself.

rachael talcott

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Re: Why would a foreclosure be cheaper?
« Reply #15 on: December 23, 2016, 05:28:16 PM »
I've purchased five "distressed" properties at prices well below market value, even after accounting for repairs.  Two were straight foreclosures and one was a short sale.  The short sale took six months to go through, and most people shopping for a home would not want to wait that long.  The straight foreclosures had been empty for years, and had deferred maintenance issues.  One needed to be completely replumbed, and this was not disclosed, although their insistence that the water not be turned on for the inspection was a big red flag.  I do make money on them, but I also put in a lot of sweat equity.

ChpBstrd

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Re: Why would a foreclosure be cheaper?
« Reply #16 on: December 23, 2016, 06:46:04 PM »
It still seems weird to assume double-digit returns are available if the only downsides are spending a couple days of work on closing and doing your own very thorough inspection / estimation. Heck, I did that for the house I paid retail for!

NoNonsenseLandlord

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Re: Why would a foreclosure be cheaper?
« Reply #17 on: December 24, 2016, 06:11:07 AM »
It still seems weird to assume double-digit returns are available if the only downsides are spending a couple days of work on closing and doing your own very thorough inspection / estimation. Heck, I did that for the house I paid retail for!

You cannot assume double digit returns, although all mine were 20%+ returns.  You still need to buy right.  In a rising market, the banks are more greedy and tend to think the property is worth more.  Banks do not want to wait years for their money, they need it this year. 

Banks cannot afford to wait, as they need 18%+ returns  - by year end.  That is likely their internal rate of return that they have to hit.  It is near impossible for a bank to make money in real estate.  They would spend too much on maintenance and management of the property.

clarkfan1979

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Re: Why would a foreclosure be cheaper?
« Reply #18 on: December 26, 2016, 09:48:33 AM »
Most buyers do not want to do any work on a house. If a house needs work, the pool of buyers shrinks considerably. When you go to sell, make sure take care of all repairs to attract the largest pool of buyers as possible.

rothwem

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Re: Why would a foreclosure be cheaper?
« Reply #19 on: December 27, 2016, 08:24:03 AM »
It still seems weird to assume double-digit returns are available if the only downsides are spending a couple days of work on closing and doing your own very thorough inspection / estimation. Heck, I did that for the house I paid retail for!

Ha, couple days could be more like a couple months.  My plumber was telling me about a foreclosure that he was doing work on for an investor--the guy bought the house and then figured out that the previous owners poured concrete down the toilet, so they had to end up jackhammering the slab to re-pipe the place. 

People do fucked up things to foreclosure houses, so do your due diligence.  People can do well, but I think you need to make sure that you're looking at the whole picture before you buy.  That "deal" might not be as good of a deal as you think it is. 

Roland of Gilead

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Re: Why would a foreclosure be cheaper?
« Reply #20 on: December 27, 2016, 08:52:32 AM »
WE bought a foreclosure from a bank 5 years ago. For about 6 months they tried to sell for a higher price but when people got the inspection they backed out. They then lowered the price to 52/k for 24 hours and asked for cash only, no inspection, highest and cleanest offer. People were lined up around the block to see it. Because my DH is a civil engineer with a PE and environmental license he knew what needed to be done and what it would cost. They had 6 offers and we bid 60/k. I had a feeling that everyone else would stay in the 50's and we got it.  WE could not move in for 4 months. Now we have 70k in improvements inside and out and it is beautiful. The home is now worth 300k. My DH did all the work himself.

$130K plus labor vs putting $130K into the stock market in 2011 and having it be worth about $250K now?

sokoloff

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Re: Why would a foreclosure be cheaper?
« Reply #21 on: December 27, 2016, 09:21:59 AM »
Cassie's gain is tax-exempt though.

LiveLean

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Re: Why would a foreclosure be cheaper?
« Reply #22 on: December 28, 2016, 10:16:03 AM »
We bought a foreclosure via Hubzu.com three years ago. The property had been vacant for three years, pipes had frozen, and the extent of damage was unknown, though a plumber I had examine it put damages at $3,500 tops.

Two days before closing, the lender said, "We're all set. We just have to turn the water on to approve."

City would not allow it. Plumber was unwilling to do something unethical -- all he would have had to do was turn water on -- and I totally respected his position. (He's since become a good friend.)

Bottom line: We had to scramble to come up with the funds to pay cash. Glad we did. The place already is worth 40 percent more that what we paid for it, is an awesome seasonal rental/second home/future FIRE home.

I knew the area very well and wondered why this home hand lingered out there for so long. I'm guessing others were unwilling to pay cash or deal with the uncertainty.

Oh, and the frozen pipe repairs? Just $800.

ChpBstrd

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Re: Why would a foreclosure be cheaper?
« Reply #23 on: December 29, 2016, 11:52:28 AM »
Yes, the snowballing of physical neglect issues has to be watched out for. Frozen pipes, roof leaks, termites, foundation collapses, and mold are big deals. Also, the people who originally bought the place may have rationally decided to let the bank have it when they discovered the termites, radon, foundation problem, etc. If their equity was less than repairs, they walked away.

I'm just exploring whether it's worthwhile to attempt to arrange for top-to-bottom inspections on a few of these. Given my background, I could spot any of the above issues and even repair some of them myself.

Finding one or two diamonds this way could add up to a lot of profit. The question is whether diamonds exist, or if efficient markets have eliminated them.

sokoloff

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Re: Why would a foreclosure be cheaper?
« Reply #24 on: December 30, 2016, 09:50:21 AM »
Real estate is micro-inefficient all around, IMO. Foreclosures and other deals with "hair" on them are particularly inefficient, so I think there's opportunity to make money by working a job in this area. But make no mistake, this is a job without the typical guarantee of income from a normal job.

Greenly Spirits

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Re: Why would a foreclosure be cheaper?
« Reply #25 on: December 31, 2016, 04:43:06 PM »
We bought a foreclosure at a great price. The price was lower than regular market value to begin with (which just adds to your original question) but the selling bank dropped the price to match our offer because it was the end of the year and they really wanted it off their books, or so said their realtor.

Cassie

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Re: Why would a foreclosure be cheaper?
« Reply #26 on: December 31, 2016, 05:29:20 PM »
Plus we wanted to live in the home which we love.