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How To Negotiate The Best Deal On A Foreclosure Home

January 24th, 2009 by Michael Oliver

negotiation-pic-rs.jpgLet’s face it everyone wants a “deal” specifically when they are making a home purchase. Most people in today’s real estate market understand that foreclosure homes are where they have the best chance of getting the best deal on a home. But how do you maximize the chances that you will get the bank to give you an incredibly good deal on your foreclosure home purchase? Well read the rest of this post and hopefully you will get the basics of how to score the best deal possible on a foreclosure home.

The first thing you want to do to maximize your chances of getting the best deal possible on a foreclosure home is to use a real estate agent (Realtor) who handles a lot of foreclosure business as a buyer’s agent. This means that that Realtor only (on foreclosure transactions) represents the buyers (your) interests in the transaction. Do not use the listing agent for the simple reason the listing agent is also the Bank’s representative and their job is to get the bank the best terms and highest price possible for the bank. Way to many people see a “Foreclosure” for sale sign call the listing agent and start giving information that only ends up costing them a lot of money.

Even something as simple as:

“Hi I’m (my name is…..) calling about the foreclosure home on ……..How much is the home?”

Listing Agent: “That home is listed at $175,000”

You: “Oh ok $175,000 that seems great I’m qualified for up to $200,000 so that won’t be an issue.”

Now that doesn’t seem so bad right? You would be wrong a smart listing agent remembers (or writes down) your name and the fact your qualified for 200k. Now even if you hire a very well qualified Realtor that specializes in buyer foreclosure representation and you decide to place an initial offer of lets say $155k. The listing agent/ bank rep already knows its not an issue of whether or not you can afford the 175k list price it’s a matter of how the listing agent and the bank is going to get you to offer a higher price and hopefully get you willing to pay full price on the foreclosure home. This is exactly what happens every day and on thousands of purchases across the US day in and day out. Buyer’s make mistakes and give away positions and intents where smart real estate agents (representing their client’s interests) pick up on these “give a ways” and then use them against you. If you were in a lawsuit would you as the defendant go to the plaintiff’s lawyer and give them your attorney’s game plan to prove you were guilty of the crime? I highly, highly doubt it but when you give listing agents (or bank representatives in a foreclosure purchase) specific information about your intent, qualifications, timeframes, anything else important they will for sure use it to get you to pay a higher price on the home you really want. That’s their job!

In fact the listing agents for the banks (bank representatives) are actually graded by the banks to see which ones are getting the highest sale prices and getting the banks homes sold in the quickest timeframes. If a listing agent(s) is not performing at the level the bank thinks they can (by using these statistics) then the bank many times will fire them and they will lose out on that entire bank’s foreclosure business forever! That from a real estate agent’s (real estate brokerage) standpoint is a disaster as many bank representatives (listing agents) make 90% (or more) of their income just off of listing one bank’s foreclosure business (foreclosure homes). This fact alone as I am sure most are aware is enough to pressure most listing agents of the banks to use every tool and trick out there to get the highest sale prices and the quickest closings so that they don’t risk the possibility of losing that bank’s account.

Ok so now that we have went into serious detail about the fact that only using a Realtor who is very proficient in representing buyer’s on foreclosure homes is the #1 thing to get you the best deal what else? Well a couple things, the next piece of advice I can give is for buyers to be available to see homes in short notice. Foreclosure deals are out there and when your Realtor spots one its important you don’t “wait for the weekend” to see it because more then likely if it’s a real deal it will be sold the same day or the next after the deal hits the market. New foreclosure deals hit the market (at least in Tucson, AZ) every couple hours, then other times some foreclosure homes are drastically reduced in price and they become “hot deals” when this happens you as a buyer need to be ready to go see the property and write an offer before anyone else can beat you to it. Being the first one to submit an offer is a huge advantage because a lot of times others want to “think it over” and they never even realized anyone else was already negotiating with the bank to buy the property. At all costs it’s important you AVOID a bidding war on a foreclosure home even in Tucson’s currently depressed real estate market a lot of foreclosure homes get into bidding wars and in many cases the actual sale price is in excess of the listed price showing that buyer demand causes the home to be worth more then originally thought. If you have to be involved in a bidding war to buy a property you really like just go slow and don’t try to swing for the fences and blow out the other buyer. The other buyer may already be at the top dollar and all you did was spent thousands more then you even had to. Your Realtor’s advice and guidance will become paramount when/if a bidding war should erupt on a property you as a buyer really want. What else will help you to get the best deal possible?

Get Sale Comparatives for the home your thinking of placing an offer on: Competitive Market Analysis (CMA’s) are not only for when your selling your home and want to know what price you can sell for there also for when buying and trying to figure out what your initial offer price should be. When I am representing a buyer client I will routinely pull the “just solds” data from the MLS and try to see if there is a trend of price declines or appreciation. I will also see what the average dollar per square foot of the most recent sales have been and use that as a gauge of where exactly the market is currently. Pricing is very difficult and you can never have too much information and when you’re trying to place an offer on a bank owned property it can even be more difficult because you and your agent must factor in for condition of property, and other characteristics that are unique to a foreclosure property. (This mainly would include the non-disclosure issues with foreclosures, and other “unforeseeable” such as defects with the property.) Again best advice here is to have your agent obtain all the trends and analyze the market very carefully. Then decide based upon those statistics and the exact features of the home you’re considering placing an offer on you can then make pretty good decisions on initial offer price and final “top dollar” price that you as a buyer are comfortable paying and also what the market suggests would be a “reasonable price”, a “below market price”, and an “over-paid price” of that particular property. It very well may work out like this:

Listed price of foreclosure property: $399,900/ works out to $145 per square foot (This house is exactly an average home for the neighborhood average size, condition, and features, lot size etc.)

Average sale price of homes in the neighborhood over the past 90 days: $445,500/ works out to $159/sf

Average sale price of homes in the neighborhood over past 180 days: $460,250/ or $163/sf

-Assuming this foreclosure property is in “average” condition and considering the neighborhood is declining in value I would be willing to say this home is priced at “slightly less then market value” currently. However foreclosure properties should typically be priced 10%-20% below “market value” on paper this property seems listed very close to 10% less then the comps suggest it should be priced at (because it’s a foreclosure). ($159-$145=$14/sf discount or a 8.8% discount to the “market price” this home currently would carry if it weren’t a foreclosure)

Ok so what else? Well you have to allow that the market is still declining so whatever your offer is you should take an additional $4/sf to try to keep ahead of the decline. $159 (last 90 days of solds) $163 (last 180 days)= $4 per square foot worth of price declines over a 3 month span should this continue 3 months from today the last 90 days worth of solds will come in at $155/sf vs. the current $159/sf. ALL THIS MUST BE CONSIDERED WHEN PLACING OFERS AND BUYING PROPERTIES!

Ok so in this made up example that has become pretty intense in my mind the following would be offer prices for this home:

Below market price: $ 378,675 (that is 15% below the “market value” of homes that have just sold plus it allows for the market to decline more (if it does) and your still have positive equity.

Reasonable market price: $399,900 where it’s currently listed and the fact that the home is very comparable to the others would suggest that your still buying with a 8.8% discount to market for the fact that this property is a foreclosure home and you as a buyer take on more responsibility and there’s also (in some people’s mind) a stigma that comes with foreclosure real estate. So the market is offering an 8.8% discount for those allowances. Since the property is in good shape “if” you needed to sell you should still have a little equity as long as the market doesn’t decline too much further. In any event I consider this a “market value” (for the fact it’s a foreclosure in good shape with no issues) and the price to be reasonable.

Over-Paid Price: Maybe someone else wants to buy this home as much as you do and a bidding war erupts so at what price is this just too expensive? In my opinion never accept less then a 5% (minimum) discount for stepping up and buying a foreclosure property (this allows for you to pay an additional 3.8% over the “market price” of $399,900). So in this example you would take the $399,900 that we already said was “market priced for this exact home as a foreclosure” and add 3.8% or the point where getting a good property at a good price becomes overpaying would be $415,000 (That’s $399,900 plus 3.8% rounded down to the lowest $500 equaling $415,000)

One Response to “How To Negotiate The Best Deal On A Foreclosure Home”

  1. Tucson Real Estate Blog: Michael Oliver on Real Estate in Tucson AZ » Blog Archive » Oro Valley High End Foreclosure- Million Dollar Plus Foreclosure Home- Honey Bee Ridge Home For Sale Says:

    [...] discount is applied could sell for as little as just under a million as many times buying foreclosure real estate will sell for between a 10%-20% discount to what other homes in the same neighborhood have sold for [...]

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