Foreclosures - Deal or No Deal?

Recently we have seen a few more bank owned and court ordered sales on the market.  I went through all of the listings in Red Deer and today there were 9 actives that would fall into this category.  Many people that I have talked to lately are under the impression that we have many foreclosures on the market and this simply is not the case.  It is not very likely that we will see foreclosure levels similar to those in the US because our laws are different and it is much harder for someone to walk from there home here, the banks here will sue the home owner for everything they have.  No short sales here.  In many cases in the US, people can walk from their homes while still holding other assets.

What I really wanted to talk about is whether or not buying a foreclosure is a good idea.  When most people hear the word foreclosure they get all excited and think that they can walk in and steal a home at thousands below fair market value.  My experience has been that many of the foreclosures end of selling for far more than they should because of the excited buyers that are trying to get a deal are quite often competing against other buyers with the same idea.  I get calls and emails from clients who want to get in on this corner of the market but in my opinion there are far better ways to buy properties than through foreclosure. 

There are a number of reasons that foreclosures do not top my list.  First of all there are hundreds of books that have been published over the years that teach ordinary people to become experts on buying foreclosures.  This means many buyers all searching and putting offers on the same few properties and driving the prices too high.  Next there is the issue that as the buyer of a foreclosure you assume all the risks in buying a home that in most cases has not been well maintained or has been modified without use of professionals (electrical, plumbing, flooding issues, mold - grow op).  So unless you know what you are doing or hire professionals to go through the property in great detail you may be getting into a big headache.  Another issue is that your power to negotiate is very limited.  Typically offers must contain few or no conditions, you have to leave your offers open for days and sometimes even weeks to hear an answer, there is typically no emotion involved on the sellers side (price is all that matters), and because in most cases there are multiple offers submitted on a property the odds of having your offer accepted are very slim.  This leads to lots of unsuccessful attempts and time wasted waiting around to hear a response.  It also seems that in most cases there is not a lot of room for price movement on these properties.  Yes typically the asking price is lower than other homes on the market of similar age and size but when you factor in condition and other risks sometime this price is not so attractive.  What I have seen in many cases is about 5% of movement on the price from whatever the current asking price is and if they don't get any offers the price gets reduced and then there is about 5% from that price.  So low ball offers in most cases do not stand a great chance of being accepted (there are always a few exceptions but this is what I have found to happen most often).  The banks or courts are trying to get as much as they can out of each property.  They are not in the business of giving away homes.

If you are in the market to purchase a home for less than fair market value there are other places to look other than foreclosures where your odds for success are much greater.  One of the best areas is to find a home in great condition where the sellers have some motivation to sell and have lived in the home for a number of years.  You would be surprised at the number of sellers where price is not their greatest concern, they just want to move on.  I have been involved in deals where clients were able to pick up a home from a seller at a great price and the home needed absolutely no work.  To me this is much more appealing than having to totally rehab a home.  Another area for opportunity right now is to find a home that is owned by a flipper who who thought the market was going to keep shooting up.  Many people entered into the home flipping business when their expertise was in something else and they are now paying for an expensive education.  You may be able to pick up one of these fully renovated properties at a great discount because the seller just wants out, even if it is at a loss.  You also need to look at new home builders.  There are some builders that are sitting on a ton of inventory right now and are willing to sell at deep discounts in order to move some product.  Also look to create a win-win situation, there are plenty of good deals out there to go around if you keep your eyes open.

 

Remember that you make your money when you buy, not when you sell.  If you pay too much at the beginning it can be very difficult to build equity.  Also don't be afraid to cut your losses and move on.  Too many investors hang on to losers for far too long when they should have just let go and made up for it on the next one.  You are not going to win every time, and the only way to win is to put yourself in a position where you may lose.  If you are well educated and know what you are doing your winners will far out weigh the losers and life will be great.

 

Have an awesome day!

Kirk Walper

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