The bank-owned (REO) homes in South Orange County are still looking like the best values available.  I picked out a list of about 15 that are seriously discounted below their last sale price. 

I am planning to resume posting my “Vic ‘s Picks” on a more regular basis – probably once per week.   This week, the list features homes in Coto de Caza, Laguna Beach, Mission Viejo, Newport Beach, Newport Coast, Rancho Santa Margarita, San Clemente and Tustin.  These are all bank-owned and offered for somewhere between $200K and $800K below the last market sale price! 

If you would like to see the actual location on these, click on the little airplane, on the right side of the listing sheet, and it will give you an aerial view of the property.  Some REO agents provide very few photos, so this can help guess what the home may look like.  I’ve also noticed that several of them like to include shots of the bathrooms with the toilet seat up (one is even sideways!)   

If you have any interest in seeing any of these, please give me a call at (949) 457-0281, and we can go check them out together!

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Does this look like a bargain?

I have been getting a number of calls or emails from buyers who think they want to buy a foreclosed home.  After I ask them why they would want to do that, I usually hear “Because I want to get the most for my money and I’ve heard that foreclosures can be a real bargain.”

Fair enough answer.  Many buyers believe there are lots of bank-owned homes just waiting to be bought for 35% – 50% of market value.  But here is what you should really expect :

• If the property is priced well, you will be in competition with many other buyers, and it will probably sell for over the list price, after you and the other buyers have submitted your “highest and best” offer.
• The bank will have a very one-sided contract – you will have to cool your heels and wait, and wait, and wait for them to get the contract back to you in writing, but then they will want you to remove all of your contingencies (“escape clauses”) very quickly.
• You will be buying the house in “AS IS” condition, even though you won’t know what the condition is until you pay an inspector* to examine it in detail.
• If you find that the cost of repairs will exceed your budget – too bad!  They will very rarely re-negotiate the price or give credit for repairs.  Your choice will be to cancel the contract, or spend more than you had originally expected.

*Make sure you find an experienced and thorough inspector!  The seller (bank) really has no idea what may by right or wrong with the house and you will have no recourse if big problems reveal themselves after closing!

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Foreclosures aren’t necessarily priced right, relative to the market conditions, or even relative to other REOs.  I just checked out 2 new foreclosures in Lake Forest today.  Both are within the same (nice) neighborhood, located only 2 blocks from each other. They are the same builder, age, square footage and floorplan, so a direct comparison is very easy.

The first one has a decently upgraded kitchen, scraped ceilings, remodeled baths, and lightly worn carpet. The atrium area is unfinished dirt, and it looked to me like an above ground spa had been removed from that area.  The garage door is the original wood tilt-up (instead of the more popular roll-up door) and it has a wood shake roof that the builder had installed in 1975.  The windows are all original, and the road noise coming in the house at 3:30 in the afternoon was quite loud. That house is priced at $545,000.  (Update 7/14/2008, new price is $439,900!)
 

The second house, just around the corner has similar kitchen upgrades, scraped ceilings, remodeled baths, professionally installed laminate flooring (it looked pretty good), attractive used-brick walkway and atrium, newer tile roof, and no significant road noise. It is priced at $498,900.  (Update 7/14/2008 – price is now $466,900!)

It’s obvious to me which lender is more serious about getting this sale done!

Please call or email me if you would like valuable information about any home for sale – foreclosed or not.  I’m starting to see some well-priced homes come on the market, and they are selling pretty quickly! 

I saw a lot of REOs back in the mid-1990s and sold more than a few at that time.  They also offered a wide range of conditions early on, but as the lenders eventually learned, most of the time they got a faster sale at a higher price by cleaning up properties before putting them on the market. More often than not, they included new carpet and neutral paint, landscape cleanup, and some minimal upgrades such as replacement of faucets, fixtures and appliances.  At this point in our real estate downturn, there seems to be a reluctance to do this, although a few do. Of the 12 properties that I saw on Thursday, only 3 could be considered move-in ready, and 2 days later, all 3 of them are now in escrow!

From my experience, there are only 3 main types of buyers of foreclosed homes.

Investors who plan to fix, rent and hold for the long term. With real estate values not expected to increase in the near future, the return on investment needs to be justified based on projected cash flow, rather than appreciation. The following factors will influence the decision making for these buyers, and dictate the price that they will be willing to pay:

• Non-owner financing is generally at a higher interest rate, and requires a greater % down payment.
• Cost-to-carry during the repair period, as well as direct repair cost, needs to be added to the original investment amount.
• Tax advantages provided by depreciation.
• Cash flow should cover at least the monthly cost-to-carry.

Investors/Flippers who plan to fix and re-sell the property quickly for a profit. In addition to requiring a decent return on investment, these buyers require compensation for taking a risk that the market could deteriorate further before they can complete the repairs, find their own buyer and close the escrow. Projected cash flow is not a strong factor in this valuation, except as a fall-back position in case the market value declines below their break-even point. Factors influencing this type buyer’s decisions:

• Non-owner financing at higher rate will again be required.
• The ability to accurately estimate costs to repair, and skills or access to skilled workers who can complete the repairs quickly.
• Market knowledge to be able to estimate (guess-timate?) the final sale price.

Buyers who plan to live in the property. Many of these buyers will be current renters. Some will be move-up buyers, with savings set aside for the down payment, and the ability to rent their current home for close to monthly carrying cost. Since lenders won’t accept contingent sales, move-up buyers that can’t qualify to own 2 properties, will not be included in this group.

• First time buyers rarely have any spare money to repair after spending it on down payments and closing costs. Lenders need to include allowance for closing costs, rate buy downs.
• Emotions play a greater role for owner occupied homes. Dirty, nasty, smelly fixers will be severely discounted or totally ignored. Condition generally needs to be fairly close to “move-in ready.”
• When estimating costs to fix, most owner-occupant buyers over-estimate by about 200%!
• Many buyers are afraid of the “as-is, where-is” contract, and will need a substantial discount to overcome it.
• Monthly carrying cost must be in-line with buyer’s previous rent + tax advantage.

Lenders need to get the message, and fix or price their properties in line with the expectations and budget of their most likely buyer. For lower end, first time buyer properties, it needs to be clean, neutral and attractive so that the buyers can move in and immediately start living in their new home. For investors, if the bank won’t invest in fixing the obvious flaws, they will need to allow the fixing plus carrying cost to come off the bottom line either by pricing it substantially below other “comps,” or offering below market non-owner financing.

** Update 12/20/2007 :  HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007 provides tax relief for homeowners who lose their homes during 2007, 2008, and 2009.  Read Kelly Kilpatrick’s article for a good explanation of what it does.