I often get calls from consumers who ask me about foreclosures.  Many times these people are looking to buy their first investment property and they've been told, or somehow extrapolated, that the foreclosure market is the place to be.  While it is possible to find a solid investment in a foreclosure, it is not the best strategy to narrow in to just foreclosures.

Having spent quite a bit of time in the REO (Real Estate Owned - the industry term for this segment) business, both on the asset management and listing agent side, it has been easy to see how much the business has changed.  I believe at one time you could probably find a better deal among foreclosures vs general listings.  However, in my opinion, that type of general application is no longer true.  Asset managers typically seek out multiple opinions of value on the home - usually in the form of an appraisal and a Realtor's Broker Price Opinion.  Typically if those values are not within a predetermined variance they will then get another opinion of value to help reconcile the issue.  That number is determined to be the Fair Market Value and from that number the list price is derived.  Implicit in the term Fair Market Value is that the value is fair - meaning that it takes into consideration the market forces, repairs, etc. and derives a value based on the exposure to all entries in the market.  Some REO companies specifically seek to price their property on a 90-120 value, meaning that the property will be exposed for a longer time and, presumably, generate a higher price.

Generally speaking, most REO companies have a policy that dictates every step of the process.  You are not likely to swoop in on the property in the first 30 days and offer 80% of what they are asking and get an acceptance.  Most REO companies are looking for a net on fair market value in the low 90% range in that first 90 days or so on the market.

The good thing about REO listings is that because there is no emotional stake in the property they are also very systematic about the disposition of the home.  Typically they will evaluate their marketing strategy monthly and make changes to the price if appropriate (and if no one has bought the home after a couple of months it is probably appropriate).  Additionally the net of fair market value that they will accept tends to decrease meaning they will look at and potentially accept lower offers.

Almost all REO companies require their properties (foreclosures) to be placed in the local MLS.  If a property happens to be priced too low your chances of scooping it up before others notice is relatively low as many times it will take a few days to negotiate an acceptance with the REO company (via their local listing agent who communicates with the asset manager).  Perhaps the 'best' deal that can be had on a foreclosed property is after the property has been on the market for an extended period and has become shop-worn.  Still, one needs to exercise caution because there could be a reason no one else has purchased the property.

There is quite a bit more to the foreclosure/REO process, but I wanted to make the point not to narrow yourself to a 'foreclosure' because you heard of someone who got a great deal on one.  In my experience, there are just as many great deals in the non-foreclosure market.  Really it comes down to finding an area that you know and recognizing a good deal when you see it.

If you spend all your time "chasing deals", you are going to get very tired and probably not "catch" very many.  Your best bet is to hire a solid Realtor who knows their stuff and keep your ear to the ground.

Questions - Call me (James Brinkman, West Elm Properties, Austin Real Estate) at 512.698.3525 or email Brink@WestElmProperties.com