Posted by David Butler on March 18, 2010 at 12:41:54:
In Reply to: Foreclosure discount banks might give? posted by Brett on March 11, 2010 at 07:10:18:
How much will they accept for a given property, in a given marketplace, at a given time.
Hello Brett,
Dealing with banks is generally an art form. In the current market place, it is developing into a bit of a science as well.
Like you and I, the bank is looking for the best offer they can get. Like you and I, the offer they are willing to accept will be influenced by current market conditions where the property is located, under the circumstances, constraints, and pressures the bank is under at that point in time.
You can't know their internal situation for the most part. What you can easily learn however are the external factors influencing the pricing decision. And all the factors affecting your own situation, and what you are willing to pay. This includes how much work you are willing to do, in learning all you can about your local market - and how to craft and present an offer in the best light.
For the past two years, the banks, with the somewhat misguided cooperation of the federal government, have been doing all they can to prop up home prices. Nevertheless, depending on what part of the country you are in, prices have dropped precipitously from their most recent peaks. In some areas they have declined almost 70%. In some areas, only 10%. The national average is just a bit over 30%.
More importantly, is that some pretty strong research indicates we are likely to see more price drops, as much as another 25% in some areas; and an anticipated 11% average drop nationally in 2010.
Here are two current examples to consider:
Two weeks ago, Skyline at MacArthur Place, an unoccupied complex of 25-story condo towers built alongside the 55 freeway in south Orange County, CA sold (as REO by the lender who foreclosed on them six months ago) for little more than a third of the project’s original value of $350 million (37 cents on the dollar. The price was $128 million, or about 55% of the project’s $233 million construction cost. A high-end showplace launched with great fanfare in 2007 right at the precipice of the Orange County real estate collapse - not one of the project's 349 condo units ever sold in retail channels, despite its high-budget marketing campaign.
At the same time... according to Foreclosure Radar, a major California oriented foreclosure tracking service, reported that:
The courthouse steps remain highly competitive with discounts to market value dropping from 17.5 percent
in January, to only 15.2 percent in February. Despite fewer foreclosure sales overall in February, as well as smaller discounts due to competitive bidding, 3rd party investors purchased more foreclosures, at 23.2 percent, than at any other time since [they] began tracking trustee sales in September 2006.As you can see, in a venue where pricing should be inherently lower, investors have gone crazy, paying as much as 85 cents on the dollar of market value at Trustee Sale. Given that retail REO single family residential properties (those that don't sell at auction then are listed with retail agents) generally sell for 85% to 90% on the dollar, you can see that at present, investors are their own worst enemies. And many of these purchases are in areas that are expected to see another 17% to 23% in price declines over the next six months. BONZAI!
In those locales, most knowledgeable investors are sitting out the trustee sales, and working triple- overtime trying to find the one needle in the haystack that makes some sense. Otherwise we'll ride out the tide, and likely be buying from these investors AND banks next year.
The point is... there is no generic formula on the selling side. You are the only one who can set the market for what you are willing to pay as a buyer. And there is a tremendous amount of credible research available to get you started.
One source that I believe to be particularly useful because it matches up with my own reliance on fundamentals in looking for the right deals, is the ongoing bi-annual updates provided by the Center For Economic and Policy Research, Hitting Bottom - Analysis of Rents and the Price of Housing in 100 Metropolitan Areas. We've been following that for almost two years now, and it is a real eye-opener.
In my opinion, it should be the starting point for any investor looking to purchase residential real estate.
The lone exception might be those experienced "flippers" who are certain that though they are going to pay 85% in the relatively high-risk courthouse sales, but still believe they can turn around and sell the property at a profit that justifies their time, effort, and risk.
I don't know how that is possible at that price point (industry standard is generally maximum allowable offer of 70%, less repair costs), but it's not my money they are risking.
It is worth noting too that in some parts of the country you can already make some decent purchases from investors who were able to get better pricing from the banks. Some of these folks have already rehabbed the properties, which makes for a better deal in many instances, for the average buyer.
Hope that helps, and best wishes for your success.
David P. Butler
Nascent Equity &
Hotspur Investment Group