Foreclosures Are the Best Deals, Aren't They?

I have had many buyers and investors ask me how they can get a "foreclosure". My first question back is "why do you want a foreclosure?". Response, "they are the best deals".

As a realtor with a background in economics, I really struggle with this concept, the concept that banks simply "give away" significant amounts of money on foreclosures because after all, they are "foreclosures". They don't. They don't have to. But I am not saying that foreclosures can't be a a good deal for the right person in the right situation.

In most cases, banks slightly under price their properties from the neighborhood in order to generate quick offers. In some cases, they dramatically underprice a property. Their experience shows that the market place responds rapidly and "bids up" the price with 20 or more offers to be at or extremely close to average market rates. We have never seen a deal that didn't. The banks look for the strongest offers (at least 20% down conventional loans), not just the highest offer.

When I offer this brief explanation, someone within earshot always claims, "yeah, well the house next to me sold for $xxx (some incredibly low price)." Well, upon requesting a few additional details, I learn that they are either buying into a neighborhood myth which is out right incorrect or the property they site as an example has something really wrong with it as compared to other homes in the neighborhood and should sell for less.

So in my view, the way in which a foreclosure is "the best deal" is when a buyer has two things: first, the financial strength to outbid numerous other buyers to acquire a property in poor condition and second, the resources to enhance the property quickly through "sweat equity" or access to discounted improvement materials which others may not know about or have access to.

I really think you can get as good a deal in a traditional sale as you can a foreclosure and with a lot less headache. From a economic point of view, if you are paying less, you are typically getting less; if you pay more, and you've done your homework, you will get more (better location, size or condition).

Overall, when I hear someone say they want a foreclosure, I've learned what they really want is a great deal. Well, we all want that!