How much should I bid on an REO and what should I expect?

Question

So I found a great REO priced below market. It was bid on after being on the market only a week. It fell out of escrow because the buyers got cold feet. Now it's up for sale again, and according to the listing agent he has several full-priced offers. How do I know if this agent is blowing smoke or not? Is there a formula for how much under you can bid on an REO? Is there any way of knowing how much that original bid was for?

Answer 1

In my experience, often foreclosures are overpriced even though they look cheap because there is often a great deal of damage that needs to be repaired.

I strongly suspect that the first buyers backed out not because they got cold feet but because when they inspected the property they found far more damage than they anticipated and that it would be much more expensive to fix than they thought.

If there are inspection reports I recommend that you request copies of those reports before you make your offer. At minimum you need an inspection of the roof, the structure itself in particular the foundation, the plumbing, and the electrical system, and a termite report for termites and water damage and dry rot. Also, I recommend a mold inspection because mold is a big issue.

The inspection reports will help you determine the cost of repairs.


I recommend that you hire an attorney who specializes in real estate law to protect your interests. I also recommend that you hire an real estate appraiser who is a Member of The Appraisal Institute. (MAI designation)

Direct the attorney to write your offer for you.

Ask your attorney to include language that makes the contract contingent on the appraisal by your appraiser not the lender's appraiser. Also make the contract contingent on your approval of the ijnspection reports. You will need a minimum of two weeks and probably more. Also make certain that your contingencies are only removable by you in writing, not by the mere passage of time.

You do not want to get your appraisal back the day after your contingencies expired because of time.

You wnat your contingencies removable only by you in writing. I cannot emphasize that enough.

the bank will probably want contingencies removable by passage of time and they will want to limit the contingency period to 10 days or less. Do not let them do that. You cannot get your appraisal and your reports done in ten days.

Real estate agent and REALTORS often specify that contingencies are to be removed within 10 days and that they are to automatically expire. the reason that they do this is because they know that you cannot get the inspection reports done, completed and read in 10 days. They want the contingency period to have expired before you get your reports back.

That way if there is something in the reports that you disapprove of it is too late to object.

That is one of many nasty little tricks that real estate agents and REALTORS pull on members of the general public.

The inspection reports will almost certainly recommend further inspections. I recommend that you do the further inspections as well.

Tell the appraiser that you are hiring him to give you a second opinion of the value so that you do not pay too much for repairs. This will probably be a difficult appraisal because there will probably be a great deal of damage, and the appraiser may not have sufficient data to adjust for the difference in value caused by the extensive damage that is likely to be there.

You appraiser will probably come back with an appraisal that is less than what you offered for the property. At this point give the bank two options:

1. Either reduce the sale price to be equal to the fair market value as determined by your appraiser or....

2. Agree to cancel the contract and direct the title and escrow company to return your deposit to you.

It is hard to determine a correct price to offer up front,. however if you will follow the procedure that I have outlined for you you will have sufficient opportunity to examine the property and appraise the property so that you can determine the true fair market value.

As long as you have your contingencies in place and your attorney has written the proper language in your offer you will be able to either cancel the contract and have your deposit returned or get the contract price reduced to the true fair market value once you have determined what the true fair market value is.

I wish you great success!!!!!!!

Answer 2

The agent may or may not be telling the truth, and should not be disclosing ANYTHING to you, other than the fact that there are other offers on the table. The amount of the original offer is considered confidential information, and will not be available to you.

There is no 'formula' for determining what to bid. You should be guided only by current market value of the property and how much you want to pay relative to that market value. FYI, I have brokered a couple of foreclosures with the past six months or so which sold for OVER the asking price. One was more than $20,000 over asking price.