Where to Find the Best Deals on Properties

7 min read

Many properties come onto the market for a buyer to consider, and they generally break down into three major categories.

• Equity Sales: properties where the seller has equity, meaning any outstanding debt linked to the property (mortgages or liens) is less than its value. If a home is worth $100,000 and only $50,000 is owed, the home has $50,000 in equity, and the seller receives funds at closing.
• Short Sales: properties where the seller has no equity and is asking the mortgage holders to accept less than is owed. If the lender approves, the mortgage of record is satisfied, the buyer receives a clean title, and the seller is normally released from any remaining debt.
• REO / Bank-Owned Properties: properties where the lender has completed a foreclosure action and now owns the home. The lender lists it with an agent and wants to sell for the best price it can get. Pay careful attention to the title on these properties, since a flawed foreclosure can leave you with a clouded title.

Do Your Research Before You Offer

Finding the best deals in all three categories requires research before you place an offer. The list price is set by the seller and may not reflect true value. As with pricing any property, review comparable Active and Sold properties in the same area with similar features, and make adjustments for differences. Do not assume this was done correctly. Do your own research and base your offer on that information; sometimes the price has been set too low and you may get a bargain.

Also watch how long a property has been on the market. A property that has lingered may be overpriced or have physical problems. Always have a competent inspector examine the property, and have a complete title examination done, before committing to a large non-refundable deposit.

Getting the Best Price: Equity Sales

With an equity sale, the seller wants to walk away with as much cash as possible, so the net amount left after the sale is the key element. Typical costs include real estate commissions, documentary tax stamps, closing and settlement fees, title insurance, and recording and wiring fees. If you keep these costs in mind, you may be able to increase the seller's net, and inspire them to accept your offer, by paying or negotiating some of them.

There may also be significant tax implications for the seller that you can help reduce by structuring the purchase to their advantage. For example, the seller might hold some of the paper, meaning they carry a note for part of the purchase price. Suggest they consult their tax advisor on the best approach. You may pay more for the property, but as the saying goes, it is often not the price so much as the terms that really matter.

Getting the Best Price: Short Sales

In a short sale, the seller typically does not care what the final sale price is, as long as the approving lender releases them from the debt left over after the sale. There may be tax implications for accepting a lower amount, but in most cases the seller is insolvent and would be excused from taxes on the released debt, also called the deficiency balance. This is an IRS provision, but insolvency must be declared. It essentially means that a person's expenses exceed their income, and most people doing a short sale qualify.

Because the seller does not care what the list price is set at, the agent handling the sale sets the price based on their best estimate of market value. Once an offer is made and signed by the seller, it is submitted to the short sale lender along with many other documents to justify approval. The lender then analyzes the value based on many factors and responds, usually with either an acceptance or a counteroffer. They typically do not simply decline an offer, even a low one.

A useful approach is to determine value through your own research, then start the bidding at roughly 65 to 70 percent of that number. Getting your offer in quickly after the property hits the market improves your chances. Cash offers with few contingencies are normally favored over financed offers with many contingencies. A short inspection and closing timeline appeals to sellers and short sale lenders, especially if the home is vacant or the occupant can move out quickly. Even so, understand that even the best offer may take time to get a response. Patience is the ultimate virtue in these matters.

Getting the Best Price: REO / Bank-Owned

Here the seller is the bank or investor that took back the home after the foreclosure was completed. No matter what they paid, they want to rid themselves of this asset as soon as possible. They are not in the real estate business and do not want to hold property, which means spending money on security, maintenance, repairs, taxes, insurance, and marketing. They rely on an agent to market and list the property at the value recommended along with input from their internal research departments.

As with short sales, determine value through your own research and start the bidding at roughly 65 to 70 percent of that number. Competition from investors for these properties is significant, since they are often in worse shape than an equity or short sale home; the previous owner may have left angry and damaged parts of the home. Investors like these properties because their contractors can go in quickly, make repairs, and resell for a profit.

A Note on Foreclosure Auctions

When a property finishes the legal action and is transferred at public auction, there is an opportunity to purchase it at that time. In most auctions the first mortgage holder is the plaintiff and usually buys back the property, then hands it to an agent to sell. In some cases the plaintiff is a second mortgage holder, an HOA, or a lien holder, and in those cases you do not want to buy at auction, since other liens must be satisfied before you will have clean title. Take special care before bidding on any property at a foreclosure sale.