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T.E. Sumner (214)924-2700
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Bargain Hunting

Hunting for Real Estate Bargains

Everybody wants a good deal.  It's in our nature.  A few buyers will do almost anything to feel that they bested the system.  The path left behind by over-zealous bargain-buyers of disappointed and angry participants can basically leave the buyer all alone when the deal is finally done.  Consider for a moment before you squeeze the last nickel out of a seller, a financier or a provider that at some point down the road you may need assistance.  If you burn your bridges on your way to success, it may be difficult to get help later on when you need it. 

What is a Bargain?

Buy low, Sell high.  Right?  Yesterday's overpriced mid-century bungalow may turn into today's rehabbed pricey duplex.  And today's wonderful neighborhood with HOA 'protection' may turn into tomorrow's run-down overpriced community of unhappy people.  No matter what you buy, be prepared to live with it for a while, or else pay the piper to get rid of it. 

If the typical price in a neighborhood is $100,000 for a 3-bedroom, 2-bath one story with a detached 2-car garage, and we find one for $70,000 is that a bargain?  Maybe.  Probably.  It might need $5k in foundation work, $6k in painting, $7k in flooring, and $8k in upgrades to countertops, and maybe $3k in appliance upgrades.  So, your "bargain" may wind up costing $99k after all is said and done, and the $100k house might have been bigger or had a pool.  Oops. 

On the other hand, the $80k competitor (20% below typical) may have been kept maintained and up to date and needs only several windows changed out.  So, its $84k finished price is better than typical. 

Bargains are those properties that sell below typical, but remember to compare apples to apples.  

Maybe the neighborhood home with a pool and a larger lot is actually a bargain when compared to the typical home in the neighborhood, especially if it's price only slightly higher than typical.  Besides, you can try to negotiate a better deal. 

Short Sales and Foreclosures

When a property is worth less than the balance left on the mortgage, selling it will not generate enough cash to pay off the mortgage – it will be short.  Short sales were common for many years when the market prices dropped generally.  In a rising market the seller merely has to hang on long enough to sell at a price that will pay off the loan.  But maybe the seller can't do that.  Maybe the family is moving out of state and can't afford two mortgages or take the risk of renting.  The alternative may be bankruptcy or foreclosure. 

Owners often contact their mortgage company and explain their problem before it's too late.  If they call right away when they're going to be late in paying, loss mitigation departments will usually make repayment deals and may even re-negotiate interest on the loan, but this does not always solve the problem.  Only a short sale can solve some situations.  The bank is more ready to absorb some loss than the high cost of foreclosure, or worse, big losses in the event of bankruptcy. 

Ask yourself, if it's a short sale, how much is the house really worth?  Also ask yourself, if the owner couldn't pay the mortgage, did he maintain the house properly or skip on maintenance? 

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Distressed properties can also result in foreclosure of the property by the mortgage company.  Taking a home back from an owner for non-payment is painful – both for the family and for the lender.  If the mortgage was a combination of a first lien and a second lien mortgage, then the second lien is almost always wiped out by foreclosure.  The first lienholder does not need to give anything to the second lienholder and of course the owner won't either.  If the original loan was structured as 80/15/5, the 80% first lienholder will own the property for the loan balance of less than 80% of the home's original appraised value.  To see MLS properties with the Distressed flags set, just flip the switch from OFF to ON on the Search menu. 

Owner-occupants can buy a home at 80% of its old value, move in and probably be fine.  Investors can't.  They typically are looking for 70% of market value.  But a smart owner would have used the short sale process to sell the house at 90-95% of market before allowing it to go to foreclosure.  The reason banks pick 80% as a normal loan-to-value maximum for loans is that the risk is small that prices will fall so low that they can't sell the property for more than the loan balance. 

Foreclosure means that a neutral third party, a trustee for banks or a sheriff for judicial and tax foreclosures, auctions the property to the highest bidder.  In Texas this auction date is set by law to the 1st Tuesday of every month, rain or shine.  Bidders must remit cash or equivalent immediately upon winning the bid.  No personal checks or credit cards.  In the case of banks, they just bid what is owed to buy the property.  They are the only bidders not required to pay cash.  The sheriff or trustee then pays off the lienholder, the tax district or the bank, and the leftover money is remitted back to the owner. 

Usually, the auction price is not high enough; it's below what is owed. Since the bank's bid is what they are owed, they buy the property without paying any additional money.  If someone else outbids the bank's bid of the loan balance, then the bank gets cash (eventually) to pay off the balance and the owner actually may get some money. When no one else but the bank bids, the property becomes Real Estate Owned (REO) by the bank. 

Banks don't like REOs and list them for sale as soon as they can.  FNMA often fixes them up first to get the best return. 

If a property is foreclosed, the lower priority lienholders' claims are wiped out by the foreclosure.  A bank that forecloses a property, however, can't get rid of the tax liens on it except by paying them. 

Tax Sales

Banks are not the highest priority lienholders.  Taxes create the highest lien.  Banks avoid having the taxman foreclosing on the property by keeping up payments for property taxes.  If an owner doesn't pay his property taxes, the taxman first raises the bill, making it harder to pay off, and then forecloses on the property. 

Note, however, that taxes are usually in the 3% of market value and even with added penalties and back taxes, tax foreclosures are usually for less than 10% of the market value of a property.  Some normal exceptions do occur, especially on vacant land or commercial property.  For example, an old gas station may have a buried tank that the environmental cleanup costs reduce the market value of a property significantly. 

Remember it's cash only at an auction.  Check with the auctioneer (sheriff or trustee) if they will honor cashier checks totaling more than your bid and issue a refund.  Don't show up thinking you can then go get a mortgage loan after winning the bid.  You can't. 

Probate Real Property

Part of life is inheritance from people who die.  If a property is held in the name of the owner and no care was taken to move the property into a trust, then the passing of the property to heirs will be controlled by a probate court.  The judge can allow executor/executrix to sell a property but only after spending a fair amount of money on lawyers in probate proceedings.  Many executors just want the property gone.  Maintaining it, cleaning it out, selling it are all a pain to the heirs. 

As a bargain-hunter you can benefit greatly by pursuing real property that is not in a trust and is being sold out of an estate as part of a probate proceeding. 

You'll want to have a Certified Probate Real Estate Specialist.  Ask us. 

Using the Price per Square Foot Tool

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On the Search menu for For Sale properties you specify the range of values to display on the map.  If the typical house in good condition is $100/sq ft and you want a 40% discount, you can grab the maximum slider (on the right of the line) and drag it left while watching the numbers displayed above the line, until it reaches $60/sf.  If you want to set a minimum to get rid of houses that need far too much investment in repairs, you can grab the minimum slider (on the left end of the line) and drag it right while watching the numbers displayed above the line, until it reaches, say $20/sf. 

Bear in mind that Price per Square Foot is not an accurate substitute for an appraisal, but it is often used by Realtors® to estimate a value for properties.  Appraisers themselves use construction costs per square foot as part of an appraisal process.  The difference that is not accounted for when using PPSF in a neighborhood is age and quality of construction, although age in a neighborhood usually is approximately the same for a development, but not always; and construction quality and amenities do vary by the builder, which happens a lot.  Some houses in the same neighborhood are built by 2, 3 or 4 different builders, each using different standards. 

When searching, you can couple the PPSF tool with maximum price, minimum bedrooms, etc to get the right combination of search parameters. 

You can even save the search and let it run while you're not on site.  If it finds properties that match, you can get an email.  Just use the Save This Search button, located 8 lines below the Price/Ft2 slider.  If you are not registered, it will let you register and save the alert based on the search. 

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