How Much Should I Offer for REO
Properties?

Each foreclosure sale is different and
requires a lot of details to be handled
when buying a foreclosed (REO) property.
Depending on many factors such as
location, sub-division, local market,
supply & demand, condition, time of the
year, multi-offer vs. single offer, etc
the suggested offer price varies
greatly. Consult with your real estate
agent regarding purchasing an REO or a
foreclosed property.
There are many differences when
purchasing an REO (foreclosed) property.
Though, not all of them should
negatively impact your decision, but you
need to be informed and be aware of the
differences.
In order to come up with a reasonable
suggested offer value for foreclosed
properties we need to understand
differences between an REO foreclosed
property and non-foreclosed properties
and put some values on those
differences.
Due to the size, I have gathered and
explained these differences in a
separate article.
For more information and detail
explanation of each difference please
visit
http://www.texasfivestarrealty.com/Foreclosure_Things_You_Should_Know.asp
or clink on the picture below.

For those of
you that would like to get an idea and
interested in a “Rule of Thumb” formula,
I have calculated the purchase price
range as follow:
0.75 * ARV – RC =< Purchase
Price =< 0.90 * ARV – 1.20 * RC
Where;
ARV = After Repaired Value
RC =
Repair Cost
For detail
information, reasoning and Mathematics
behind this formula, please visit my
page at:
http://www.TexasFiveStarRealty.com/How_Much_Should_I_Offer_for_REO_Properties.asp
Example:
There is an REO property listed for
$170,000 for last 8 days in the MLS.
After viewing and inspection you find
out this house needs some minor
plumbing’s, painting interior, and
carpeting replacement throughout the
house. Due to the natures of the
repairs, they cannot be done all at the
same time. It is estimated to take about
4 weeks and cost about $10,000 to bring
the house in a move-in ready condition
comparable to the similar house in the
same neighborhood which was recently
sold for $206,000.
As a “rule of thumb”, utilizing our
formulas we will have the following
range for offer:
After Repaired Value (ARV)
= $206,000
Repair Cost (RC)
=
$010,000
Adjusted Repair Cost = 1.2 * $10,000
= $012,000
Maximum Offer = 0.90 * ARV -1.20 *RC =
0.90 * $206,000 - $12,000 = $173,400
Minimum Offer = 0.75 * ARV - RC = 0.75 *
$206,000 - $10,000 = $144,500
$144,400 =< Suggested Offer Price =<
$173,400
For more information on Foreclosure
Process and purchasing foreclosed (REO)
property, please visit
http://www.TexasFiveStarRealty.com/Foreclosure_Process.asp
For a current list of foreclosed (REO)
properties in North Texas, please visit
http://www.TexasFiveStarRealty.com/List_of_Foreclosures.asp
Definition: REO or Foreclosed Properties:
First, let’s define what exactly an REO
or a foreclosed property is:
When the property is not sold in the
auction at the court step, as described
in the article
foreclosure Process,
it goes back to the lender, and if that
lender is a mortgage company/bank it
becomes known as REO (Real Estate Owned
- by the bank) property. Based on some
historical data and observations, only
about 3%-5% of all scheduled auctioned
properties are sold to the audiences at
the court step of the Counties (e.g., in
Collin County of Texas). This means,
more than 95% of those properties go
back to their respective lenders or
banks.
Please note that this article suggests
offering prices for an REO or foreclosed
property (after the bank repossesses the
property). For foreclosure buying
process at the court steps in Texas,
please visit
http://www.TexasFiveStarRealty.com/Foreclosure_Conduct_of_Sale_in_Texas.asp
For the most up-to-date list of REOs
foreclosure in North Texas please visit
http://www.texasfivestarrealty.com/List_of_Foreclosures.asp
Second, let’s identify differences when
purchasing an REO or a foreclosed
property:
In most parts, purchasing a
foreclosed (REO) property and the
process of offering, counter-offering
and negotiations will be somehow
different than regular (non-foreclosed)
sales. There are many lender’s specific
rules and requirements that require
purchaser to follow.

Disclaimer:
Please note that following is a summary
list of differences that I have
collected during my years of experiences
in real estate and I believe the REO
purchasers must be aware of them. This
list should be used as a guideline and
for informational purposes only and may
not be complete.
This is a summary list of differences without
explanation here due to the size.
For more information and detail
explanation of each item please visit
http://www.texasfivestarrealty.com/Foreclosure_Things_You_Should_Know.asp
Third, let’s put some values for these
differences when purchasing an REO or a
foreclosed property:
Group 1: No Hard Dollar Value,
but could have negative psychological
impact on a buyer. Depending on a
buyer’s attitude, expectations and
tolerance, these could be problems or no
problems at all.
1.
Banks may require
Pre-approval or pre-qualification letter
from a specific lender,
2.
Banks may require To use
their preferred Title company,
3.
Banks may require To use
their own forms and addendums in
addition to or replacement of the
standard forms.
4.
No Seller Disclosure Notice is
required.
5.
Property is usually sold “AS IS”
Condition,
6.
No Warranty, If Repairs done by
Bank:
7.
Bank usually takes longer time
than regular sale to respond.
8.
To submit offers online through
their websites,
9.
No Option Period and No
Unrestricted Rights,
10.
Utilities may not be turned on.
11.
Inspection Periods and
Limitations
12.
Non-Negotiable exact pre-defined
amount for earnest money.
13.
Owner Occupancy Certificate may
be required.
14.
Special Warranty Deed Instead of
General Warranty Deed
15.
Waivers of Buyers Rights
16.
Seller's Sole Discretion
17.
Non-Timely Negotiations Hear Back
18.
Non-Guaranty Acceptance of
Contract or Counter-Offer
Group 2: The
following could have Some Hard Dollar
Values
19.
Property Tax Proration.
20.
Prior Year’s Exemptions.
21.
Additional expenses to Buyer due
to fixing and repairing.
22.
Multi-Offer Situation,
23.
Limited Seller Closing Cost
Contributions
24.
Late Charges and Choosing the
Realistic Closing Date
Group 3:
Loss of Time and Money after Closing
25.
Loss of Time and Money During the
time to make the house move-in ready
This has a major cost involved if and
when the foreclosed house requires
repairs and maintenance. The more
repairs, the more cost required. Let’s
say the house needs some plumbing work,
carpet replacement and paint inside the
house. Let’s say you got estimates
totaling $7000 and 1 month time needed
for all these repairs.
This means extra cost, as explained
below, for the 1 month that you are
repairing and waiting the house to be
ready, paying mortgage, etc., but cannot
use the use,
25.1.
You are paying Mortgage payment
without using the property. 1 month
mortgage payment is approximately about
1% of the purchase price. Please see for
more detail and accurate information
about mortgage payment vs. value of the
house.
25.2.
You pay 1 month utility bills
(Electricity, water, gas, etc), but not
using the house. This could cost a
couple of hundred dollars to thousand
dollars depending on the area, utility
companies, and season.
25.3.
Cleaning and make the house ready
to move-in
Group 4:
Loss of Money due to Holing (for
investors only)
Investors intending to buy the
foreclosed property, fix it and sell it
for profit (flipping) encounter
additional charges after making the
house move-in ready as follow:
26.
They have to market it, listed
with brokers to sell the property.
Though the cost of listing and
commissions is not fixed and is
different from area by area and broker
to broker, but let’s say for example
this cost is 3%-6% of the purchase
price.
27.
Up to a couple of months ago in
our North Texas area, It used to take
3-4 months to sell the house. This is an
additional 2%-4% of the purchase price
for holding the property until it sells.
Note, this 3-4 months holing time is
different from area to area and from a
season to another.
28.
Paying utilities (electricity,
water, gas, etc.) for 3-4 months while
holding the property. This could be a
couple of thousand dollars. 1%-3%
29.
When Investor sells the property,
(s)he has to pay another closing cost
(Title, survey, etc…). The closing cost
for seller is estimated about 1%-2% of
the sell price.
The additional cost for investors due to
holding the property to sell is 7%-15%.
We use 10% in our case study.
How much should we Offer?
1.
First we need to have a good and
reliable CMA (Comparative Market
Analysis) of the neighborhood and the
sub-division.
2.
Find the value of the property
that is move-in ready and it is as much
as possible to our subject property.
3.
Determine the ARV (After Repaired
Value) of the foreclosed property.
4.
Determine the Repairs Cost and
time (RC).
For individual owner occupant buyer
5.
For individual owner occupant
buyer, adjust the estimate of Repair
Cost (RC) by a factor to take care of
your time finding reliable contractors,
negotiating and monitoring their work.
This factor depends on your personal
knowledge and experience with the
repairs needed, e.g, 1.20 – to 1.50
6.
Use a percentage of ARV for all
inconvenience and additional cost
incurred listed in items 1-24 above. We
use 10% as a typical number for
homeowner occupant.
7.
The Maximum Offer price would be
as follow:
After Repaired Value = Purchase Price +
Adjusted Repair Cost + Expectation of
Good Deal
Expectation of Good Deal = a percentage
of ARV for all inconvenience and
additional cost incurred listed in items
1-24 above = 10% * ARV
č
After Repaired Value => Purchase Price
+ 1.20 *Repair Cost + 10% After Repaired
Value
č
Purchase Price =< 0.90 * After Repaired
Value - 1.20 *Repair Cost
PP =< 0.90 * ARV – 1.20 * RC
For Investor Buyers
8.
For investor buyers, they have
usually personal knowledge and
experience with the repairs needed and
they know and work with their group of
contractors. We usually don’t adjust the
repair cost.
9.
Investors do flipping as a
business and expecting a profit. Their
profit margin vary from 10%-30%
depending on the condition location,
etc. of the property.
10.
There are some rules and
restriction on investors flipping the
house from FHA that investors cannot
gain more than 20% of what it cost them
to purchase the property and bring them
in a move-in ready to sell (including
purchase price, repair cost, closing
cost, commissions, etc.). We use this
guideline to come up with minimum offer
price for an REO property.
11.
The Minimum Offer price would be
as follow:
After Repaired Value = Purchase Price +
Repair Cost + Profit
Cost of Purchase = Purchase Price +
Repair Cost + Buyer’s Closing Cost
Buyer’s Closing Cost = estimated about
2% of the Purchase Price
č
Cost
of Purchase = 1.02 * Purchase Price +
Repair Cost
Sale Proceed = Sale Price - Cost of Sale
Cost of Sale = Two Commissions +
Seller’s Closing Cost
Two Commissions = estimated 6% of the
Sale Price,
Seller’s Closing Cost = estimated about
1.5% of the Sale Price
č
Sale Proceed = Sale Price – 7.5% Sale
Price = 92.5% Sale Price = 92.5% ARV
č
Sale Proceed = 92.5% ARV (After
Repaired Value)
Profit = Sale Proceed - Cost of Purchase
Profit should be <= 20% of Cost of
Purchase (per FHA rules)
Sale Proceed - Cost of Purchase <= 0.20
* Cost of Purchase
č
Sale Proceed <= 1.20 * Cost of Purchase
č
Sale Proceed <= 1.20 * (1.02 * Purchase
Price + Repair Cost)
č
(1/1.20) Sale Proceed <= 1.02 * Purchase
Price + Repair Cost
č
(1/1.20 *1.02) * 0.925 * After Repaired
Value <= Purchase Price + Repair Cost *
1/1.02
č
0.7557 * After Repaired Value <=
Purchase Price + Repair Cost * 1/1.02
č
Purchase Price => 0.7557 * After
Repaired Value - 0.98 * Repair Cost
For simplicity we are using the formula
as:
Purchase Price => 0.75 * After Repaired
Value - Repair Cost
PP >=
0.75 * ARV - RC
Summary of
Calculations:
0.75 * ARV – RC =< Purchase
Price =< 0.90 * ARV – 1.20 * RC
Example: There is an REO property listed
for $170,000 for last 8 days in the MLS.
After viewing and inspection you find
out this house needs some minor
plumbing’s, painting interior, and
carpeting replacement throughout the
house. Due to the natures of the
repairs, they cannot be done all at the
same time. It is estimated to take about
4 weeks and cost about $10,000 to bring
the house in a move-in ready condition
comparable to the similar house in the
same neighborhood which was recently
sold for $206,000.
How much should we offer?
Each foreclosure sale is different and
requires a lot of details to be handled
when buying a foreclosed (REO) property.
Depending on many factors such as
location, neighborhood, local market,
supply & demand, condition, time of the
year, multi-offer vs. single offer, etc
the suggested offer price varies
greatly. Consult with your real estate
agent regarding purchasing an REO or a
foreclosed property.
As a “rule of thumb”, utilizing our
formulas we will have the following
range for offer:
After Repaired Value (ARV)
= $206,000
Repair Cost
= $010,000
Adjusted Repair Cost = 1.2 * $10,000
= $012,000
Maximum Offer = 0.90 * ARV -1.20 *RC =
0.90 * $206,000 - $12,000 = $173,400
Minimum Offer = 0.75 * ARV - RC = 0.75 *
$206,000 - $10,000 = $144,500
$144,400 =< Suggested Offer Price =<
$173,400
CONCLUSIONS:

There is no absolute or fixed suggested
offer price that can be hold true for
all foreclosure transactions. Each
foreclosure sale is different and
requires a lot of details to be handled
when buying a foreclosed (REO) property.
One thing is for sure, not all
foreclosed properties are “Good Deals”
nor are all “Bad Deals”.
Depending on many factors such as those
explained earlier, purchasing an REO
property may or may not turn out to be a
“Good Deal”.
Also, there are many other regular
sale properties in the market that could
be "Better Deal" than REO or foreclosed
deals and should be considered in your
search of "Good Deals".
There are many differences when
purchasing an REO (foreclosed) property.
Though, not all of them should
negatively impact your decision, but you
need to be informed and be aware of the
differences.
It will require a patient and informed
Buyer to have an REO transaction close
successfully.
·
If you expect your home to be completely
nice, clean, move-in ready, a
foreclosure property may not be for you.
·
If you expect to move-in quickly or get
quick responses (e.g., within one or two
days), a foreclosure property may not be
for you.
·
If you expect the Seller to make major
or cosmetic repairs before you move-in,
a foreclosure property may not be for
you.
·
If you have time to wait a longer time
and don’t mind to repair/fix problems
yourself or deal with contractors to
repair/fix problems for you to bring the
foreclosed home to a move-in ready house
and you have reasonable expectation such
as 10%-15% below the market of
comparable house, then a foreclosure
property may be for you.
Each foreclosure sale is different and
requires a lot of details to be handled
when buying a foreclosed (REO) property.
Consult with your real estate agent
and/or your real estate attorney for
questions regarding purchasing an REO or
a foreclosed property.
As a rule of thumb, suggested offering
price falls in the following range:
0.75 * ARV – RC =< Purchase
Price =< 0.90 * ARV – 1.20 * RC
For more information on Foreclosure
Process and purchasing foreclosed (REO)
property, please visit
http://www.TexasFiveStarRealty.com/Foreclosure_Process.asp
For a current list of foreclosed (REO)
properties in North Texas, please visit
http://www.TexasFiveStarRealty.com/List_of_Foreclosures.asp
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