Real Estate Pros can Salvage their Careers by Leveraging the Foreclosure Market - Part 1

Let me start by saying that I am not employed in the real estate industry or the mortgage industry.

My authority on this subject comes from personal experience (I’m preparing to purchase my 5th primary residence inside of 7 years) and my ability to recognize market potential for opportunities based on products or services that I have found would benefit consumers facing the same market shortcomings that I have realized.

According to RealtyTrac there are nearly 650,000 foreclosure and bank-owned properties on the market right now and those numbers are growing. While this is unfortunate for all of those families who have lost their homes in recent years, it does present a seemingly excellent opportunity for buyers who are in a position to purchase these homes at prices significantly below market value. It only makes sense that the lenders who now own those homes would want to sell them off as quickly as possible for the simple sake of recouping their investment, right?

While it might be true that lenders are not interested in retaining foreclosed properties any longer than they need to, navigating through the process of placing an offer and getting that offer accepted is often easier said than done.

Here is why:

In many cases, the high risk mortgages on these homes were sold off in bulk to foreign banks. This simple fact turns the offer approval process into a time consuming nightmare that can take up to 6 months with no guarantees of desirable results, even if the buyer’s offer is at or above asking price for a given property. The reason for this stems from the differences between working directly with home owners and navigating through the complex channels of a large financial institution.

For example: If you were looking to sell your home and a person was interested in buying that home, you would in all likelihood do everything within your ability to respond to their offer quickly in order to make a sale and move on with your life. When a bank is trying to sell a home that might account for just a fraction of their overall portfolio, the financial liability is much smaller for one thing. For another thing, the lives of the people you are dealing with at a bank are not directly impacted by whether the home sale closes this week or 6 months from now and yours isn’t the only deal they are working through. Without that same emotional attachment, the bank employees’ motivation is much less than that of the buyer’s, which empowers them with the liberty to move at a much slower pace. Add to that the fact that you may not be dealing with the same person each time you or your agent contact a given lender and further delays are guaranteed.

The second major factor clogging up the process is the fact that lender-sellers prefer cash transactions. This means that the average Joe planning to put some percentage of cash down on a home and finance the rest (through the lender of their choice) needs to be qualified for the purchase by the lender-seller who owns the foreclosed property, thus delaying the process further.

Finally, let’s say you find a home in foreclosure listed for $200,000 and it is something that you would really like to get your hands on quickly because your research shows that comparable homes in the area are going for 2x that amount. Being the smart person that you are and feeling that you can shave a few days off of the process, you offer full asking price for the property. Since you already have financing lined up along with your cash downpayment, this deal should be a slam dunk, right?

Wrong.

The reason why is that the lender-seller is going to demand a BPO ( brokers price option), which is the estimated value of a property as determined by a real estate broker or other qualified individual or firm. Back to the example where you offered $200k on a home that was clearly worth $400k. Chances are that after the lender-seller reviews the BPO indicating that the home is worth considerably more than $200k, they will reject your offer. Now you’re probably asking yourself why the property was originally listed for $200k if they actually wanted more for it.

The reason this happens is that some real estate agents and brokers are using this as a tactic to generate leads from buyers looking to get a good deal on a home. Once they are able to get the buyers’ interest and earn their trust as a client (if there is any trust to be found with these individuals), then they explain to them the complexity that I just explained to you and start shopping for homes that will not be so difficult and time consuming to purchase.

In part 2 of this series we will focus on suggestions for How can Realtors and other real estate industry professionals can harness this opportunity and provide valuable services to home buyers.