H.
Don's answer is correct in manny ways, good advice, I am a local Realtor if you contact me i will do a home evaluation for you at no cost and tell you what the actual price should be around.

Knowing that it is an REO and knowing what the bank has as a BPO does not mean you could not pick this up at a much reduced priced. I have completed many of these deals in the past for other clients of mine and i don't mind helping you out on this if you decide to contact me.
see my web site below to get contact info. thanks

Thu Jan 10 2008, 05:41

Hello Cindy, thank you!

Am I understanding correctly? There is no profit limitation imposed on banks when selling their REOs?

If the mortgage balance was $150,000 and the bank sells the REO for $300,000, that is allowed? I was under the impression that the banks were restricted to simply recouping their losses (defaulted mortgage) plus fees, etc.

Any help to clarify this issue would be great!

Wed Jan 9 2008, 21:26

H: The amount owed on the property has very little to do with what the bank will accept on an offer. Ultimately, they need to answer to their investors.

As far as the pricing - banks hire realtors to do BPOs (brokers professional opinions.) Sometimes the lenders use agents to do these that do not sell in the area. This is one reason for the over pricing of REOs.

It's a great time to by. Good luck!

Wed Jan 9 2008, 20:54

Hi Don, Thank you for your response!

Currently I am living out of state from the property location, but do plan to return eventually (and possibly occupy the house). I am viewing this as a long term investment with possibly multiple stages of renovations.

The property size is quite large for the area, but the house, pool house, landscaping and pool are in disrepair. If I purchased the property, I was considering renovating the pool house (2/1) first, to generate rental income as soon as possible, fence the yard, and landscape for appearances.

The big decision is whether to renovate the small, outdated main house, or build an addition, or raze it and start from scratch. Each of these decisions would have a different future value. The concern with building a new structure is treading the fine line of overbuilding for the area (it is the largest lot) vs. having the benefits of new construction and modern layout.

For the right price, I would be able to rent out the pool house and postpone any renovations until I decided what to do with it.

How do you compare new construction in an area that consists of older homes (late 1950's) and calculate future value?

Is the listing price based on the amount owed to the bank? If so, then they are not likely to accept a much lower offer. In its current condition it is way overpriced, so I am wondering if I should even continue to consider this property if there is no chance of the bank accepting a low offer. I don't want to waste time on a property that doesn't make sense.

This house is listed for approx $415K, is 2000 sq ft (includes both structures), sitting on 1/2 an acre. Most of the homes in the neighborhood are 1000-1600 sq ft, sitting on 11,000-14,000 sq ft and cost $200-$460 sq ft, within the last 3 months, some even on the same block.

There is such a range that it seems difficult to compare. With this house seemingly in the worst condition, requiring the most work and capital, but having the largest lot with potential for future new construction or an addition, how would you analyze this?

Wed Jan 9 2008, 19:47

It's fine to do research on a property, but you may be overanalyzing this. If you plan on rehabbing it, start by determining a reasonable price the property would sell at after rehab. (Ask a competent Realtor for comps.) Let's say $300,000. At this point, an investor would take 70% of that number, or $210,000. You might go a bit higher if you actually plan on living there. Then subtract the rehab costs. Let's say $40,000. Subtract that from your earlier number. So an investor would pay a maximum of $170,000. If you were buying it to live there, not counting any time and effort you'd put in, you obviously shouldn't pay any more than $260,000. And recognize that rehabbing almost always costs more than anticipated.

So those are your numbers if you plan on rehabbing.

If you plan on razing it to build a larger home, your approach would be similar. Find out how much it'll cost to demolish the old home and build a new one. Let's say $200,000. And how much would the new house be worth? Let's say $600,000. Again, an investor would start from the end point--$600,000--reduce this to about 70%--or $420,000. Then subtract the cost of the new house: $200,000. The most you ought to pay as an investor is around $220,000. If you plan on living there yourself, again you've got more flexibility. But factor in the time, effort, energy, stress, and complications you're certain to run into.

Those are the important numbers. If you can't acquire the property for the relevant figure, then it doesn't matter what's owed to the bank or what the bank's rationale for pricing is.

Hope that helps.

Wed Jan 9 2008, 16:14