How Foreclosure Prices Are Determined

It is not uncommon to see multiple foreclosures while driving through a neighborhood.  This leads many to wonder how the price that these foreclosed homes is determined.  The price of a foreclosed home is determined when a lender takes over possession of the home.  During this time a prospective listing agent must prepare a Broker’s Price Opinion.  The Broker’s Price Opinion or BPO is determined in basically the same fashion as an appraisal.  The listing agent uses comparable sold properties in the area as well as any homes that are currently listed.  Once the listing agent determines the average market value of the home the asking price is then determined by calculating how much work would need to be performed on the property to bring it up to acceptable.

The final part of the BPO requires that the listing agent provide an as-is value, a repaired value and a 30 day value.  The 30 day value is the listing agent’s opinion of how much the price should be for the lender to receive an offer within the first 30 days of listing.  This amount can vary depending on the current market conditions and the comparable prices in the neighborhood.  The property manager responsible for the property will typically order at least two BPO’s and one appraisal before determining the final asking price.  It is common that most foreclosures are listed at fair market value minus the repair costs.

This is why it is common to see a home listed for less than others in the same neighborhood.  The other homes listed are typically being sold by owners and not the bank.  If you find a foreclosure that you are interested in, it is important that you determine how much work the home requires to make it acceptable.  If you find that the work that needs to be done is within your skill and budget level you can then ask the realtor to prepare an offer.  Keep in mind that you may not be the only interested party in this property.  In that case you should be prepared for a multiple offer situation. 

In the case of multiple offers, they are all presented to the asset manager in charge of the property.  It is up to the asset manager to determine which offer is in the best interest of the bank.  If multiple offers are made on a foreclosed property, it is common that the asset manager will more than likely choose an individual’s offer over that of an investor.  They are also more than likely to accept a cash offer over a financed one.  They also tend to take offers where the buyer chooses not to have an inspection done over an offer that includes an inspection caveat.  These are only some of the things that you should consider before making an offer on a foreclosed home.  Not all foreclosed homes are in bad condition, but keep in mind that there may be work involved in the purchase of a foreclosed property.

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