Where are the limits these days?

These days I work with a lot of would be buyers; or people who call themselves buyers, who are really thieves trying to steal houses. These would be investors are sure that they can bid $100,000 for a house that is listed in foreclosure for $200,000, and which used to be worth $400,000 a couple of years ago. I try to counsel them not to waste their time (and mine) with these off-the-wall, low-ball bids; but they insist on making them anyway.

That started me thinking about what is really reasonable or even rational these days. What really constitutes an unreasonable bid these days? Most of these first-time buyers have read all of the bad news about real estate and concluded that everyone is in such big trouble that even outrageously low bids will be considered by the sellers – be they private sellers or the banks.

Urban legends have grown up around those mythical perfect homes that someone supposedly bought for pennies on the dollar. In the legends the homes are in great shape (maybe needing a paint touch-up here or there, but otherwise move-in ready) and the final purchases prices extremely low. The reality for most foreclosure shoppers are cold, damaged or trashed houses that may have been stripped or vandalized; and, which require 10’s or 100’s of thousand of dollars in repairs. It’s not a pretty picture, once you get out actually looking at the foreclosure inventory.

So, where are the reasonable limits? It kind of depends on where the house is in the foreclosure cycle. Early on, in the redemption phase, you can bet that the bank isn’t going to entertain bids that are too far below what they just paid for the place at the Sheriff’s Sale. Why should they? At that point they don’t have full control, with the owner still in the picture. After foreclosure, most banks will try a market testing period, where they will try to get the full market value for the house, with that value being normally determined by a Realtor. Generally they just ignore low-ball bids during that time.

After a few months they finally go into “dump it” mode and price it to move quickly. The properties normally sell within weeks of hitting that price, but that is not a time to come in and low ball that “dump it” price, which too many first-time buyers try to do – often bidding 10-20% less than the asking price. Then they are all disappointed when someone else gets the place for the asking price. The “someone else” who normally wins is a savvy investor, who bids at or above the “dump it” asking price.

I generally advice my clients to bid 95% or better of the “dump it” price, once it gets there. Many of them ignore my advice and lose house after house, until they give up or start listening to my advice. Many just sour on the whole foreclosure market and go back to looking for good deals on regular houses (which, unfortunately they like to low-ball, too). The idea is to understand for any market where the limits are of reasonableness. Buyers can learn that from their Realtor. Full-time Realtors work at every day and they know what is reasonable and what is not for any given situation. So, listen to the advice that you get from your Realtor.