Finding The Best Deal

One question you should be asking is, “How can I find the best deal when buying a home?” We all want the best deal, whether we are buying real estate or anything else. Why is the term, “sale” used so much in marketing? Because to most people, sale means deal, and a deal is exactly what every person is looking for.

Home buyers are no different.

Let’s start with the definition of a deal.

Every individual buyer has a different take on what a deal means, but the term is almost always associated with getting a great price on an item. So, do you think you got a deal just because you got a great price? Sometimes a perceived deal on the price is not much of a deal at all!

Let’s imagine a couple: Robert and Cynthia. They purchased a home for $20,000 below its current market value, but the market has fallen at a rate of 5% per month for the past six months. Is this really a deal? It won’t take long for the market’s negative slide to catch up with that $20,000 savings.

That same example would also not constitute a deal if they had to put twenty thousand dollars or more into the property in order to make it comparable to the other homes on the market. This is why the term deal has many hidden meanings.

When talking about price, you need to see the whole picture—this is where a good Realtor® comes in. A good Realtor® can provide a “comparative market analysis” (CMA) on the home to determine the market value of comparable properties in the same neighborhood.

Most people associate a CMA with home sellers, but a CMA can have equal, if not more importance for you. Unfortunately, many realtors don’t perform a CMA when working with a buyer. For example, if a home is priced at $200,000 and you are interested in this home, many realtors will write an offer without researching the market. Without research, or doing a proper CMA, how are you supposed to know if the home you are buying is a good deal? Unfortunately, this happens all too often, and you can end up offering more than you have to.

Even if you feel that you got a great deal, a little research may indicate that the falling market turned their so‐called deal into an over‐payment. As illustrated here, a CMA is an absolute must when buying any home.

It is important that a CMA be done properly. Most realtors will only do a surface CMA of the property. They look at the home’s basics: square footage, number of bedrooms, and bathrooms. Then, print a list of all homes in the same neighborhood listed for sale and sold in the past six months.

There are other factors needing consideration.

  • You need to know whether the sellers paid closing costs on behalf of the buyers. This will better determine the net dollar amount properties are selling for in the area
  • Some neighborhoods are very small, or have very little turnover. A radius search of at least one mile in every direction is recommended to find all sales that are comparable to the subject property
  • How should these homes compare? In addition to having the same number of bathrooms and bedrooms, the homes should not be more than 15% larger or smaller than the subject property and no more than five years apart in age

A professional Realtor® will also obtain the “absorption rate” of the neighborhood and the comparable properties. The absorption rate tells you how quickly or how slowly a market is moving. Although it sounds fancy, the absorption rate is nothing more than the number of homes being sold each month divided by the number of homes available for sale.

For example, if 100 homes are available for sale and only 5 homes sell each month, the absorption rate is 5%. This means there are 20 months of available inventory on the market. This doesn’t account for the future inventory likely to hit the market. This is a key piece of information to know if you are a buyer trying to get a good deal.

Taking this a step further, the professional Realtor® should provide the success rate of sale of the comparable properties. Basically, this shows every home that has been on the market in the past six months and every property that has sold as well.

For example, if there have been 150 homes on the market for sale—including active properties, properties under contract, those that have expired, and those that have sold— and only 20 of these were sold in the past six months, this would be a successful selling rate of only 13%. This rate will help to determine the price at which a particular home should sell. It will also help you determine a good initial offer to make on the home. All of these factors need to be used in order to determine how much to offer.

So far, the focus has been on determining a good deal with regard to price. There are many other factors, however, that determine whether or not a home is a good deal. These factors have to do with your personal preferences. Homes may be situated in a specific neighborhood or school district or have amenities that no other home can match.

The importance of these factors will vary from buyer to buyer, and will influence your offer. Overall, though, home buying usually comes down to price, and few homes can offer a better price than foreclosed homes.

Foreclosures

When talking about foreclosures, it is important to understand a few key terms. Put simply, a foreclosure is a home for which the owner has stopped making payments, causing the bank to put it up for auction.

Many in real estate refer to a home as a foreclosure when trying to sell it for a bank or financial institution. This is actually more correctly referred to as an REO property (Real Estate Owned, by the bank).

Why are these homes often the first that are sought out by many buyers? It is simply a perception that these homes are a great deal. Truly, they often are, and every buyer should consider them. Often, they are priced less than other comparable properties in the same area.

The reason for the discount is often times these properties need some sort of work or updating in order to get them to the standards of other comparable properties. Most of these homes are sold “as‐is.” Meaning, the bank will do no work on the property, no matter what is found on an inspection report. Usually there is a monetary reward, or a lower price, on a bank‐owned home than what you typically find on any other property available on the market.

Short Sale

Another type of home that represents a good deal to you is the short sale. A short sale home is where the property owner owes more than the home is worth. The property owner may be delinquent in their payments due to a hardship of some type, like a divorce, job loss, death in the family, or any other situation.

The bank will review the owner’s financials in great detail, then weigh the outcome of accepting an offer “short” of what is owed versus foreclosing on the home owner and selling the home as an REO property. Banks may be willing to accept less than is owed because of the tremendous cost of securing, marketing, preserving, and selling the REO property.

Often, short sales can represent an even better deal to the buyer than REO properties because many of the extra costs incurred by the bank on an REO property are avoided with a short sale. Typically, the owner is still living in the property and maintaining it so the bank doesn’t have to.

Still, the extensive report and financial calculations by the banks and their loss mitigators are not without drawbacks. The biggest drawback is the overall time it takes to complete these sales. If you are in no hurry to move into the home, or to even get an answer on your offer in a reasonable period of time, then the short sale can be the perfect option.

How Long Will It Take?

It typically takes anywhere from two months to as many as eight months to even get an answer on whether the buyer’s offer is acceptable. The other big drawback is that like REO properties, the buyer must purchase the home as‐is.

In both the case of the short sale and the REO, it is imperative for the Realtor® to do their homework on repair issues, and other costs that could tip the scales on whether or not the purchase is a great deal for their client.

Are There Other Resources?

Other sources for finding great deals are readily available to anybody with an Internet connection. The MLS (Multiple Listing Service) or affiliated websites like Realtor.com provide every listing available for sale in the local MLS where sellers have hired a Realtor®. Often, this includes all short sales, REOs, distress sales, investor sales, and many other types of properties that can represent a good deal for you.

Off-Market Inventory

One market segment that is often overlooked by many buyers and their realtors is off‐market inventory. Off‐market inventory is often referred to by realtors as expired, canceled or withdrawn listings. In other words, these sellers were trying to sell their home, but for some reason, the home did not sell.

Your mindset in looking for these types of properties has to be one of catching these people in a vulnerable state. Most likely, they have been on the market for a minimum of four to six months. Within that time frame, they’ve had many strangers disturbing their normal routine and walking through their home and looking through their things.

These off‐market sellers are frustrated that no one has decided to purchase their home. In most cases, a savvy Realtor® can pull up all the details on these properties and send them to you. They can also gather contact information for these sellers and set up a private showing with you.

This benefits you when looking for a deal because the seller will probably be more willing to negotiate a lower price on the home: It is a one‐on‐one situation. You solve their problem, and they will no longer have anyone else walking through their home.

In this situation, the seller can afford to sell their home for less than it was previously listed because they now only have to pay the Realtor® representing you. Due to this savings, they are usually willing to cut their price considerably, and you inherit the savings that were once reserved for paying commission.

No matter how the house is found, whether a foreclosure, REO, short sale, off‐market home, traditional seller, or any other type of home, the key component to make everything work effectively for you is a top notch Realtor® working on your behalf.

The difference in working with an average Realtor® and an exceptional one can be the difference in getting a good deal or no deal. Often, if you choose to work with an average Realtor®, you will not get as good of a deal as you would if you had chosen a better one.

In the next month’s installment, we’ll go more in depth on buying Foreclosure homes.

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