Under-market-value home prices should raise a red flag. But in markets that experience a huge and sudden influx of foreclosures, it's hard to tell. Part of the problem is that banks sometimes underprice deliberately. However, there's more to those artificially low prices that appear to be under market value.
- Many factors affect home prices, but some sellers undercut prices for specific reasons.
- A price might be low because banks might be advertising starting-foreclosure auction prices or short-sale prices to attract buyers.
- A home might not have an attractive location or might need a great deal of repair, or there could be a mistake in the listing.
Types of Under-Market-Value Home Prices
In any given market at any time of the year, you're likely to find home prices that sound too good to be true. Before you jump on these under-market-value home prices, ask your agent to help you understand why those homes are priced so low. What types of under-market-value homes exist? Let's take a look.
These are homes lenders have seized in foreclosure transactions. Why did the banks take them? Because nobody met the banks' prices at the courthouse steps, meaning the bids were lowball offers. Because the asking prices, which might have been the amounts owed against the homes, were simply too high above market.
The price you see advertised might be an opening bid price for an auction. Auctions bid up the price, often to market value. If the bank is undercutting the price from market value, that's probably because it wants to encourage multiple offers to drive up the price.
For the most part, these prices are fabricated. Nobody knows what the bank will accept, so agents tell sellers to price a short sale really low in hopes of attracting deal-hungry homebuyers.
However, banks take their sweet time responding to short sales, in part because they will order a broker price opinion (BPO), and that can take a while. If the comparable sales don't support the sales price, it's unlikely that the bank will accept your offer. That is one of the many reasons to avoid short-sale homes.
Homes that require a great deal of repair, whether it's failing foundations or collapsing roofs, are heavily discounted on price. If you're not a contractor, perhaps these types of fixer-upper homes aren't for you.
There may be hidden defects you don't see, which could double or triple your repair budget. Always get a professional home inspection, then verify repair costs with a contractor. If the cost of repairs brings the sale price to market value, you could instead buy a home in move-in-ready condition and save yourself the hassle.
Homes in Bad Locations
You can't fix a bad location. You can fix functional obsolescence, but you ordinarily can't move a home from its spot. If it's next to the freeway, a landfill, or a commercial zone, you're pretty much stuck. Remember the mantra: "Location, location, location."
If the price is below market value when you buy such a home, you'll also need to price it below market value when it comes time to sell it. Anything will eventually sell if it's priced low enough.
Homes Priced Too Low by Mistake
It's easy to make a typo when inputting the home price to MLS. Agents can leave off a zero at the end or type a "2" instead of a "3" as the first number in a home's value, both of which dramatically alter the price. Newspapers do it, too. So it could be a misprint.
Call the listing agent or seller to determine whether the price is correct before getting excited about the property. If the price seems to be under market value, there is probably a very good reason for it, which might not result in the magical deal you're expecting.