Are Those Under-Market-Value Home Prices Real or Fake?
Here's How to Spot Bogus Pricing
Question: "I'm finding a lot of homes on the market that are advertised at really low prices. However, when I tried to buy a home with a low price tag, the seller refused to accept my offer. Can they do that? Are those really low home prices for real or fake?"
Answer: Under-market-value home prices should raise a red flag. In markets that experience a huge and sudden influx of foreclosures, it's hard to tell. Part of the problem is banks sometimes underprice deliberately. But there's more to those artificially low prices that appear to be under market value.
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-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:
- Foreclosures: These are homes the bank has seized in a foreclosure transaction. Why did the banks take them? Because nobody met the banks' price at the courthouse steps, meaning the bids were lowball offers. Because the asking price — which might have been the amount owed against the home — was 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, it's probably because the bank wants to encourage multiple offers, which will also drive up the price.
- Short Sales: 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 banks 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 the bank will accept your offer. There are many reasons to avoid short sale homes.
- Fixer-Uppers: 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 that you don't see, which could double or triple your repair budget. Always get a professional home inspection and then verify repair costs with a contractor. If the cost of repairs brings the sales price to market value, why don't you 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: 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 find out if the price is correct before getting excited about the property.
Realize that if the price seems under market value, there is probably a very good reason for it, which might not result in the magical, hot deal you're expecting.
Tip: Ask yourself, why isn't the listing agent buying this home?
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.