Why a Foreclosed Home Sells for Less Than What You Offered the Bank
The process of overbidding to buy a home, whether it's a foreclosure or a regular home, is often very confusing to buyers. Part of the reason buyers are confused is that they might think the price of a home is the value of the home. The truth is the asking price, the eventual sales price, and the market value of the home can be three different values—and often are.
Bank-Owned Foreclosure Sale
When a bank-owned home comes on the market as a foreclosure home, it can attract many buyers if it's priced attractively. Say, for example, the bank wants to sell the foreclosure for $250,000. The bank might price that home at $240,000, hoping that buyers will easily see the home is priced far less than it is worth and be drawn like moths to a flame. Underpricing is one way a bank can get multiple offers for a foreclosure home.
The problem that can arise is sometimes agents don't do a very good job explaining to potential buyers why underpricing occurs and how to make underpricing work for the buyer's benefit.
Making an Offer Over the Asking Price
If the home is priced too low, many buyers will probably make offers over the asking price. The asking price is simply the starting place for negotiations.
The following is an example of how the process of buyer's offerings may work. This should help you understand the process behind each offer and price. You will also see how each offer might rank, depending on the order in which they are received.
- The first offer to buy—The offer is slightly under the asking price. That's because the buyer is first and there are no other offers on the table.
- A second offer to buy—This buyer offers a price at the asking price or $1,000 or so above. That's because the buyer figures the first buyer offered full price, even when the buyer did not.
- The third buyer—This person offers the bank quite a bit above the asking price. That's because the buyer wants to beat out the first and second buyer.
- The fourth offer—This is also above the asking price but it could tie with what was offered by the third buyer. That's because the buyer is hoping the third buyer might back out.
- The fifth buyer—This price is above list price with a hefty earnest money deposit and a shortened inspection time. This is often the buyer who really wants the home.
- The sixth offer—This offer is a little bit below list price but an all-cash offer. This buyer thinks their offer is golden. Maybe they are right; maybe they are wrong. There are advantages to paying cash to buy a home.
And, so it goes, the bank receives 7 or more offers, these offers can be all over the board. Some low, some high and some are incomplete. It might seem as though everybody and their uncle are throwing offers at the bank.
Reasons Behind the Selling Price
A lot can happen during an inspection period and offer negotiations. The terms a bank agrees to in advance can change. A tree can fall on the house or market conditions could suddenly worsen. Not to mention, interest rates could go up, putting downward pressure on prices.
Sometimes the home could require extensive work, which was revealed during a home inspection. In these situations, buyers can ask the bank to lower the price to reflect a newly discovered condition.
Also, the listing agent represented the buyer and purposely—although it is generally against the law in most states—pushed her own buyer's offer to the top of the pile while downplaying the other offers. Not every real estate agent is an ethical agent.
Finally, the buyer might have offered a price that was too high to be substantiated by an appraisal. In that event, generally, a bank will lower the price to match the amount of the buyer's appraisal. A low appraisal is the most common reason.