The process of overbidding to buy a home, whether it's a foreclosure or a regular sale, 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 that the asking price, the eventual sales price, and the market value of the home are often three different values. In some cases, the final sale might come in lower than some of the offers.
A Bank's Foreclosure Strategy
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. In a foreclosure, as in any home sale, 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 because 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, assuming the first buyer offered full price, even when they did not.
- The third buyer: Knowing there are a few offers on the table, this person offers the bank well above the asking price.
- 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 it's an all-cash offer. This buyer thinks their offer is golden. Paying cash to buy a home can vastly simplify and speed up the sales process.
And so it goes, the bank receives seven or more offers; these offers can be all over the board—some low, some high, and some incomplete. In the right market conditions, it might seem as though everybody and their uncle are throwing offers at the bank.
Reasons Behind the Selling Price
If a bank receives several high offers, why would it ultimately accept a lower one? There are a few reasons this might occur.
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, in some cases, the listing agent represents the buyer making a lower offer and purposely—although it is generally against the law in most states—pushes their 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, some of the offers might have been 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. This is one of the most common reasons that a bank will accept a lower offer.
The Bottom Line
If you're considering making an offer on a foreclosure, be sure you're working with an agent experienced in dealing with foreclosures. They can help you navigate the nuances of pricing your offer just right.