Need help with Reo opportunity! Urgent!

[Ivan Poon]

Hi guys, i'm a first time home buyer working with an RE agent that specializes in REO deals. He found a REO that seems to be way undervalued from the FMV.

Here's some stats:

2000 square feet, 3 bedrooms, 2 bathrooms, 2 car garage, roof is aslphalt, exterior is cedar shingles. It's missing the refrigerator, but it appears to have a built in oven and microwave into the wall (forgot to take a pic, d'oh... think it's missing a stove too)

The basement is almost finished... it has a full bathroom, a bedroom, a living room... needs a stove and refrigerator to finish out the kitchen.

This is in the Northeast (a fairly expensive part of the northeast)

The house was bought for about 520K back in 2003.

Zillow's estimate range is 430k to 600k (the 'zestimate' is about 520K)

The asking price is 370K. If i get my offer in fast enough before anyone else sees it (everyone's on vacation this weekend), i could probably get it for that price.

Today was the first day it hit the market and my RE agent said there were a long line of people in the morning to look at it.

The neighborhood is good... the only thing about the house is that it's most definitely 'unique' compared to the other houses in the neighborhood. You can see from these pictures i took:

http://www.flickr.com/photos/iypoon/sets/72157622270851340/

I labeled the rooms, so i dunno if you guys can give an estimate as to what obvious remodeling needs to be done.

My concern is that i don't know how to price the house considering there is probably going to be work that needs to be done. How much, i have no idea (at the very least painting and replacing the boiler). The outside of the house probably needs to be updated too, but i don't know how much... I'd probably be able to close before december 1st and get the tax credit, so i could at least offset the boiler. So do you guys think this is a 'deal'?

[Jon Holdman]

Zillow is useless as a source of values. Sometimes its close, sometimes its WAAAAY off. You have no way of knowing.

For an investor, the way to figure out values is to look at a lot of houses. Work an area, drive up and down every street, and look inside as many houses as possible. A hundred is ideal.

Find sold data. Actual selling prices are what matters. If you watch an area for a while, you'll eventually get sales on properties you've been inside. Even without that, you'll learn the floor plans and typical arrangements for the area. Drive around and look at the solds. You'll get a pretty good idea of what houses are actually bringing.

Try to separate distressed sales from retail ones. If the seller is a bank, and the house is undergoing renovation, it was a distressed sale. Often, its pretty easy to split these types of sales apart after watching for a while.

It sounds like you're new to this. About the best you can go quickly is to ask your broker to pull comps for the area.

Sounds like it needs a lot of work. The investor's rule of thumb for flips ($300-400K houses make terrible rentals) is to buy at 70% of ARV (after repaired value, market value when fixed up), less the repairs. If you think this is really worth $500K fixed up, and it needs $50K in work, this formula tells you that you can pay $300K. That's $500K * 0.7 = $350K. Then, less the $50K in work gives you $300K.

But without knowing the value, its impossible to say.

Also, keep in mind that banks aren't as dumb as they sometimes seem. On a new listing, they often try to get roughly market value less the cost of repairs. That would be $450K in my example. If its a desirable property, this often works. They're really looking for an owner occupant who's willing to put in some sweat equity and get a good deal.

Hot properties can draw a lot of bids quickly, and go for over the listing price.

You have little leverage with the bank on a brand new listing. They will be willing to let it set there for a while to draw a good offer. If its been on the market a year, you'll have a lot more negotiation room.

If you're determined to buy a REO, and want to close before 12/1/09, you need to spend the next week looking at 10 REOs a day. You need to make offers on two or three of each group, with short acceptance deadlines and an inspection contingency. Don't give any earnest money, just say "earnest money to be provided by certified funds within 72 hours of accepted contract." Give them a copy of a check, if need be.

Buying REOs is a heartbreaking business. You have to make lots of offers and take what you can get. If your heart is set on this house, offer something well above the asking price. Attach a nice big fat earnest money check. Don't put in any contingencies. Personally, I wouldn't do that, but if its intended to be your residence, and you're in love, you gotta pay the price.

Note that "as is" just means they won't make repairs. You can still do an inspection. If you put in an inspection contingency, you can bail out if that finds a problem. Or, renegotiate the price.