Analyze a “Below-Market” Deal: Comparable Sales

The art of analyzing a home’s “comps”—once the exclusive domain of real estate agents and appraisers—is now open to everyone thanks to sites like Zillow and Redfin that display detailed data on sold homes.

The basic process is simple: Make a list of recently sold (within the last 3 months, ideally) homes similar to the one in question (size, floors, beds, baths, lot size, age, etc.) that are as close to the home of interest as possible. Knowledge of the neighborhood will be necessary to weed out homes that may be nearby, but are in a part of the neighborhood that is much nicer (e.g. – has amazing views) or much worse (e.g. – on a busy street) than where your potential home is located.

On Zillow, the map info bubble that pops up when you search for an address has a link called “Comps” with a little yellow house icon. Click that and you will be brought to a map of the area with recently-sold homes Zillow thinks are similar. On Redfin, there is a section of every home’s details page at the bottom titled “Nearby Similar Sales.” You can get a similar map of the homes listed there plus other comps in the area by clicking the “Map Similar Recent Sales” link at the bottom of that section.

With both of these sites, you’ll need to open each individual home that is returned as a comparable result to do a manual sanity check. Once you’ve got a decent list of homes (shoot for 5-10), compare their sale prices to the home you’re looking at, adjusting the sale price for any differences in features.

As an example, let’s say we’re looking at a hypothetical $190,000 home with 1,800 square feet on two stories, three bedrooms, 1.5 bathrooms, on a standard 5,000 square foot city lot. Nearby we find one similar home that sold for $270,000, one with half its square footage in the basement that sold for $170,000, one in really poor condition with ~20% less square footage that sold for $185,000, and a similar home that sold for $234,000. Given that the two homes that sold for less than the asking price on this home were either significantly smaller or in bad shape, $190,000 looks like it could be a decent deal.

In general, if the house you’re looking at is asking 15% or more less than what nearby comparable homes have sold for in the last three to six months, there’s a good chance that you’re looking at a nice below-market deal. Keep in mind that the moment you close on a house, you effectively lose 8% of the value since it will costs 3% to a buyer’s agent, 3% to your selling agent, and 2% in excise tax when you want to sell, so you want to have a buffer that’s around twice that amount at a minimum.

How To: Analyze a “Below-Market” Deal

Full disclosure: The Tim is employed by Redfin.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

60 comments:

  1. 1
    Ahau says:

    Thanks, Tim!

    I’d also add that if I’m looking at a sale that is not a short sale or a foreclosure, I would cull out comps that are short sales and foreclosures. Those sales came with a discount based on the risks inherent in purchasing them, and should either be adjusted for that discount or eliminated from consideration.

    Also, there’s a lot that goes into adjusting a comp when you’re looking at more or less square feet, rooms, etc. It’s not rocket science, though it’s still complicated if you’re looking at really unique properties. It can be particularly useful to dig up the last appraisal of your own home (or any other residential appraisal you can get your hands on) to see how the appraisers were operating.

    For example, my appraiser adjusted comps by $30/sqft for differences in size, $1,000 for an additional bath, and $3,000 for an additional bedroom (though all of these would change, I’m sure, depending on the neighborhood). It’s not a certified appraisal, but it’s worth what you pay for it (i.e., your time).

    I run this exercise for my own place every few months.

  2. 2

    From piece: “The basic process is simple: Make a list of recently sold (within the last 3 months, ideally) homes similar to the one in question (size, floors, beds, baths, lot size, age, etc.) that are as close to the home of interest as possible.”

    You left out two of the most important things. Style of house and type of sale.

    A split entry is not a good comp for a two story. You should be able to weed those out by looking at the listing pictures.

    A short sale or bank owned is not typically a good comp for a normal sale.

  3. 3

    By Ahau @ 1:

    For example, my appraiser adjusted comps by $30/sqft for differences in size, $1,000 for an additional bath, and $3,000 for an additional bedroom (though all of these would change, I’m sure, depending on the neighborhood). It’s not a certified appraisal, but it’s worth what you pay for it (i.e., your time).

    The problem with appraisals is they don’t adjust enough for condition–particularly kitchens. Also, an additional bath might be worth $1,000, if you’re talking about the difference between a 5 and a 6 bathroom house. ;-)

  4. 4
    Ahau says:

    RE: Kary L. Krismer @ 3 I’ll agree with you on adjusting for condition.

    In my case, we’re looking at the difference between 2 and 3 baths, in 3 bedroom townhomes. I’d pay $1,000 for a 3rd bath any day of the week, and that’s not even amortizing the cost over 30 years. Same goes for another bedroom @$3,000. I think it’s fair to say that his adjustments were made more along the lines of the cost to build in a new construction setting, rather than what those features would add to the sales price of the subject home in a balanced market.

    At a certain point, however, when you’re dealing with a variable that makes up less than one or two percent of the home’s value, it becomes moot to most buyers/lenders.

  5. 5

    RE: Ahau @ 4 – My point was $1,000 is low, and that you’d be willing to pay that “any day of the week” bears that out.

    BTW, three years ago I did a blog piece on going up against an appraiser as an expert witness.

    http://blog.seattlepi.com/realestate/archives/124688.asp

    He used $5,000 per bathroom, which was low, especially where the comparison was between 1 and 2 bathroom homes.

  6. 6

    By Ahau @ 4:

    At a certain point, however, when you’re dealing with a variable that makes up less than one or two percent of the home’s value, it becomes moot to most buyers/lenders.

    I’d agree with that. A good example would be a house that is 1,500 square feet compared to one that is 1,575. I wouldn’t even adjust at all for that. Layout could be far more important.

  7. 7
    Ahau says:

    RE: Kary L. Krismer @ 5 – Yeah, I wasn’t very clear in my post, but I was agreeing with you that $1k was low for a bathroom in this situation. I was shocked to see that on the appraisal.

    I’m often tasked with valuing raw land at work, so it was enlightening to get a glimpse of the residential end of things while buying my own place.

  8. 8
    Lurker says:

    RE: Ahau @ 1

    Naturally, a buyer cherry picking all of the REO comps would not be an inaccurate representation of market value akin to a seller that uses overpriced & unsold listings to prop up their asking price but foreclosures and short sales are a very active part of today’s market. I agree that there can be more risk involved with going after those particular properties but to strike them completely as comparables is silly. I feel that as long as the comp is similar in condition then it should be taken into consideration regardless of being distressed or not.

    Many short sales, in fact, can be very legitimate comps. A short sale only means that the seller is unable to sell the property for more than what they owe. Short sales can be time consuming transactions and deals may fall through if banks and lenders do not cooperate but only the buyer can truely put a price on what that cost might be.

    Another case in point might be where there are more recent distressed sales comps than non-distressed. Obviously, a high level of distressed properties can bring down the overall neighborhood’s value.

    Finally, distressed sales can be a good indicator of what the home’s value might be worth if the seller found themselves in a similar situation and was unable to make payments. From what I’ve heard, many banks are considering this in their own appraisals now.

  9. 9

    RE: Lurker @ 8 – Well if you can get a normal sale for the price of comparable short sales or REOs, go for it. Just don’t expect to get a discount from that, and realize that you’d be doing very well to do that well.

    Stated differently, if you think you don’t think there’s a discount for properties of a type only maybe 20% of buyers have an interest in, you’re fooling yourself. Less demand means lower prices.

  10. 10
    Lurker says:

    It took me several re-reads but I think I see where you are coming from and perhaps where I lost sight. You cannot compare distressed to normal because a factor of being distressed typically commands a decrease in value and this quality cannot logically be passed over to a non-distressed property.

  11. 11

    RE: Lurker @ 10 – Or maybe it’s the quality that results in decreased value?

    I’ve seen REOs where they have gone in and really fixed the place up to make it look nice, but which inspected very poorly. Couple that up with the lack of any meaningful warranties and questions about whether you’ll even close at all on short sales, and the properties usually don’t command the same price.

  12. 12

    BTW, the Zillow Android app seems better than the full webpage at finding sold comps, especially if you’re at the location of the property to be valued. If you start at the comp at the top of the screen you can click through all the comps, and even go look at listing photos where available. It’s pretty slick. Not as nice as the NWMLS Matrix system, but it does pull up non-listed sales too.

  13. 13
    ray pepper says:

    RE: Ahau @ 1

    “Those sales came with a discount based on the risks inherent in purchasing them,”

    “eliminated from consideration?”

    HUH???????????????…I’m sorry but do you have any clue what you are talking about?

    You better factor in each and every REO and short sale into any assessment of value. There is substantial risk in purchasing property from a seller, estate, REO, or short sale. Risk is universal and nor MORE or LESS from an REO or shortsale. This is why inspection and title is done……….

    If you have 2 Reo’s in a given neighborhood at 200k. A short sale at 190k..and 3 similar properties all listed at 230k with conventional sellers I’m here to tell you that if all size, location, age, and deferred maintenance is the same the value is 190k TOPS… You can throw all the others above it out the window.

  14. 14
    David S says:

    Given there are 39 houses on Refin that match my particular search criteria and location that have an average CDOM of around 180 days and counting I don’t expect there are any cherries in there left to pick. In fact, there are no deals to be had. These sellers must only be interested to see their homes listed. Redfin presents the simple comparable for me to review and shows these listers to be way off the comparable sales. And bless it’s heart, Redfin is reaching way back six months to try and help me! And I think it uses distressed sales too. Who in their right mind would not consider distressed sales for comps? Only the condition must be taken into account on the sanity check.

    Thanks Tim looking forward to the continuing coverage.

  15. 15

    By ray pepper @ 13:

    If you have 2 Reo’s in a given neighborhood at 200k. A short sale at 190k..and 3 similar properties all listed at 230k with conventional sellers I’m here to tell you that if all size, location, age, and deferred maintenance is the same the value is 190k TOPS… You can throw all the others above it out the window.

    That’s just wrong, unless you’re an investor and can take the chance on the short sale closing, or are a renter and have very flexible ability to move (e.g. you’re renting from a relative).

  16. 16
    ray pepper says:

    RE: Kary L. Krismer @ 15

    Sorry, Kary never pay retail when given the opportunity at wholesale or less. In my above exp I could never recommend to my client to pay 10-40k more if there is a very good chance of the short sale closing. Personally all mine have closed except 2 that went to Trustee Sale. Then my Buyers bought it back when relisted as an REO. Very well worth the wait.

    No Buyer should be rushed to do anything when THEIR money is on the line and they have the opportunity to purchase the same property for far less. This is why I recommend to everyone to look at Trustee Sales 1st, REO’s, Short Sales, then all the others can get in line………….

  17. 17
    David S says:

    RE: ray pepper @ 16 – Your trustee sales are ok for you but most of us can’t sustain attending week after week of relentless auctions that cater to cash only investor market bases.

  18. 18
    Lurker says:

    RE: Kary L. Krismer @ 11

    Right. The additional risks associated with a distressed listing usually result in a decrease in asking price compared to normal listings. Perhaps there could be some cases where distressed comps can be used for normal listings but in general you really cannot compare the two since the normal listing does not possess those same risks.

    Like you said, if you can get away with it, go for it, but it is really not a fair comparison (like a seller using unsold listings) and I lost sight of this in my original post.

  19. 19
    David S says:

    RE: Lurker @ 18 – How is it not fair? If I buy a certified used Toyota from a Toyota dealer they will be charging a premium. If I buy the same car for a better price from a Chevrolet dealership then there is risk but I get a better deal. The KBB value still factors my higher risk sale at a lower price into it’s comparables. Sure, it’s a consumable commodity, same situation with distressed property versus conventional more traditional sales. I’m including all sales and giving consideration to condition. Actually there is no more or less risk on distressed sales once you close. Closed sale is a closed sale. Ask anyone in sales.

  20. 20
    ray pepper says:

    RE: David S @ 17

    David contact Guild Mortgage and speak with Ian..As long as you have 20% down, credit score above 640, your good to go with an exit strategy of an immediate refinance…

    Yes, it takes ALL cash but not necessarily yours. Pay the 4pts and get the 2 point rebate for an immediate refi in less then 45 days and your done.

    Due diligence and time is all you need David. You already found the Bubble don’t think you cannot do it.

  21. 21

    RE: David S @ 19 – It’s more like this.

    Three used comparatively equiped 2008 F-250 pickup trucks w/ 30,000 miles. The first is owned by the original buyer, who can give you all the maintenance records. The second is owned by the bank, either as the result of a repo or a lease return. The third is owned by a private party and his estranged wife, but the wife is out of the country for 2-4 months and doesn’t even know the husband wants to sell the truck or the price he set. You are currently leasing a vehicle and that lease expires in two weeks.

  22. 22
    David S says:

    RE: Kary L. Krismer @ 21 – I would be kicking some serious tread, my due diligence so to speak.
    RE: ray pepper @ 20 – Guild Mortgage, It’s bookmarked I’m on it. Thanks.

  23. 23
    ChrisM says:

    I realize the blog is geared towards Seattleites, but can someone comment in appraising hobby farm properties? Is soil type, grade, water sources/rights taken into consideration? Thanks!

  24. 24
    ARDELL says:

    Not to be overlooked:

    If the properties are newer and in the same neighborhood, be sure to look at the original purchase price of the comps and the subject property. I just did a valuation where “on paper” the properties looked the same. But the comp home was originally sold by the builder for $50,000 more than the current property for sale, at time of original construction.

    I don’t really know why or care why the comp was worth $50,000 more at time of original sale, even though it was the same model with the same square footage and the same size lot. If this house that is for sale was worth $50,000 LESS when it was built, for whatever reason, it is not worth the same as that recently sold comp today.

  25. 25
    ARDELL says:

    RE: ChrisM @ 23

    Chris,

    One of the most significant value issues for a “hobby farm” is to what extent the land can be subdivided in the future. Of course codes with regard to that can change, but if one is subdividable into 20 lots and another only 12, the one that can be subdivided to 20 is usually worth more.

    Also, check for abandoned underground oil tanks. Just because the property is currently heated by electric or gas, does not mean that it was never heated with oil.

    Rarely will the appraiser be able to find 3 suitable comps for a hobby farm purchase. They almost always go to “field review” trying to find similar property much further away than a normal appraisal allows.

    When considering a hobby farm you should see many before they sell, even if you don’t really like those to buy them. It will give you a feel for relative value, as appraised value is almost always “a shot in the dark”. The few friends and family I know who bought hobby farms spent years looking for just the right one.

  26. 26
    BillE says:

    By Kary L. Krismer @ 2:

    A short sale or bank owned is not typically a good comp for a normal sale.

    In a lot of areas, shorts and bank owned ARE the normal sales.

  27. 27
    me says:

    Comps are dangerous right now; they often reflect data from a time with different conditions (in bubble/assumption that mortgages will be tax deductible/sold at a time of 4% mortgages). If you factor in that a lot is changing, and project forward a bit, reasonable estimates might well be below comps.

  28. 28
    softwarengineer says:

    RE: ray pepper @ 13

    I Agree More With You

    Buying the most riskiest investment of your life now-a-days doesn’t just mean grabbing up the top fish 15% below the water; especially, when economic growth and unemployment are both in the crapper for Seattle.

    Perhaps if your employment outlook the next decade is totally global, there’s some hope, but even Seattle global management jobs can easily be insourced/outsourced for lower wage rates.

    I heard a blogger joke yesterday that made me chuckle, the contributer wrote that the current MSM economist(s) pushing Recession’s over could easily be replaced by a cheaper foreign replacement and perhaps the new low wage insouced/outsourced economist(s) wouldn’t be making so many bad predictions the last 10 years, as the domestic ones. LOL

  29. 29

    […] at a home that is priced below market.How To: Analyze a “Below-Market” DealIntroductionComparable SalesNearby RentsHistoric PricingPosted in Features | Tagged appraisal, how-to, overvalued, undervalued, […]

  30. 30

    By ARDELL @ 24:

    I don’t really know why or care why the comp was worth $50,000 more at time of original sale, even though it was the same model with the same square footage and the same size lot. If this house that is for sale was worth $50,000 LESS when it was built, for whatever reason, it is not worth the same as that recently sold comp today.

    Some builders are apparently a bit like buying a computer at Dell. You can select all sorts of extras. I ran across a property this year where the seller kept the list, and it was about 20% of the purchase price!

  31. 31

    By BillE @ 26:

    By Kary L. Krismer @ 2:

    A short sale or bank owned is not typically a good comp for a normal sale.

    In a lot of areas, shorts and bank owned ARE the normal sales.

    I wouldn’t say a lot, but there are some. One example I can think of is a group of stand alone condos built in probably 2005-2007 in an area where they were the only condos within about two miles or more. You could value it by looking at SFR sales and applying a discount, but absent that the only data you’d have would be short sales.

  32. 32
    Ahau says:

    RE: ray pepper @ 13 – Ha Ha, Ray, you crack me up.

    Yes, there is risk inherent in any purchase. There is risk inherent in waking up in the morning. But, to say that entering into a PSA and buying an REO and a Short Sale are no riskier than a conventional purchase, for an average buyer (not an investor)… do YOU have a clue what you’re talking about?

  33. 33

    RE: Ahau @ 32 – My favorite clause in most REO contracts is the one where if you breach they keep your earnest money, but if they breach they return your earnest money! There was a recent court case upholding such one-sided clauses.

  34. 34
    Ahau says:

    RE: Kary L. Krismer @ 33 – What kind of deed would a buyer get from an REO or a short sale? WD, QCD, or B&SD? Any additional exceptions on the title policy?

    I will qualify my statement in comment #1 to say that one should identify which sales are conventional and which are distressed. If you’re trying to determine the fair market value of a conventional purchase in similar terms as an appraiser, then adjust the distressed comps or eliminate them if you have enough conventional sales. Determine your desired discount from FMV from there, and make an offer.

    If you’re looking at buying a short sale or an REO, then ignore or adjust the conventional sales and use the distressed comps to establish whether or not you’re getting a better deal than others who have been buying distressed properties.

    My point is that distressed sales need to be accounted for, just like location, age, quality, size, etc. If you’re looking to determine fair market value, your goal is to find comparables that are as similar as possible to your subject, and adjust them from there as needed.

  35. 35

    By Ahau @ 34:

    RE: Kary L. Krismer @ 33 – What kind of deed would a buyer get from an REO or a short sale? WD, QCD, or B&SD? Any additional exceptions on the title policy?.

    The bank sale would be a more limited form of deed, such as a bargain and sale deed, not likely a warranty deed. A short sale would likely be a warranty deed, but from someone likely insolvent. I really don’t consider those issues that big of a deal because of the title insurance you mention. I’m not aware of any additional exceptions on a title policy for either an REO or a SS.

    The bigger issue would be whether you even close. Maybe the bank discovers a flaw in their foreclosure process. Maybe the short seller discovers that the bank won’t waive the deficiency and doesn’t want to close. If you find that out 2 days before closing and you’ve given your 20 day notice to your landlord, you could be in trouble without any real recourse.

  36. 36
    Ahau says:

    RE: Kary L. Krismer @ 35 – Thanks, Kary.

    I’d probably rather get a Warranty Deed from an insolvent party (assuming they took title on a Warranty Deed themselves) than a Bargain and Sale from a bank. Title was a big issue for me, but probably only because I’ve dealt with more title problems and seen more title company errors than the average buyer.

  37. 37

    RE: Ahau @ 36 – One thing I noticed in my attorney days was that title insurance companies seemed to cover things they had clear exceptions for, and didn’t cover things that they should have covered. Note though that I didn’t do real estate law, so I have only a few dealings with title companies on claims (as opposed to just on transactions).

  38. 38
    ray pepper says:

    RE: Ahau @ 32

    Good Luck Ahau. We need Buyers like you in the market. Just like the car dealerships occassionally sell for the sticker price on the car.

    Keep the wheels turning for us all!

    (Remember Ahau, when you choose to buy real estate (NOT RENT) you are ALWAYS an investor. (Today, more so then ever.)

  39. 39
    Ahau says:

    RE: ray pepper @ 38 – Thanks, Ray. We need agents like you in our market too. Just like the car buyers who need a used car salesman telling them that there’s no risk in buying a 12 year old Mercury with an unplugged odometer and a lost title.

    But–it’s ok, you have a mechanic friend who listened to the engine.

    (Remember Ray, when you choose to buy a home for your family (NOT A RENTAL OR A FLIP), making a pile of money in the near term should NOT be your main consideration. Today, just as much as ever.)

  40. 40

    RE: ray pepper @ 38 – Not surprising that you don’t understand risk—-considering how often you eat at Claim Jumper! ;-)

  41. 41
    ray pepper says:

    RE: Kary L. Krismer @ 40

    tell me about it Kary..uggh had the Chili, Pretzles, and the chix salad sandwich..It was good!

    Ahau……..has nothing to do with MAKING a pile of money in the short term. You are buying into a depreciating asset environment and most likely will be overpaying from what I have read. If for some reason you and your family must sell this home and get out from under it for any reason you will be in BIG trouble unless of course you are placing 50% down.

    But, either way good luck and at least take the time to look into Vestus or Data Snap so you can really see what the homes around your tgt area are selling for. You will be glad you did and rethink your strategy.

  42. 42
    Daniel says:

    By Kary L. Krismer @ 15:

    That’s just wrong, unless you’re an investor and can take the chance on the short sale closing, or are a renter and have very flexible ability to move (e.g. you’re renting from a relative).

    I never understand your argument there but what is the worst case here? It may be a little inconvenient to have to move twice instead of once, put most of your stuff in storage and move to an apartment (with no or a short term lease) temporarily but that is really the absolute worst happening to a renter if the deal falls through (More likely one will be able to work out a deal with either the old landlord or with a new one – been there, done that). There are some minor costs associated with the inconvenience but considering how rarely one buys a house I would rather search or wait for months to find the right place than jump into things to quickly and overpay or get a property that was far from ideal.

    I completely do not understand why closing time is such a big issue for some people. I however agree that there are other risks very well worth considering.

  43. 43
    Jonness says:

    By ray pepper @ 41:

    But, either way good luck and at least take the time to look into Vestus or Data Snap so you can really see what the homes around your tgt area are selling for. You will be glad you did and rethink your strategy.

    So if I sign up, quit in a month, and buy an MLS-listed REO 4 months later, I owe them 3% of the tax assessed value? Or is it only if I buy an auction property within 6 months of terminating my agreement with them?

  44. 44
    Ahau says:

    Thanks, Ray.

    I am not a prospective buyer. I signed a deal in March and closed in May. This home was not overpriced, and is still worth more than what I paid for it (though, of course, I’d lose money if I sold tomorrow). I got into this knowing the risks involved, and I’m comfortable with them. We love our home and our neighborhood. This is the right environment for us to raise our son (this was not the case in our rental).

    I may seem foolhardy for buying in this market, but as of yet, I have no regrets. Thank you for wishing me luck, and I wish you the same.

    Thanks for the links as well–I didn’t know of them before, but I did review every comparable sale in this neighborhood before hiring an agent, and I presented them with my list of comps in order to convince them that my (well below asking price) offer was reasonable. Not that they wouldn’t have made that offer anyway, but I prefer to have my agents agreeing with and understanding my position before they negotiate on my behalf.

  45. 45
    ray pepper says:

    RE: Ahau @ 44

    Ahau I’m also buying into this market but far differently. You are not a fool for doing so if it was the best decision for you and your family.

    Jonness you owe them nothing if you buy anything off the MLS. If you buy at Trustee Sale and you used their resources you owe them 3% of the tax assessed value (however you can always negotiate this prior) . There is no binding agreements on time frames.

    Got ALOT of tasty ones coming out on Monday the 27th but I will be outta town dang it!…Keep looking…They are coming BIG TIME!

    BTW you can sign up and quit whenever you desire. Many people do just to learn the process and then go at it on their own. I belong to Data Snap just because I know the team there.

  46. 46
    MK says:

    I bought a. Condo for $74000 in September, @ 4.65%
    It last sold in 2002 for$129000. The complex is well kept, spacious, newer roof /siding and paint. I dumped $10000 into it right away, new hardwood, carpet, paint and trim. 920 sq ft, bank owned..total payment $739…all incuded. HOA dues cover utilities… Risk?…….trtr>RE: Ahau @ 32

  47. 47

    […] post will go live at noon today. Enjoy!How To: Analyze a “Below-Market” DealIntroductionComparable SalesNearby RentsHistoric PricingConclusionPosted in Features | Tagged appraisal, how-to, overvalued, […]

  48. 48

    By Daniel @ 42:

    By Kary L. Krismer @ 15:

    That’s just wrong, unless you’re an investor and can take the chance on the short sale closing, or are a renter and have very flexible ability to move (e.g. you’re renting from a relative).

    I never understand your argument there but what is the worst case here? It may be a little inconvenient to have to move twice instead of once, put most of your stuff in storage and move to an apartment (with no or a short term lease) temporarily but that is really the absolute worst happening to a renter if the deal falls through (More likely one will be able to work out a deal with either the old landlord or with a new one – been there, done that).

    If you could cut a deal with the old landlord that would be great, but what if they’ve already rented it out? Or what if they want a one year lease? I really think you’re underestimating being suddenly homeless. In addition by that point you’d have between $500 and $1,000 invested in the transaction, not to mention being emotionally attached. Having it flip during the last week would be a huge disaster for most people.

    Also, I’d t consider having to move twice to be a huge disaster. I only want to move about once every ten years at the most.

  49. 49
    Blurtman says:

    “Precisely. So it was decided to build three gigantic ships. Three gigantic Arks in space. The idea was that into the first ship would go all the brilliant leaders, scientists, the great artists, you know, all the achievers. Into the third ship would go all the people who do the actual work, who make things and do things. Then into the B ship — that’s us — would go everyone else, the middlemen. Of course, we were sent off first.”

    I believe realtors were in the B ship. :>)

  50. 50

    “Also, I’d t consider having to move twice to be a huge disaster. I only want to move about once every ten years at the most.”

    That’s because you’re an old fart dinosaur, Kary.
    ( Said by the guy who is the same age as you and thinks of moving as a form of torture.)

  51. 51
    Gerald says:

    RE: Kary L. Krismer @ 48 – How is that different from a seller in a conventional sale wanting to delay closing and putting you in a bind? Besides possibly getting cold feet, can’t they have their own timing issues that may cause them to try disrupting your plans?

  52. 52

    By Gerald @ 51:

    RE: Kary L. Krismer @ 48 – How is that different from a seller in a conventional sale wanting to delay closing and putting you in a bind? Besides possibly getting cold feet, can’t they have their own timing issues that may cause them to try disrupting your plans?

    If it happens it’s not so different, but it’s much more likely to happen with a short sale. With a normal sale both parties typically want the transaction to close. With a short sale the seller may not really care that much, or may actually want the transaction not to close.

    In the not really care that much category, one thing that can easily happen is the bank refusing to pay for some closing cost item. Let’s say it’s $500. The seller might have so little interest in closing that they won’t pay it, so that would leave you with possibly having to pay the item, effectively increasing your cost.

    In the not wanting the transaction to close category, the item I mentioned was the seller realizing that they will be responsible for the deficiency and not closing for that reason. You might have legal recourse for that, but it’s somewhat doubtful you’d have effective legal recourse.

  53. 53
    Jonness says:

    By Kary L. Krismer @ 21:

    RE: David S @ 19 – It’s more like this.

    Three used comparatively equiped 2008 F-250 pickup trucks w/ 30,000 miles. The first is owned by the original buyer, who can give you all the maintenance records. The second is owned by the bank, either as the result of a repo or a lease return. The third is owned by a private party and his estranged wife, but the wife is out of the country for 2-4 months and doesn’t even know the husband wants to sell the truck or the price he set. You are currently leasing a vehicle and that lease expires in two weeks.

    That’s easy. Lowball the daylights out of the bank and pick it up for half off what the original buyer’s truck goes for. Then turn around and sell it cheap for a 40% profit. Ride your bike to work and lowball the bank on another vehicle. While you’re at it, stop paying on your 0-down mortgage and get 3 free years of rent.

    Meanwhile, eat the highest quality organic food you can get your hands on, and date hot chicks who drive nice cars. :)

  54. 54
    Jonness says:

    John Marsh, Joe Mclean, and Richard Head each own exactly the same condition and equipped 2008 F250 Ford pickup trucks. They purchased them on the exact same day, and they all live in adjacent apartments, so they all know about each other’s deals. John paid $35K for his truck, Joe Paid $30K, and Richard paid $10K. Suddenly, they all lose their jobs and need to sell the trucks. Since a lot of people lost jobs, the fair market value of the trucks is $20K each.

    John and Joe realize they are deeply underwater, and Richard cashes out and heads to the sports club. A super hot chick sits down, buys him a drink, and asks him his name. He replies, my friends call me Richard, but my neighbors call me Dick! Later that night, when Richard and the chick are lying in bed together in his apartment, they hear two gunshots spaced 15 minutes apart. Richard smokes a cigarette and drinks another glass of champagne before falling into a deep and restful sleep.

  55. 55
    EconE says:

    RE: Jonness @ 54

    And then, Richard turns to that hot chick, and says, “What’s your name?”

    She replies “Nong Poy”

    DOH!

  56. 56
  57. 57

    […] today is something you decide to do.How To: Analyze a “Below-Market” DealIntroductionComparable SalesNearby RentsHistoric PricingConclusionPosted in Features | Tagged appraisal, how-to, overvalued, […]

  58. 58
    Ahau says:

    By MK @ 46:

    I bought a. Condo for $74000 in September, @ 4.65%
    It last sold in 2002 for$129000. The complex is well kept, spacious, newer roof /siding and paint. I dumped $10000 into it right away, new hardwood, carpet, paint and trim. 920 sq ft, bank owned..total payment $739…all incuded. HOA dues cover utilities… Risk?…….trtr>RE: Ahau @ 32

    MK, first and foremost, if you need to ask someone on the internet what your risks are (after the fact), in my opinion, you shouldn’t be buying a foreclosure. That isn’t to say that foreclosures aren’t right for many people; in fact, they are. A lot of great deals can be made. If I were single or if I had a 20% down payment and an otherwise balanced investment portfolio, I would be buying foreclosures myself. I congratulate you on what is likely a very good deal for you.

    You’ve already navigated the risks involved in buying your place (i.e., delayed closing, bank taking your earnest money, etc., etc.). My concern going forward would be any material defects that, in a conventional sale, would be warranted by the seller, but are not warranted in the case of a foreclosure. Mind you, I did not buy a foreclosure, so I’m not familiar with all of the risks (I don’t think anyone could be), and I’m certainly not familiar with all of the details of your situation. Here’s an example of what I’m talking about, though it’s not in terms of condo ownership:

    You buy a foreclosed property–a rambler in an older neighborhood, where the zoning allows subdivisions into townhomes, and many of the older homes in the area were torn down and 4 townhomes were built in their place during the bubble. Comparable homes are selling for $450K (because of the assumed future development potential–in fact, a couple of your comps sold to home builders), and you picked up your place for $350K–what a steal! After you buy, you are working in your garden one day and find a property corner stake, and decide to measure off the width of your lot. On the opposite property line, you find that two of your neighbors have built their common driveway 10′ onto your property, and there is no easement in your title report. You find out that the driveway has been there for 15 years. Further, your city’s development code requires a 20′ building setback from private roads. You now realize that you can now only fit 2 townhomes on your lot, rather than 4.

    Now, let’s assume that the previous owner was aware of the encroaching driveway, but had done nothing to approve or dissaprove of it. In a conventional sale, he would be required to disclose a defect like this in the purchase and sale agreement. Further, he would be conveying title to you on a Statutory Warranty Deed, which means that he is warranting clear title to the property. If he failed to disclose the encroachment (and this is where my understanding gets more hazy), I believe you would have a legitimate claim against him.

    But, since you purchased the property through a foreclosure, the bank gave you no such warranty (you got a Bargain and Sale Deed, which does not convey the same protections). The bank had no knowledge of the encroachment, and thus did not disclose it. With a standard homeowner’s policy, you are not protected by your title company with regards to encroachments that are not of record. Well, not to worry, because you don’t want to build townhomes anyway, right? But, when you turn around and sell this place, guess what–the buyers are going to be looking for a Warranty Deed. And that means that you are either going to have to disclose the encroachment that you now know about and take a hit on your sales price, or you can fail to disclose and risk a claim from your future buyers.

    Yes, I know this kind of thing sounds rare, but it’s more common than you think. I bought a house for my company that had been poorly subdivided and lot-line adjusted in the 1970’s, and there was a 12′ wide driveway to one neighbor, that was put in under a 90′ wide private ingress, egress and utilities easement, and it didn’t even connect to the property it served. This title defect, had it not been cured, would have prevented us from building a 3 million dollar project on that site.

    Now, back to the matter at hand–the risks (real or perceived) involved are not really the main issue at hand when you are valuing property. The fact is that foreclosed properties and short sales SELL FOR LESS than if those properties were sold through a conventional sale. MK, your post illustrates this, as does Ray Pepper’s business strategy: buy for less today than what you could sell for tomorrow. If you are valuing a property, you need to adjust for this difference in prices. Why should you adjust a comp that has more bedrooms than your subject? Because it will sell for more money on the open market. Why should you adjust a comp that sold as an REO? Because it would sell for more money as a conventional sale (this is assuming you are valuing a conventional sale–the opposite is true if you are valuing a foreclosure or short sale).

    This has nothing to do with recommending whether someone buys one kind of property or another, or whether or not the rewards of buying a foreclosure outweigh the risks. It has to do with valuing your subject, and determining whether or not you are getting a good deal based on what you are looking at. If you are looking at foreclosed properties and you are valuing them against conventional sales (without adjusting them), you will find yourself overpaying for your house.

  59. 59
    Lurker says:

    “If he failed to disclose the encroachment (and this is where my understanding gets more hazy), I believe you would have a legitimate claim against him.”

    You can only do this if you can prove that the seller knew of the encroachment, is that correct?

    Thank you for that informative post btw.

  60. 60
    Ahau says:

    RE: Lurker @ 59 – I’m not an attorney or an agent, and have probably overstepped my bounds on this thread as it is–but I believe you are correct, you would need to prove that the seller had knowledge of the encroachment.

    Another anectdotal story here–my parents bought a house on a subdividable lot, back in 1992. Shortly after they purchased it, a new development went in behind them, and their new neighbor built his fence a couple feet into their property. He also started occupying some adjacent property that was owned by the city for a future park. My parents had argued with him over the fence, but never resolved the issue. They wanted to subdivide a few years back, and needed an easement from the city to access the resulting lot. The city agreed, but because of the neighbor’s encroachment, there was not enough room to fit the driveway in the easement. The city was unwilling to shift the easement a few feet away from this neighbor, and they were also unwilling to enforce their boundary line, even though one cannot claim adverse possession against the government. My parents never were able to subdivide. Had they sold the property and not disclosed the encroachment, it would have been very easy to prove they had knowledge of it, because they had discussed it with the neighbor and the city (so there’s a pretty strong argument for them to disclose). If the property had been foreclosed, I can pretty much guarantee that the bank would not have known about the encroachment, and thus would not have disclosed it to an REO buyer, who would have looked at the property as clearly subdivideable.

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