Why Bidding Wars are Happening in a Buyers Market
I’ve had several clients recently who have come up against a common challenge in buying a home right now, and I’m not talking about tough lending standards! It’s hard enough to be a first time home buyer in Southern Maryland; Trying to understand the loan process can be stressful, understanding all of the moving parts involved in a real estate transaction is difficult, and now investors are coming into the market with a passion!
Why Are Biding Wars Happening?
Unfortunately this means that home buyers are forced to compete with cash-flushed investors who are ready and willing to make a splash in real estate again. With banks under pressure to sell off the foreclosures and REO properties they currently have, investors are quite often making the bank a deal they can’t refuse, specifically, CASH! (Rel. Link: Washington Post: Cash Investors Trigger Bidding Wars)
Real Estate Investors Are Active Right Now
The reason investors are hitting the market so hard is simple. There are a ton of cheap homes for sale right now! Investors are experts at identifying great deals, and they have the ability to write offers that traditional buyers simply can’t compete with.
When an investor writes an offer, they often have the ability to write a contract that includes a proof of funds (POF) letter showing they have the liquidity to purchase cash, which means that the banks don’t have to worry about appraisals, underwriter approvals, termite inspections, or perhaps even a home inspection!
When compared to a home buyer who needs a loan to purchase the property, an investor could go to closing within 10 days, while a home buyer may need 30-45 days (or more) to get through inspections, appraisals, and underwriting. It’s a no-brainer for the bank, a cash offer has very little chance of falling apart, and in some cases the bank may even take a lower priced offer if the purchaser is writing for cash.
Banks Are Underpricing Homes
The other issue that buyers can find frustrating right now is that banks are often deliberately underpricing foreclosure properties. You see, banks WANT to getting these sort of bidding wars started. By getting multiple bids simultaneously on a single property, banks can force people to offer more money on the home, using the fear of losing the property as motivation for offering more money.
What Are Investors Doing With These Homes?
What the investor does with the home depends on what their goals are. For some, they are investing into rehabbing the property so that they can sell it in tip-top shape for a profit. For others, they are holding on to the properties and using them as rental units. The profit margins can be very lucrative:
Home Price: $150,000
Closing Costs: $2,500
Total Purchase Cost: $152,500
Annual Taxes: $1,400-$1,600
Rental Value: $1,450/mo or $17,400/yr
Annual Income: $15,800
Annual Return on Investment (ROI): 10.3%
With an ROI of more than 8%, the profit potential is very attractive for possible investors! Unfortunately, until sales prices or rental values change, investors have a very good reason to be buying homes, and individual buyers are going to continue to see this trend continue.
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Jon Benya Keller Williams of Southern Maryland
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[...] the fewer contingencies in your offer, the better it looks to the seller. Especially with the investors in the market making cash offers on foreclosure deals, you need to make your offer as contingency undemanding as possible. For [...]