This post is an attempt to understand, not to lecture. Allow me to set the stage for you. In our firm, transactions involving HUD foreclosures account for a third of our volume for the past couple of years. Considering the deals that were available in this corner of the market, it was always a viable option for our investor clients looking for homes below market value. But this year, change is in the air. For one thing, homeowners are bidding on these foreclosures more often and winning these bids since they don’t require investor-like discounts and HUD likes to promote home ownership. But most importantly, now more than ever, we’re noticing that a dominant majority of properties are going for asking price or more. Sometimes, much more.
The Research
To make sure that I wasn’t extrapolating data from a few deals into a conclusion with rather serious consequences, I decided to dig deeper and substantiate my hunch with hard numbers. During the period from Jan 1st – Jul 1st 2008, there were a total of 207 HUD properties sold in Harris County, 49% of which sold at or over asking price. During the same period in 2009, there were a total of 128 solds, 69% of which sold at or over asking price. That’s a 40% jump without even counting the 75 properties currently pending that didn’t make it into the analysis.
Puzzle Pieces
Why does this matter and where does the housing stimulus enter into this? The numbers I presented above were sales figures in the $90,000 to $130,000 price range. My mortgage pros will probably back me up when I say that wide majority of these transactions involve FHA financing. When you purchase a HUD Home with FHA financing and bid higher than the asking price, the Buyer has to make up the difference in cash since the lender is obligated to use the HUD appraisal. What we’re seeing on the trenches, are bids higher than asking by 7, 8, 10 thousand dollars. Most buyers that use FHA financing do so for its lax down payment requirements since they don’t possess conventional type money to put down . Which brings up the question: Where are these buyers coming up with this money to close these transactions? My theory is that first time homebuyer tax credit money is being used to cover the difference.
Questions
- Is the jump in “at or over asking” solds due to competitive environment or overzealous agents pushing clients into higher bids?
- If the second option is true, does this constitute a breach of fiduciary duty by these agents?
- If first time homebuyer tax credit is being spent for this purpose, is it worth the expense?
- Are you seeing similar trends in other parts of the country or is this a local Houston issue?
I would love your input in the comments.
Thomas Johnson
July 16, 2009 at 10:06 am
Maybe the HUD appraisal values are suppressed. I do not think there is a new appraisal which would bump the value when these new deals close. If there are 10 HUD homes nearby, and a third of them sell for more than HUD appraisal by say 5%, then the remaining HUD homes would be another 5% undervalued. If there is a deal, cash comes out of the mattress.
jlittleaz
July 16, 2009 at 10:32 am
In the Phoenix market, REO drives the prices, but investors drive the REO sales. It can be almost impossible for a traditional buyer to purchase an REO listing in lower price ranges or in a desireable community.
Mike Simonsen
July 16, 2009 at 10:35 am
Awesome data Erion! I’m not one to blame “overzealous agents” for this any more than you can blame mortgage guys for the last time around. I take the position that the market situation drives the participant’s behavior.
However, I do indeed think that this surge at the low end (we see it in the Altos data too) is a function of two years of stagnation, pent up demand, what looks like screaming good deals, cheap money AND the tax credit. The Feds wanted to stem the tide and well… there you go.
The question is, How much is too much?
BawldGuy
July 16, 2009 at 12:20 pm
Hey Erion — I think Mike has it right. Either the buyer wants the home or they don’t. When they realize they’re in competition with others willing to pay more, it becomes gut check time.
The agents? I’m sure there are a few not doing their honest best for their client. That said, I’m also sure you and your guys are often asked by your buyers for guidance when the bidding begins. You give you best, informed professional opinion. The buyers then make their own choice.
I also wouldn’t discount the affect the last few years has had on the psyche of entry level buyers. Surely many think this could be one of their last chances to own a home.
Make sense?
Louise Scoggins
July 16, 2009 at 12:26 pm
We are definitely seeing a trend of mutiple offers and bidding wars on MANY of our REO and HUD listings. A lot of them are priced so ridiculously low that a buyer could bid above list price and still be getting an amazing deal. Oh and don’t forget the short sales. I hardly come across a short sale that doesn’t have 2-3 offers already in and the bank is still accepting offers. I also think sometimes the multiple offer situ makes a buyer think “oh this must be a REALLY good deal if other people are already bidding on it”. This is where we, as Realtors, need to truly examine the area comps, see what kind of work this REO property needs, and determine just how good of a deal is it.
Ruthmarie Hicks
July 16, 2009 at 1:43 pm
We are still in something of a slump and we haven’t had (so far) the REOs that other areas have had. However, the stagnation of the market has created a lot of pent up demand. Once the prices started to come down – buyers started to come out of hiding. I’m with Mike, no market can stagnate forever.
Erion Shehaj
July 16, 2009 at 4:42 pm
@Mikesimonsen
One piece of information I left out of the original post was this: Last year we were seeing multiple price reductions ($10k a pop) after properties were going through auction without sufficient bids. Fast forward to this year, when properties are selling over an unreduced asking price. Many of these deals carry retail price stickers on them. Pent-up demand has to influence things, sure. But 40% and counting?
I don’t think anyone can argue against the fact that some of the mortgage guys were responsible for some of what happened last time around just like some agents are responsible for some of this issue.
@Bawldguy
I disagree with you so rarely that when it happened this morning it got me giddy 😉 I’m all for personal responsibility and “buyers either want the house or they don’t”. But you can’t tell me agents’ advice doesn’t influence that decision. When a first time homebuyer sees the asking price of a home, they don’t automatically think: Hmmm let me go over that. Their agent fuels that urgency by striking the fear of losing the deal into their hearts. Clients are the ones to sign on the dotted line, but this decision is UAI (under agent influence). And if enough agents engage in this practice, you have an overflowing, competitive market like this. Which brings about my question: When an agent influences their client’s decision to go higher than asking, is she serving her client’s interest or her own? When an agent suggest usage of tax credit to cover the difference, is she breaching fiduciary duty?
I’m by no means suggesting that this is an industry wide issue. The majority of agents selling HUD homes are honest, hard working Realtors. But the issue is, are there enough deal pushers to force the market into this “inflationary” trend? Because if there are, honest Realtors will have to adapt to new market conditions by suggesting that their clients go higher on their bids as well.
@Thomas
Many of these deals are not at severe discounts considering condition.
@Louise
Thanks for your input re: your market. I have no issue with bidding wars per se as they tend to be part of the game in the distressed property market. My issue is with the increase in the ferocity of these wars which makes me wonder about its authenticity.
BawldGuy
July 16, 2009 at 5:05 pm
Erion — We really don’t disagree much that I can discern here. In my comment I said — The agents? I’m sure there are a few not doing their honest best for their client.
But you also touch on another principle. As pros we should make clear and obvious judgments about value, communicating them to clients. But in your examples I don’t see homes selling for obviously ‘over priced’ figures. Influencing a buyer to pay $120K for an $85K home is something neither one of us would do, sans overwhelming evidence it was worth the higher figure.
Are all of the buyers either stupid or advised by unscrupulous agents? Not likely.
That said, there are just as many mistakes made by ‘knowledgeable’ agents in what I’ll call transitional markets as anyone. Example: Coming out of the S & L Crisis many pros advised clients in the way you recommend, but were soon called on the carpet when the market showed that advice was woefully incorrect. Of course, if there are tons of like-kind homes available, the buyer can take their chances, moving on to another opportunity. Sometimes though, that’s simply not the case.
In the long run, paying a little more for a home doesn’t really come out in the wash, so to speak. Your position seems to assume the agent will always know the future, which of course is not the case.
Make any sense?
Ken Brand
July 16, 2009 at 5:29 pm
Great stuff. I believe the First Time Buyer Credit persuades an otherwise reluctant buyer by offering an intellectual bridge to their emotional desires. Also, I think the super low rates make and extra few thousand dollars in purchase price seem insignificant when turned in to less than the cost of a Latte a day.
Dear Buyer, if you want it, buy it. You’re rich uncle wants to give you a wad of cash back and the mortgage rates will be much higher in the future.
Also, I think our Houston market is blessed. In terms of percentages, compared to other hard-hit areas, the low number of total foreclosures compared to inventory creates buyer competition.
Mike Simonsen
July 16, 2009 at 9:23 pm
Erion – While I agree that there are bad apples in every bunch, they’re so far down this food chain that I can’t see them as the *cause* of overbids. Overbids happen because of demand vs. available supply.
And on that note… I’ve got some cool data brewing…
Vivian Hooton
July 17, 2009 at 3:16 am
As an REO investor you have hit a topic of mine squarely on the head.
Louise Scoggins says-A buyer thinks “oh this must be a REALLY good deal if other people are already bidding on it”. This is where we, as Realtors, need to truly examine the area comps, see what kind of work this REO property needs, and determine just how good of a deal is it.
For me, this is where my Realtor is worth her weight in gold. I can get 5 comps from various sources and have a mean price from one go $75,000 up or down as you look at the mean of the other sources. Usually the MLS comps give a gut feeling of being more accurate.
As Bawldguy thinks, so do I. He says,
Hmmm let me go over that. Their agent fuels that urgency by striking the fear of losing the deal into their hearts. Clients are the ones to sign on the dotted line, but this decision is UAI (under agent influence). And if enough agents engage in this practice, you have an overflowing, competitive market like this. Which brings about my question: When an agent influences their client’s decision to go higher than asking, is she serving her client’s interest or her own?
These are questions that pop immediately to mind if I should be dealing with a listing agent I do not know. Yes, this influence is strong in the marketplace. Yet, as you say, it’s the buyer who makes the final decision.
Missy Caulk
July 17, 2009 at 10:13 am
We are seeing HUD homes and foreclosures in some area’s go over asking price. The listing agent tells us all bids due by ??? Make it your highest and best.
Mostly in Ann Arbor city not the other parts of Washtenaw County.
Of course we tell our Buyers that IF they want that house.