It’s nothing new.  For the last couple of years we have seen those little yellow signs dotting the streets saying “Bank Owned Property- Open House”.   It is interesting that these signs are printed bright yellow.  Yellow signs are generally known as an indicator to use caution.  So it is in the case of bank owned homes- buyers should be cautious!

Everyone loves a good deal.  But are bank owned properties really such a good deal?    Anyone interested in purchasing a bank owned home should carefully consider a few things.  On the surface, a home that is being offered for less than the bank note might seem like a great deal.  However, with the slowdown in the construction industry, there are equally or better deals on building a new home!  

Take the follow scenario for example.  Several years ago when things were booming in the valley, Speculators with little or no building experience were anxious to make a quick dollar by “building” a spec home.  An average high end luxury home might be offered anywhere from $3-4 million.  Let’s use a home that would have had a target price of $3.5 million.  For a home of that price range, the lot likely would have been around $800,000.  Construction costs and soft costs could have been in the $2,000,000 range putting the total developer investment at about $2,800,000.  Speculators were putting hardly any money down on these projects, but for this example let’s say the bank note is $2,500,000.  Many of these spec homes that were poorly designed and shoddily constructed ended up going back to the bank when the economy slowed down.  The bank would love to recover its investment by selling the once $3,500,000 home for $2,500,000.  The bank may even settle for much less and take a loss and sell the home for below its investment.  So let’s say the bank takes a $500,000 loss and settles for a $2,000,000 purchase price.   The opportunity to purchase a $3.5M home for $2M seems like a phenomenal deal- right?  Well, land has plummeted in price.  Lots are now half to a third of the price of a few years ago.  So, that $800,000 lot used in this example is now worth $400,000 at most.  Construction pricing has also dropped dramatically and is approximately 30% less than it was a couple years ago.  That would put the once $2,000,000 cost of construction now at $1,400,000.  So, the total cost to build that same bank owned property at today’s pricing would be at $1,800,000.  That would be $700,000 less than the bank note and $1,800,000 less than the asking price several years ago.  Which is the better deal?  

Well, that was just a scenario, and it is not to say that all Bank Owned homes are a bad deal.  There however are many things that should carefully be considered before purchasing a bank owned or short sale home:

• Is this house a place we really want to call “home”?  Is it the style and layout that I like? Is it in the neighborhood that we prefer?
• If the home is not occupied or completed, can we be confident that the structure and mechanicals have been properly built and maintained?  If the outer construction looks shabby, the things you do see, what do the items under the slab or behind the walls look like?  Have the underground utilities been installed correctly?   Has the structure been properly constructed? 
• Who do I call if something needs servicing or repair?  How much will items not covered under a warranty cost to have repaired or replaced?
• Has the builder incorporated the latest energy saving and convenience features?  How much more will I spend on utilities? 
• How much will be needed to complete, repair or make the home the way we would want it?  Is it worth our time and efforts to do this?  How much money are we willing to put into the home to make it look and function the way we prefer?  How much inconvenience are we willing to put up with?

If you have any questions or would like additional information, please don’t hesitate to contact us.  We would be happy to offer a complimentary home or land assessment.