by Anne Rand
© 8/99 Foreclosure News of NJ, Inc.

Everyone knows the expression, "When life gives you lemons, make lemonade". The same can be said of homes. Some homes are lemons for esoteric reasons which are easily remedied with a keen eye. Other homes are lemons due to structural defects which are not so easily cured! Obviously, when picking lemons one looks for ripe homes with minimal flaws and avoids major defects.

In this sellers market, when buyers are bidding over the asking price for some homes, it may be hard to believe, but some homes just don't sell. There are many reasons why a home may not sell. A keen buyer will look for these clues to turn a lemon into lemonade.

The major reason why a home does not sell is it is overpriced. It may be overpriced because the seller purchased the property in an hot market and expected it to appreciate. It may be overpriced because the current owners made improvements which cost more than the market will pay. It may be overpriced due to the sellers sentimental value which buyers do not share. It may be overpriced due to a Realtor providing a generous market analysis in order to obtain the listing.

Most retail buyers will ignore an overpriced listing. If a listing is priced 10% or more over the market value, most buyers will not place a low offer; figuring it will not be accepted and the desire not to offend the seller. Therefore, most retail buyers avoid overpriced listings and move on to other listings.

When a seller is in foreclosure and takes the steps to sell a property before the Sheriff's sale, overpricing is the "kiss of death". Many sellers in this position do not know the home is overpriced. Others are trying to pay off the mortgage regardless of the market value. Selling a home in the best circumstances is extremely stressful, selling a home with the cloud of foreclosure is unbearable stress.

When approaching a seller who is in foreclosure, don't be a bull in a china closet and present a low ball offer with a take it or leave it attitude. It may work or it may backfire. People do not think clearly when under this amount of stress. The seller may think "I'd rather the bank take it than give it away to that SOB". Foreclosure buyers who wish to negotiate with a seller must tread carefully. Often the best technique is listening. While the goal is to secure the property at the best price, listening to the seller may provide clues to innovative terms.

I know of a deal where the seller was in foreclosure and getting divorced. The foreclosure buyer listened to the seller and discovered what the seller really wanted was to get away. He offered to trade a used recreational vehicle in exchange for the seller signing over the deed. The recreational vehicle was worth less than the equity in the home but it suited the sellers needs.

Another important technique in negotiating with a seller in foreclosure is providing information in small doses. When people are under a lot of stress, they suffer from information overload. You want to lead the seller to adopt the reality that the home is overpriced. Many sellers have not compared other homes in the neighborhood, their view is rather myopic concerning their present circumstances. Presenting an analysis spreadsheet of competing properties with amenities and prices is probably overwhelming. On the other hand, mentioning the house down the street is priced $20,000 less and has an additional sun room will provide food for thought.

Obviously, selling a home in need of maintenance, repair and cleaning is harder than a home with a neat and clean appearance. Retail buyers expect and look for houses in "move-in condition". Most retail buyers will not even make an offer on a house in need of repair, maintenance or cleaning. Along the same lines, homes which are decorated in a "out of date" style or with a bold statement usually take longer to sell on the retail market. Many retail buyers are dual income families with little time even for cosmetic improvements. The disruption of moving is complicated enough without having to scrub and paint with rug-rats bouncing off the walls.

The seller in foreclosure is strapped financially. The prospect of using limited funds to purchase paint for a home they may lose is psychologically unbearable. Sometimes it is impossible if the choice is food or paint. Even the no-cost task of cleaning may not get done due to depression and a defeatist attitude. The seller in foreclosure, who has not maintained the home, is between a rock and a hard place. He has difficulty selling due to the condition and appearance of the home and does not have the funds or ambition to improve the marketability of the home.

The keen foreclosure buyer will see homes in need of repair, maintenance and cleaning for the gem they can be. One must overlook the worn carpeting, the outdated paint and tired fixtures. These things can be easily changed by the "do it yourselfer". Most importantly, you can discount the price of the house up to twice the cost of making these improvements.

For example, assume a comparable home in "move in condition" is selling for $100,000. Your target foreclosure property is in need of cleaning, interior paint, carpeting and updated fixtures. An industrial cleaning professional will cost $500. If you hire professionals to paint the interior, it will cost $2,500; new carpeting is $3,500 and hiring professionals to update lighting and plumbing fixtures will cost $5,000. The total is $11,500. This is not pocket change for most people. Additionally, if you are living in the home while this work is being performed, it will crimp your lifestyle.

If you are negotiating on this house, your first offer should be around $77,000. This figure is obtained by using the $100,000 market value in move-in condition and subtracting two times the $11,500 for maintenance and improvements or $23,000.

If you did all the work above yourself, the approximate cost is cleaning $0-$20 for supplies (perhaps rental of a carpet cleaning machine to save replacement of the carpet); painting $250 for paint and $200 for supplies (brushes, rollers, drop cloths etc. if you do not already own); Search for carpet remnants and have it installed professionally for $1,500; Purchasing your lighting/plumbing fixtures at a home improvement center will allow you to control the quality ($200 for top quality or $20 for cheap). Assume the combination selected totals $500. If you are not experienced at installation, contracting for installation only for several fixtures at once will save some expense (assume installation runs $500.) Along the same lines, perhaps your bathtub is fuscia pink. A new bathtub installed may cost $3,000 (or more if the adjacent tile is replaced or other problems occur). Consider having the bathtub, refinished in place, with a lifetime guarantee - cost $250. Total out of pocket cost is $3000 to $3220. Sweat equity value added is $20,000. ($100,000 market value - $77,000 purchase price = $23,000 - $3,000 out of pocket cost = current equity.

Go for the guts. Is the structure and foundation sound? Is the electric, plumbing and home systems in good working order? If not, it is not necessarily a deal killer, but tread carefully. The average homeowner should not tackle these repairs without experts. Even with an experts cost estimate, be prepared to pay 20% more for the unexpected (there is always something unexpected). Apply an even higher discount to the price you will pay the seller to compensate for the higher risk of performing major repairs.

Sometimes innovative solutions can cure even major structural problems. For example, I was in contract for a house which, upon inspection with an engineer, required $60,000 worth of structural repairs with no guarantee the problem would be fixed. The house had a brick face, which was cracked, and the foundation was sinking. I got out of the contract but made my findings known with the town building department. The eventual buyer of the house, had a creative solution. He did not put $60,000 into structural repairs; he removed the brick face of the house. He figured the weight of the brick was a major factor in the sinking and removal would eliminate the problem. So far, so good. I congratulate him on his ingenuity.

Location. If the location is bad but the house is perfect it will still be difficult for the seller to sell. Short of moving the house, a bad location is difficult to overcome. (Don't laugh, it is done everyday, not a small undertaking, to say the least). In most circumstances, moving the house is not an option.

Before eliminating a house with a "bad location" determine the explicit reason it is bad (undesirable schools, traffic, condition of nearby properties etc.). Is the cause likely to change? Many neighborhoods go through cycles. At the "mature" cycle, older homeowners can not keep up with repairs and maintenance and a shabby appearance becomes the norm, prices are reduced when the time comes to sell. New families move in because the homes are affordable and make repairs and the prices gradually increase. Be alert to the cycles in a neighborhood. Catching a neighborhood on a upswing will allow you to cash in!

Sometimes a "bad location" is not the neighborhood at all. Sometimes, it is ONE house-ever neighborhood has one. It is the house that stand out like a sore thumb (due to paint color, debris in the yard, lawn and yard maintenance etc.). When the "sore thumb" is the foreclosure real estate you are purchasing, great! just discount accordingly and your improvements will remove the "sore thumb". After you purchase it and fix it up, not only will you profit, but the goodwill from adjacent neighbors will be overwhelming.

On the other hand, if the "sore thumb" is the house next door, this is more difficult. The price of the neighbors house is depressed due to the sore thumb. This house will be difficult to sell without a large discount. However, it may be worth buying at a large discount, especially if the "sore thumb" is no longer there when you sell. There are 4 ways I can think of to remove the sore thumb: 1) ask/help the neighbor to clean up his act 2) Apply pressure through any town codes or ordinance to force cleanup 3) buy the "sore thumb" house and make the repairs 4) find out if the neighbor has plans to move in the near future.

My first house was next to a "sore thumb". The "sore thumb" house needed exterior painting, the garage door was hanging by a thread and it was sideways, the steps were broken and unsafe to enter the house, the grass was knee high, the downspouts were broken and unsightly. It also had a gorgeous Italian tile built in pool in the back yard. The house I purchased was discounted by the sellers by almost 20% of comparable properties in the neighborhood. It was in "move-in" condition. While there were some decorating changes I wanted to make, they were things that could wait. It was all I could afford, so I took a chance. After moving in, I discovered the "sore thumb" neighbors were very nice. The first day I cut the grass, I hopped the fence with my weed wacker. I started by the fence to get to trim what couldn't be reached by the other side. Before I could finish the husband came out, I explained I just got this weed wacker and was overcome with enthusiasm in using it. He explained his teen age son was supposed to cut the grass but the lawn mower broke....I volunteered my lawn mower for his use. I also asked him If he minding me trimming his yard first with the weed wacker to get the grass where my mower could do a good cut. It was very friendly conversation, and I was careful not to make him feel embarrassed. Over the next two years, I helped the neighbor fix the remaining "sore thumb" items on the exterior or the house. The key with this neighbor was he stopped noticing. He lived there so long, he still saw the house as the new house he bought and did not have any sense of urgency to make repairs. Helping him with the items, one by one, made it manageable and did not offend him. Two years later, I sold the house for a profit.
As a foreclosure real estate buyer, timing is everything. Sometimes, the best timing is to be the first to make an offer after the homeowner receives his foreclosure notice. The owner receives notice just before the property is listed on NJPForeclosures.com. Sometimes, the best timing is to be the last to make an offer before the property goes to Sheriff Sale. This can be up to a year or more after the listing has appeared on NJPForeclosures.com. Sometimes, if you don't first succeed, try again. Save those old issues, and follow-up.

How do you know whether you should be the first or last to make an offer. The truth is you can't always tell. Generally, the harder to sell houses will settle closer to the Sheriff Sale, where as the cream puff houses will sell quickly in this sellers market. Many real estate brokers use NJPForeclosures.com to obtain listings from people who are likely to sell. Real estate professionals vary in their abilities to successfully market properties. A listing agent who places the listing in MLS and does little else may not obtain the traffic to sell the property. A listing agent who is difficult or not well liked by other agents may not get enough traffic to sell the house. The abilities or personality of the listing agent can also make a house "hard to sell".

There are many reasons why a house may not sell. When a homeowner is in foreclosure and the house is either overpriced, in need of repair, maintenance or improvements, or in a "bad location", or is not effectively marketed, buyers can command larger discounts and enjoy the profits of creative solutions to the "hard to sell" home. This is taking a lemon and making lemonade.