Bidding on a Foreclosure? Here's a Simple 3-Step Process to Calculate What Your Offer Should Be

Are you attracted by the prices of real estate foreclosures now on the market? But you're not sure what you should offer? Here are some guidelines.

But first, let's knock down some of the misinformation and the "old wives' tales" that you may run into:

Offer full price. A full-price offer ensures you'll get the property. Not true.
Offer 3%-5% under the list price. After all, that's the average discount on properties in many areas today. Not true.

Offer 5%-10% above the listing price. After all, foreclosures are really good bargains, and there will be a lot of competition. Not true.

Find out what the previous owner owed on the house, and then offer that. That way, the bank will break even. That's what they're looking for. Not true.

Offer 25% under whatever price the house last sold for. The bank knows it'll have to take a loss, and that's the size of the loss they consider acceptable. Not true.

Offer whatever the house is assessed at for tax purposes. Not true.

OK. You've probably run into some of that advice. You may even believe it. Well, forget it. There's a simple, 3-step process for coming up with the "right" offer.

Ready?

Step One: Determine what the home would be worth in good condition. Ask a Realtor to run a CMA on it. (A "CMA" is a comparative market analysis. Your Realtor will compare the property you're interested in to other nearby comparable properties that have sold recently. It's not a formal appraisal like you'd get if you paid an appraiser, but it's quite close. And it's free.)

Step Two: Subtract needed repairs. Since foreclosures are sold in "as is" condition--meaning if something's broken the bank won't fix it--be very generous with your estimate of needed repairs.

The number you come up with is the most you should pay. You can offer less. Here's the big secret: What you offer has absolutely--ABSOLUTELY--nothing to do with the listing price.

Here's an example: Let's say the house in good, fixed-up condition would be worth $300,000. And let's say you believe (subject to an inspection) that it needs about $20,000 worth of work. Then the most you should pay is $280,000. Offer that amount or less. How much less? It depends on how much you want the house, and what the competition is for that sort of property.

I don't care if it's listed for $400,000. You offer $280,000 or less. That's all it's worth.

Step Three: Determine how much less than market value you offer.

This is the only part that's even a little tricky.

The CMA, adjusted for repairs, has to be:

Lower than the listing price,
Equal to the listing price, or
Higher than the listing price.

Using the example above, let's say the adjusted fair market value is $280,000. If the property is listed for more (let's say $400,000), you use your number--$280,000--as the cap. Listen to your Realtor, but consider offering 5%-10% less than your $280,000 cap. So the house might be listed at $400,000, but you'll only offer maybe $270,000.

Same property, still worth $280,000. But this time the listing price is $280,000. Depending on how much you want the house--and the likely competition for it--consider offering something in the range of $270,000-$280,000.

It's bit more complicated if it's listed for, say, $240,000. If there's a reasonable amount of real estate activity in your area, it's likely other potential buyers will also know that it's underpriced and will offer more. On the other hand, if the property's been sitting on the market listed at $240,000 for 4 months, then you might well offer $240,000 or so. Your Realtor can help advise you on that.

Notice that the only time we really took the listing price into consideration is in that last example: When it's listed for substantially less than it's worth. What you and your Realtor have to figure out is whether that's a serious price, or whether it's a "teaser" price--one just meant to get people bidding on the property.

In any case, though, the basics are simple:

Determine what the house would be worth in good condition.
Subtract need repairs from your first number.
Pay no more--and likely offer less--than the value of the house minus needed repairs.

Is that a guarantee that you'll be the successful bidder on the house? No. But it a guarantee that you won't overpay and that, if you're successful, you'll have gotten a good value.