How To Buy An REO At Its “Bottom” Price Point

You often hear people talk about real estate hitting a bottom or wanting to buy an REO at the “bottom” price. But what exactly is a real estate bottom and how do you know if an REO property has reached its bottom price?  Let’s take a look at a few tips:

1. The “bottom” is relative. If you’re waiting for REO prices to drop to 1930’s levels you’ll probably wait forever.  A price is only at the bottom compared to its peak price during the last real estate boom. For example, if you’re looking at an REO property that sold for $200,000 in 2005 and now it’s priced at $125,000, it just may be at its bottom price. But that also depends on other factors.
2. Gauge the state of the economy. If the unemployment rate is on a downward trend and consumers are gaining confidence, this could soon translate into more buyers in the REO market.  A property’s bottom price is usually the price it’s selling for right before the economy takes a turn for the better. Once the economy improves, demand for real estate increases and drives prices upwards.  Keep an eye on changes in the economy so that you can catch REO properties at their lowest prices.
3. Study interest rates. The Fed will continue to fiddle with interest rates during a recession hoping to find a “magic number” that will prompt borrowing.  Once lending increases, the interest rate will stabilize. Stable interest rates are one sign that real estate prices may have reached their bottom prices.
4. Gauge access to credit. Difficulty in getting a mortgage will definitely temper real estate sales, even REOs which are often purchased with cash. Once lending increases and it becomes easier to get a mortgage, an increase in real estate prices is almost inevitable. If you were looking for a “bottom entry point” to buy an REO or other property, this may be a sign to make your move.
5. Measure the time a property sits on the market. If an REO property has remained on the market for an extended period of time AND the price has decreased significantly, this is one sign that the property may have reached its bottom price.

It’s important to note that each property’s bottom price will be different depending on its location, condition and the state of the local economy. And while there is no perfect way to determine an REO’s bottom price, studying a variety of factors will increase your chances of making a purchase at the lowest price possible.