Re: How about the forclosures? - Posted by Sean
Posted by Sean on January 24, 2003 at 10:47:05:
JC,
I am no guru, but have been doing distressed/REO’s for a while now, here’s what I can tell you.
When a bank takes back a property, they immediately have it appraised. Now, its been my experience that it is not uncommon to find that the appraisal the bank has is often times a JOKE. I have no evidence of this, but I honestly believe often the appraisors don’t even enter an REO when they appraise it, just look at the outside and fill in the boilerplate.
Banks GENERALLY will list a property at their appriased value, regardless of what is owed on them (IE only owed 10k, but market is 30k so they list at 30k) Occassionally you will run into a complete steal where the bank owns a property in good shape (needs no rehab) and lists it well under retail. This is not the general case. But they do happen occassionally.
However, market truly determines what list price means! If you live in a hot area, where properties move quickly, banks may stick to their guns on price. If you live somewhere else, you may get properties far far under asking. For the record though, List price on an REO is not a “minimum bid” its an asking price just like any other seller.
What a bank asks is really irrellevant, at least in my market, especially if it needs REHAB. In lower middle and upper lower, I can find properties all day long at .50 on the dollar or less (purchase price v appraisal value at time of purchase). Sometimes I pay at or close to the bank’s asking price (19k when bank is asking 24k) but the property is worth 40k before I even touch it, so that’s fine for me. Other times I pay less than 1/2 of the banks asking price 18k, bank was asking 44k. I have offers in right now, for 13k and 18k on properties banks are asking 27k and 41k. I may not get them, but that’s what I determine them to be worth to me, to be able to fix them up, see a cash profit and have good positive cashflow as well. I don’t care what a bank is asking on a property, especially with rehabs! I determine what it is worth to me, and what my market will accept. I know, from my experience and knowledge of my marketplace, that my offers are reasonable enough to where I will get at least some of them accepted. Your market may be different, you will have to feel it out for yourself.
What you offer should be a function of what makes the property “profitable” to you. Obviously you want to pay as little as possible for a property, but just because someone else may have gotten a property for 10k less, does that mean you got screwed because you paid 10k more? Provided the property is profitable for you and meets your criteria, then no you didn’t get screwed at all.
I refuse to touch a property that I won’t see at least 10-15k cash, and another 10k -15k of equity… That’s my criteria, so my maximum offers are worked back from those numbers. I put my offers in based on them, and if I get them great, if I don’t, so what move on to the next one. (I am generally buying properties worth in the 50s-70s after fix up) My minimum refi cashout +equity I will accept in a property is a combined total of 25k. (I am buying, fixing, refinancing to 75% of post rehab value and renting out) So as you can see with that criteria on houses only worth 50k-70k after repair I have to buy them inexpensively to get the kind of money I want.
Your market or targeted neighborhood may be hotter and therfore you may not be able to purchase the way I do… that’s ok… you just need to find out what your market will accept. The way you do it is by talking to other investors, keeping an eye on other REO’s that have sold, and getting out there and trying different approaches. You will find out what works where you live.
Also, I focus mainly on rehabs, this definately contributes to why I can get properties at the prices I do. If you are looking for move in condition properties, in good neighborhoods, you are likely not going to get properties for 1/2 of retail value… because you will be competing to purchase the properties more often than not from John Q Public… and as an investor based soley on monetary analysis, you likely will not beat out John and Mary Q buying their own home with emotional attachment. You want to increase success in acquisition, stay with properties John and Mary Q are overlooking.
Finally, TERMS… some people who focus on REO’s focus on terms… IE, I’ll pay your asking price if you finance the purchase 100% and pay closing costs and give me a 30 year loan for 4%… I personally can’t attest to how well this works. I think for owner occupied properties with good credit, this would be a good option. I think though as an investor, offering a bank CASH in hand to take a dead asset off the books may be a better offer. If you are trying to buy at .50 of worth, I GUARANTEE YOU, YOU WILL NEED TO BUY THE PROPERTY OUTRIGHT! If you approach a bank saying Mr. Banker I will pay you 20k for your property listed at 40k and I want you to give me a new 1st mortgage for 100% and pay all closing costs, and have an interest rate of 4% your offer is basically going to be toilet paper nearly 100% of the time. If you want terms from a bank, you will pay more for the property.
HUD - Generally in my experience not worth the hassles.
VA - See HUD
Fannie Mae/Freddie Mac - Pretty much forget deep discounts on purchase price, but can get pretty good terms. I think they will do 3% down for owner occupied and hold financing, and 10% down for investment holding fiancing.
Generally REO purchase is pretty much like any other RE purchase, you offer, negotiate and buy.
Other rules of thumb. Generally forget getting right to assign the purchase contract and/or Lease Options. You might get this with a local bank foreclosure, but no big bank is going to let any of that go.
Dealing with Banks is a pain in the arse, its much easier to deal with direct sellers… you will likely do a lot of HURRY UP AND WAIT. Banks will put performance penalties in their contracts IE if you don’t close by XXX you must pay YY a day… watch out for them on this… you will offer 45 day close and find the addendums they send have a 15 or 30 day close out of the blue… Of course the bank is under no penalty if they aren’t ready… Which in my experience the likelihood of them not being ready to close on time is far more likely than me not being ready. Had to wait 3 months past the official offer close date on one property because the bank couldn’t get their act together.
Hand Money, REO in my area, traditionally need $500-$1000 Hand Money with any offer.
SOF letter. Often banks want to see the same prequalification of any other seller, want a Source Of Funds letter with the offer. (IE mortgage company pre approval letter etc).
Finally most banks want the Hand Money Check to be held by their listing agent (at least in my market)… I work with a Realtor who makes sure the Banks agent doesn’t get the hand money check until the contracts are all signed and official! Its a lot easier to get your check back if things fall apart this way then after someone else has it.
OH and one last thing, Listing agents get paid pretty much DIRT by banks for handlign their REO’s… at least in my area, so they are often on the bottom of the piles… getting calls returned from listing agents can be a pain, having them meet you at a propert etc… often sadly is work. I suggest you find a good agent of your own to work with, rather than calling listing agents on REO’s directly. Let them do the endless phone tag and meeting arrangements etc! I can get into any REO with a lockbox with my agent, she shows up on time and I reach her easily! If I have to wait for a listing agent to get back and show a property to me, etc etc.
Anyway, good luck!
