How low to lowball a REO from a far distant bank - Posted by Dan Simpson

Posted by PBoone on November 11, 2000 at 20:26:32:

Sounds like a great deal of thought has gone into the purchase and resale… go for it and let us hear about the success.

How low to lowball a REO from a far distant bank - Posted by Dan Simpson

Posted by Dan Simpson on November 10, 2000 at 22:37:38:

The subject: 5 yr old 3/2/2 in a nice subdivision. A bank repo that no one bid on to the trustee. Outstanding amount is 76,985 on this house. Appraised at 92,900. Comps in upper 80’s to around 90. The bank is located about 1000 miles from here. Selling price is 92,900 (the above appraised value) which I and the realtor knows is about 5 grand too high…
I got approved this evening for an 85% loan to appraised value loan. The only thing about this lender is that they are gonna charge me around 4500-5000 closing cost which they told me would be worked into the loan and I wont have to come up with much money if any at all at closing.
The bank has two addendums. one obviously is the “as-is” addendum since no one from the bank has seen the property. The other is one that basically says that the sale should be a no-frills, clean sale. No assigning the contract, approval from a mortgage company within 25 days or so of acceptance of contract, and so on… This addendum basically protects the banks interest and rules out alot of creative deals. Unless someone on here has an idea that is. So I cant have a double closing where I never come up with financing but simply close with my buyer and then pay my seller (the bank). that is too cute in their eyes, I guess. So the above loan is what I got approved for…
Here are my questions -

  1. Isnt the 4500-5000 closing costs rather excessive, even for this type of loan? Shouldnt I feel fortunate to be able to get this type of loan without coming up with a down payment? And that they said they could get me 8% interest?

  2. I am sure that the above mortgage on this house has PMI insurance, so no matter what the property sells for the bank should get the outstanding amount on it. So how low should I go? I was thinking in the low 70’s…

  3. If I offered 72k, then add the 5k (or less) closing costs, that puts me up to 77k. The house appraises at 93k and I would feel comfortable selling at around 85k. Thats not a whole lot of spread. Should I offer lower? Sell higher? I figure if I cant sell the house for cash for the amount that I want I could lease option the place or owner finance it for a higher sales price, or simply rent it out. If I do indeed get 8% interest, that is a great interest rate on a non-owner occupied property. Would this still make it a deal where I cant lose? especially since I would be paying very little out of my pocket…

I am sorry this is so long. I am pumped and am really out there looking fot that first deal and I am gonna make this offer on Tuesday. I tried to today but the realtor basically said I have little chance unless I show the bank that I have been preapproved for a loan, which I did tonight and should be getting the letter of approval on Monday. I am the first to jump on this one, as it just came on the market…
Thanks in advance for any help!

Re: How low to lowball a REO from - Posted by dewCO

Posted by dewCO on November 11, 2000 at 20:58:48:

Bottom line is that you always have to offer what will work for you. Period end of story. The costs sound a little high— don’t you have a good faith estimate breaking it all down? Shop with other lenders and compare. It’s not all loan costs, some of it goes to setting up the new escrow account and paying for your first year insurance premium.

What’s to say you can’t flip it to another buyer after you close, as long as the loan has no prepayment penalty. But all these costs add up, and that’s why creative RE buyers only go for DEALS from MOTIVATED sellers. If this house is great and just a little over priced the bank will wind up selling it any way, so they aren’t all that MOTIVATED I’d suspect. IF they have a good agent they should know it’s a little over priced, although it’s interesting they go an “appraisal” that $5k too much. One if you is likely wrong, or have gotten the wrong “story” o what it actually appraised for.

Re: How low to lowball a REO from - Posted by Tom

Posted by Tom on November 11, 2000 at 12:12:16:

Dan, you say “I got approved this evening for an 85% loan to appraised value loan.” One thing to remember: The bank will want a new appraisal after you have an accepted deal. The appraisal will (99% of the time) come in at the purchase price. If your contract price is $72K, That’s about where your appraisal will be. The appraisers work for the banks, even though you have to pay them.

Do not become a motivated buyer - Posted by PBoone

Posted by PBoone on November 11, 2000 at 07:59:26:

The bank is looking for a retail buyer, if that is your intention and you want to live in the house Congrats and welcome to your new home.
In the above message it appeared to me you may be considering this property for resale. If that is the case Make your offer with profit in mind. All transactions similar to the one mentioned require an investor to buy at about 25% below market for us to realize the profit necessary to stay in business. Consider your actual cost of acquisition, holding and closing. Here are some examples.
Resale: 85K
Profit: 8K (your numbers from above)
Heres what you are missing:
Holding costs:$3390.00 (approx 6 mos.)
6 mos. Prepay:$3200.00 (usually 6mos interest)
Advertising costs:$500.00
so with this in mind 3390 + 3200 + 500 = $7090.00
Now: Profit of $8000.00 - $7090.00 = $810.00
The $810.00 profit is there if you pay nothing to a realtor for finding a buyer at that point you lose.
Do not get caught up in the “Bank REO” fantasy excitement sold by realtors they are usually bad deals.

Re: How low to lowball a REO from - Posted by Dan

Posted by Dan on November 12, 2000 at 24:23:44:

Both the agent for the house and the agent I work with stated that the house is overpriced by about 5 grand, and that is what my comps tell me also, although there HAVE been some other like houses selling in the low 90’s in that subdivision. I am not surprised at all that the appraisal came to that. The bank is just going by what someone appraised the house for. They dont know the market because they are 1000 miles away, and I guess the agent didnt haggle with them too much about their high selling price. She didnt strike me as too good of an agent anyways…
Yes I do have a good faith estimate from the lender breaking it all down. And yes the numbers sound high and are probably a little higher than what they will end up being. But to be safe they are on the high side. I will definitely shop around some more though.
You are right about finding motivated sellers. I am not sitting around waiting on this house and have no expectations of the bank accepting my lowball offer. But I figure that there is a chance they may, and I dont want to not take that chance…
Thanks for your feedback

Re: How low to lowball a REO from - Posted by Dan

Posted by Dan on November 11, 2000 at 13:23:32:

Now wait a minute…
Are you trying to say that if the banks’ appraisal comes in at 93k, which it did for the bank that is trying to sell the property, and then I turn around and buy for 72k, they order a new appraisal that comes in at 72k? My lender, for the purpose of giving me an 85% of appraisal loan, will want the appraisal to come out to be around 93k, which it should. Why would they turn around and tell me that their appraisal comes out to be 72k? What am I missing here?

Re: Do not become a motivated buyer - Posted by Dan Simpson

Posted by Dan Simpson on November 11, 2000 at 11:34:12:

Thanks for your info Pat. Why do I have to pay 6 months prepay? And is that the case in every situation or just in certain ones? And can it be worked into the mortgage?
I think you are looking at this from a “flippers” viewpoint. If I were to try and flip the house, then the deal would be skinny as I said, and you broke down for me. However, if I get the house for very little down and I am only paying 8% interest, wouldnt my best course of action be to offer the house either owner financing or lease option? I would get someone in there right away and not have to worry about 6 months holding costs. I think you may be basing your 6 months holding costs on a house that needs rehabbing. This house needs no rehab. Or maybe it is a worst case scenario that I wont sell the house in 6 months. That I can understand. Another thing that I want to point out is that no realtor is enticing me to buy this house, I did the research on my own and found that the house was taken back by a bank a week or so ago, and then when I drove over there it had a realtors sign on it already. Perhaps the bank will hold out until they get retail price, but perhaps once they see an offer in front of them along with a certification from my lender that I am a willing and able buyer, they will accept and rid themselves of their “non-producing asset”.
On a lease option, here are the numbers that I come up with based upon your numbers and mine:
72k purchase
5k closing + 6 mos prepay of 3200 (Hopefully all or most worked into the loan like the lender said she was going to do for me!) +500 advertising = $80,700

I lease option the house, taking 2500 for option consideration, 850 a month lease, 150 a month credit to the buyers, and a purchase price of 95,000. It is a 3-year lease option. but the lease is renewable every yr and the price goes up 2 grand every yr.
P & I on 80,200 @ 8% is 590 a month. If I have to pay the taxes and insurance (not sure who pays on a lease option) then add another 70 bucks to the payment bringing it to 660 a month.
I am collecting 850 a month. 850 - 660 = 190 a month cash flow…
After one year, my buyers exercise to buy at 95,000. They get 1800 credit towards the down payment. Thus they buy at 93,200.
93,200 - 80,700 = $12,500
$12,500 - 2500 option applied to purchase price = $10,000
12 months of + cash flow of 190 = $2,280
$10,000 + $2,280 = $12,280 profit
Aw hell I pay the buyers closing costs just to entice them to exercise and buy…
12,280 - 1,500 = $10,780 profit
Did I miss anything here? If I did then that is my own ignorance and I will have learned something.
I am not trying to come across as a “know it all” I am just hypothesizing that a profit CAN be made on a house even if you buy at 10-15% below market. If I can get a loan at 85% of APPRAISED value (non-owner occupied) and not have to come up with much money out of my own pocket, and pay a low interest rate, then that opens up a HUGE market for me. None of the above would even be feasible for me if it wasnt that with my great credit that the lender is willing to offer me the terms cited above…
I could possible make more on an owner financing “wrap around” but I wont go there for now.
Thanks again Pat and I would welcome additional feedback from you or others.
Dan Simpson

Re: How low to lowball a REO from - Posted by dewCO

Posted by dewCO on November 11, 2000 at 20:49:16:

Are you aware that conventinal lenders will lend only on the LOWER of the purchase price or appraisal? The issue of what this will appraise for then becomes moot, for the purpose of your new loan. While Tom is basically correct, I would hope the appriaser would come in a little closer to actual value, if indeed the actual value is 93k and you get it for 72k.

One reason they don’t go out of their way to go higher than the contract purchse price is because of my first statement. It’s academic and a moot point as far as the new loan is concerned.

Re: How low to lowball a REO from - Posted by Tom

Posted by Tom on November 11, 2000 at 13:57:33:

That?s right. In most cases, your bank is going to order a new appraisal, one of the items that they will require is a purchase agreement showing the purchase price. If the purchase price is $72K the appraisal will be within 5% of that price. Appraisers work for the lenders; they can make numbers come out any way they want, total subjective. If not, if the appraisal does come in higher, say $90K, the bank will only lend you 85% of the purchase price (72K), they want to see some of your money in the deal.

If you find a bank or mortgage company that does any different it would truly surprise me. Sometimes hard moneylenders will, but not at 85% LTV and not at 8% interest.