REO "as is" question - Posted by Valerie

Real Estate Investing Retail
#1

Posted by Kent Cheatham on June 20, 2001 at 17:54:49:

Valerie! Stop! Your using emotion here! Thats what everyone does. Use logic, this is a PERFECT potential buy…PERFECT!

The bank has heard the emotional response to the damage already I’m sure. They’re scared to death they’ll never sell. Since the basement was carpeted and sheetrocked it was added as appraised footage as living space. Since it is now destroyed to the point carpet and sheetrock must be removed you must request it be taken off the living space and re-classified as a basement. Your purchase appraisal just dropped by a third on footage! Also, not only is it now justa basement but you as a buyer must assume the worst…that the walls leak terribbly. So it now is worth less than just a basement, it is a liability…a negative. Subtract the cost of removing all materials and converting to a plain basement plus the cost of water-proofing the basement in your bid…then subtract 10% more of this cost for your trouble.

Low ball the hell out of the bank, whining all the time about how much its going to cost to just reclaim it as a basement.

Then re-sheetrock the basement (the studs and wiring will still be good…as well as the ceiling!!) Carpet it also and you can have it re-appraised wqith 1/3 more living area!!! You’re gonna make a killing!!! You’ll have more than enuff to add dirt to yard to get it draining better but I’d leave the yard alone, the marshy-ness is not as big a detractor as not having pretty grass (unless you plan on living there). This is a Retail flip dream!

I would love this house!

Kent

#2

REO “as is” question - Posted by Valerie

Posted by Valerie on June 18, 2001 at 12:58:41:

I found this property I could only describe as “pretty”. It a 3/1.5 rancher (beautiful outside) in a great neighborhood. It is currently an REO and the asking is $159,900. I had a realtor friend look into comps which came back in the $165k to $170k range. The listing agent (not my friend) told me it was being listed for 10% below FMV but to me that would be $175k and the comps aren’t coming in that high.

My friend told me that it is being offered “as is” and that I should be careful. She is taking me in to see it tomorrow afternoon. I know I have to check into it with an inspection but I was wondering if an “as is” from an REO is more of a “let’s just cover our tail” from the bank rather than the fact that they know something is wrong with the property.

Also, how well do banks negotiate? I was thinking of flipping this property (FIRST DEAL) and had an idea of maybe offering $135k for it if I can’t find anything wrong with it but write up the offer so I can back out if the inspection turns up a problem. I know that the bank doesn’t look at vacant properties as a asset so I just want to know what a good offer might be.

Any suggestions or ideas would be graciously accepted.

Thanks,

Valerie

#3

Re: REO “as is” question - Posted by JPiper

Posted by JPiper on June 20, 2001 at 19:54:56:

There’s no real magic here Valerie. The houses you can buy the cheapest are generally going to be the ones that retail buyers won’t buy. Retail buyers won’t buy houses that have problems.

So this house has a problem…and therefore will probably not sell retail. Instead, it’s going to sell to someone willing to deal with the problems that you mention.

Whether the bank is ready to acknowledge the problems right now, or whether this will take place months down the road we don’t know. So what you do is you make an offer.

Your offer should be one in which you start at retail comps…and then back into the offering price by deducting all of your costs and your profit. Costs would include things like Realtor commission to sell, closing costs to buy and sell, costs to obtain a loan, cost of carrying the loan for 6 months, insurance, property taxes, utilities. Costs also include repairs. I would also include some contingencies for when your repairs estimates, time to sell estimates, etc are incorrect…a fudge factor.

Profit…insert your own number here…but it should be high and compensurate with the risks involved. I don’t do rehabs for less than $20K…and that’s at much lower prices and risks.

In all probability your offer should be for $100K or less. Keep in mind I don’t know the cost of repairs here.

You can’t make alot of money unless you’re buying what other people don’t want.

JPiper

#4

Re: REO “as is” question - Posted by IB (NJ)

Posted by IB (NJ) on June 18, 2001 at 18:33:41:

Banks put down ‘as is’ as their way of saying that even if something is wrong, they’re not going to fix it. You will have to buy the property “as is”. It doesn’t necessarily mean they are trying to cover something up. In most cases they are not. In most cases, the banks know what’s wrong with the property and try to price accordingly. But 159K is a bit high for a REO selling “as is”. Definitely offer lower. Right now the deal’s too ‘skinny’ for you to make a profit. Your best bet is to go in with a contractor and check the majors: Plumbing (make sure it’s all there and working), electrical (make sure it’s up to date), foundation (make sure there are no crack in the foundation and/or structural problems), roof (make sure it doesn’t leak), heating (make sure the furnace is working). If those check out then the other stuff is cosmetic. You should be able to see this (cosmetic) with the naked eye. But make sure you factor the cost of any repairs into your offer. In my experience, banks don’t give you an opp. to “back out” if the inspection turns up something. That’s why it’s “as-is”. You should get into the practice of having your contractor inspect the property BEFORE you make an offer. And don’t get emotionally attached to ANY house. That’s for your buyers to do :slight_smile: Good luck.

#5

Re: REO “as is” question - Posted by K Cheatham

Posted by K Cheatham on June 19, 2001 at 05:14:39:

Valeries right. They always say “as-is” to cover the banks tail. But there can ALWAYS be something wrong.
I jumped into a pool house deal. I guessed a fixed up appraisal of 45k and 8k to put it there on repairs. The repo bank had it listed at 30k. I had only glanced at the house in a passing walk thru. I casually threw them a take it or leave it offer of 14k. They took it in 20 minutes! So they can sell for what they want.

They bad news is I did EVERYTHING wrong. It had terrible termite damage (I suspect they knew). It wound up costing $12k to fix-up. The realty market in 1987 was crumbling. I lived 200 miles away and couldnt manage the repairs from afar. It sat empty for 1.5 yrs, was vandalized, insurance dropped me because it was empty…I did EVERYTHING wrong! But the one thing I did right was buying cheap. Even after bumbling my way thru this deal and finally selling it for $35k…I did okay. I realized $9k profit and 2 years tax write off. At the time realty could be bought in Okla for 50% LTV due to the oil bust. It still can be had here at 80%LTV (at worst) for wholesalers and 60% for bargain hunters. I dont know your world. It would scare me to give 90%. But your 10% profit there is probably bigger than my 30%…grin. I dont go into anything I can’t run from at a moments notice and break even. If you became ill suddenly could you sell this for a break even on a quick sale?

Kent
"Hope for the Best…Prepare for the Worst"

#6

Re: REO “as is” question - Posted by Valerie

Posted by Valerie on June 20, 2001 at 07:28:34:

Well, I had my realtor friend take me through and there was a lot of cosmetic repairs (paint, wall paper peeling) OK, I could deal with that. The table turned when I went down the basement. Totally remodeled, finished basement with two and a half foot water mark with mold growing up the wall. The carpet was soaked (brand new but soaked). I walked down first with my friend behind me and as we were going down the stairs she says to me, What did they do down here… Sponge Paint??? After she saw it was mold, we both got hysterical. The backyard was “swampy” too. It’s a shame because it really was a nice house UPSTAIRS. New heater, water heater, roof, etc. Needless to say, NEXT!!!

Thanks for your responses and giving me more insight on the caveat emptor of REO’s.

Valerie