REOs - Stuck in the Gate - Posted by Loren (FL)

Real Estate Investing Retail
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Posted by Sean on August 15, 2005 at 10:07:09:

Well, again, as we all know, markets differ.

When you have 1% per month appreciation its hard to wind up underwater… if you live where I live though… appreciation is not going to bail you out in the short term at all.

Foreclosures are almost ALWAYS overleveraged here, and chasing pre-foreclosures is largely a waste of time.

Newbies overpay even in my market and end up losing their shirts too… That’s a general universal no matter what the markets are doing. I have one newbie that has been calling my ad for a year trying to get me to buy the rehab he bought for too much, fixed up (but didn’t do it right), and now can’t sell… but wants me to show up and pay him all the money he’s in it for… He’s learning a very costly lesson, and every few months I get another call from him… I am sure its only a matter of time before the property is back on the foreclosure listing, and this time, in much better shape that it was the last time.

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REOs - Stuck in the Gate - Posted by Loren (FL)

Posted by Loren (FL) on August 11, 2005 at 15:28:37:

Greetings All,

Let’s get it out of the way first: I’m a n00b.

Okay, that being said, I’m having a hard time finding info on REOs. I’m in a hot area (SE Florida) and am getting tired of talking to agents who are super-excited to offer me “deals” that are marked up 30% above market. Hence, REOs, but I’m having a hard time getting people at the bank to talk to me. Most act as if they don’t know what I’m talking about. The folks at Bank of America told me to check their Web site, which offers a grand total of four–yup–four properties for the entire state of Florida. When I called back and mentioned this, the woman I spoke with said, “Yeah, I’m not entirely sure what happens there. I think it’s all internal.”

I’m sure I’m doing something wrong here. Any suggestions for me?

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Re: REOs - Stuck in the Gate - Posted by Sean

Posted by Sean on August 12, 2005 at 09:16:27:

Ok, Nutshell on REO… for archival and posterity:

#1 Other than perhaps a small local bank, you can pretty much forget that you are going to pick up a phone and talk to a bank about their REO’s.

#2 The vast majority of REO’s are listed for sale through Real Estate Agents anymore… You can find them on the Multilist… and in most cities/areas, only a handful or two of realtors list probably 90% or more of ALL REO’s.

#3 Those agents that DO list the REOs are generally crotchety and you can’t blame them for it… they get paid usually a pittance commission for selling these things by the banks, and have to deal with every new schlub that just read a book or took a course trying to lock up their property to try to wholesale it, or fix it, only to NOT perform.

#4 Just because the property is an REO doesn’t mean the bank is going to deal. Sometimes banks just want the property gone, and will bargain… other times they are adament about their price… YOU with all your 300 page book of knowlege or weekend seminar are NOT likely in the least to change their minds if they don’t want to deal.

#5 Your best price on an REO is the same way you get the best price on anything else… ALL CASH, NO CONTINGENCIES AND A FAST CLOSE ON THE DEAL…

#6 Unless you intend to LIVE in the house yourself, you can pretty much kiss getting terms from the bank away… yes it does happen, sometimes… and sometimes they will even let you know they’ll give you terms/money to buy and fix up… but its not consistent and the price they want in exchange for that is usually higher than makes the deal worth while other than an owner occupant.

#7 Don’t expect banks or their agents to routinely be selling PERFECTLY conditioned houses for pennies on the dollar… this RARELY happens. Those sorts of houses are going to attract RETAIL buyers, and a retail buyer is going to pay far more than YOU as an investor should pay for a property. Yes, every once in a while you hit a home run and get a house that just needs paint and carpet for .50 or .60 on the dollar… .but that is the EXCEPTION. They are great when you get them, but they are also not a repeatable and reliable business model. I live in a place that has been a buyers market for 20+ years… and EVEN in this area you aren’t likely to find those types of deals often… even in a slow market there are retail buyers and retail buyers recognize deals too.

#8 Banks are going to force you to commit to your closing date or pay daily penalty… but as often as not, they won’t have their act together to close on the date of the contract… deal with it. These are foreclosures, very often there are problems with the title that come up when the bank tries to sell.

#9 Short Sales on single liened properties are largely BS… Do they happen? Yes. Are they a reliable and consistent model to operate under? Not in my experience. Even once the bank accepts a short sale, things always show up that you didn’t know about… like liens and other things… after all if Mr. Homeowner hasn’t paid his mortgage in 6 months, he likely hasn’t paid anyone else either. Paying for a title search before you have a deal with the bank is a waste of money… and after you have a deal finding out there are thousands in water liens or mechanics liens or back property taxes makes the deals DOA. I don’t care what seminar guru says what to encourage you to buy their SS course… the single lien SS that works is about as reliable as the REO property that just needs paint and carpet at .50 on the dollar.

#10. If you are in a HOT market, and appreciation is rising at 1% a month… don’t be suprised that banks aren’t willing to sell cheap… Hot markets give sellers more opportunities, that’s just reality folks.

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Re: REOs - Stuck in the Gate - Posted by Sailor

Posted by Sailor on August 11, 2005 at 19:45:04:

In a hot market there are few REO’s, as owners can sell instead of going to foreclosure. That said, B of A would NEVER be my choice–their poisonous corporate personality filters all the way down. Don’t know how long they’ve been that way, but I can attest to their record for the past 45 years.

I tried REO’s years ago in Calif., but figured out that I was much better off working w/owners pre-foreclosure. Much easier to work w/those folks than banks. I liked helping people get out of a jam & into a new life. However, now that I’m on the East coast & it’s a coupla decades later, I no longer do those kinds of deals, so can’t give much advice, only encouragement.

Tye

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Re: REOs - Stuck in the Gate - Posted by eric-fl

Posted by eric-fl on August 11, 2005 at 15:58:09:

You’re right, you’re doing something wrong; you are talking to the bank. They have ZERO interest in talking to you, or any other investors directly. They probably get 100 calls like yours per week.

After the bank repos the property at auction, they are listed through real estate brokers. Typically, this is a very small and cloistered group of agents. Some of them even do this exclusively.

Often, these agents to not even list these in MLS. They frequently will call their list of pre-selected investors, as a “pocket listing”, and sell them directly to them. Often, even if they are listed, they will frequently go to the selected investors, even if others offer a greater price.

The upshot of all this is, the reality is that this is a very cloistered world, and one you have to work very hard to break into. Once you do, it’s probably very profitable I’m sure, but as a noob, there are probably easier ways to make a buck.

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Re: REOs - Stuck in the Gate - Posted by xcvxcvxv

Posted by xcvxcvxv on August 21, 2005 at 01:37:37:

vcxvxcv

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Re: REOs - Stuck in the Gate - Posted by Loren (FL)

Posted by Loren (FL) on August 12, 2005 at 14:16:13:

Thanks, Sean. I appreciate the counsel quite a bit.

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Good Post - Posted by Natalie-VA

Posted by Natalie-VA on August 12, 2005 at 12:02:32:

Sean,

In our hot market, there are very few REOs (if any). Not much seems to make it all the way to foreclosure anymore.

I’ll add that when I got started in RE 6 years ago, I was an REO listing agent. I can vouch for the fact that the lenders pay measley commissions and expect you to not only sell their overpriced piece of crap, but they also want you to act act property manager and general contractor. I’m glad I got out of it. And, yes, many calls from contractor types (or newbies with no proof of funds) who just want to complain about the condition and price of the home. Take my advice, save your breath, the listing agent doesn’t want to hear it. Just make your offer if you have one.

–Natalie

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Great post! Must read for Newbies - Posted by Kevin IL

Posted by Kevin IL on August 12, 2005 at 10:01:28:

n/t

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Re: REOs - Stuck in the Gate - Posted by Loren (FL)

Posted by Loren (FL) on August 12, 2005 at 08:41:37:

Hey Eric-fl,

Yes, I realize it’s likely a difficult world to break into, however, it seems like one that would help me achieve my goals. Let me explain: My wife and I want to owner-occupy a small multifamily and have a small positive cash flow. Not a whole lot to ask it would seem, but it’s pretty difficult down here. I’ve been farming three distinct areas every week for months and find plenty of properties–usually marked up way above market. We do the research, make the offers that make financial sense (i.e. garner at least $50 positive cash a month) and have gotten nowhere.

Hence, the thought of REOs.

I understand that banks are inflexible. If you (or anyone else) has a better idea, please tell me. My ears are open, I’m humble and ready to learn.

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Re: REOs - Stuck in the Gate - Posted by Frank Chin

Posted by Frank Chin on August 15, 2005 at 08:29:45:

Loren:

Sean’s post is right on target as I dabbled with REO’s for a while, during the down market. To add to what he said:

  • In hot markets, most sellers in financial distress can easily sell homes, get top dollar, and then move in with relatives.

  • In the last DOWN market when I bought my REO’s, not only did a get NOO loans for REO’s but the banks financed 90%, paid the closing costs, sold it free and clear (that is they paid off ALL leins). And I had a property where the developer was foreclosed, taken over by the bank, who then went bankrupt, taken over by the RTC, and in turn sold to a large bank who offered financing to get unload the place.

  • My wife was a banker and the time, and I had a chance to talk to the guy in charge on REO’s, who I bought the property thru, and I offhandedly commented that I noticed they only sell the stuff thru public auctions, or certain realtors. His comment to me was if the bank handles its own REO’s the names of the “bank staff” in charge of REO’s were known, not only would the these people be flooded with calls, but slick investors would offer CASH BRIBES to get houses 50 cents on the dollar. My wife agreed because she got her job as VP of Finance because here predecessor was arrested for taking cash bribes to sell bank assets for pennies on the dollar.

If I was in charge of a large nationwide bank, I certainly wouldn’t want people at the branches with authority to sell assets pennies on the dollar taking cash bribes. I would feel much better if the staff sounded stupid and have no idea what you’re talking about.

Frank Chin

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Re: REOs - Stuck in the Gate - Posted by IB (NJ)

Posted by IB (NJ) on August 14, 2005 at 10:49:19:

My advice: leave Realtors and (overpriced) REO’s alone. Deal directly with homeowners in trouble (i.e. foreclosure, etc.). Become knowledgeable in real estate and foreclosures and muster the courage to knock on doors of homeowners who NEED to sell now. Do this and you’ll never complain about not finding deals again.

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Re: REOs - Stuck in the Gate - Posted by Jeff

Posted by Jeff on August 12, 2005 at 14:55:31:

Not to nit pick your ideas, but…

As you are getting into this, make sure you are ACCURATELY figuring cash flow. Unless you are in a highly appreciating area, $50 is way too thin, IMO. One month vacant and you have $0 cash flow on the year, not even considering repairs, cleanup, etc. Consider vacancies (you WILL have some), repairs, collections, mgmt, marketing, etc. when you are doing your analysis.

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Re: REOs - Stuck in the Gate - Posted by Sean

Posted by Sean on August 15, 2005 at 08:36:41:

I have to strongly disagree with this statement. The absolute BEST deals you are going to get are not distressed sellers, but sellers who for whatever reason just want a property gone and have them free and clear.

I am not against chasing the distressed sellers, but the ones that have foreclosures on their backs, are rarely good deals, because usually they have overleveraged the properties and owe more than they are worth.

As to overpriced REO’s, well I suppose in hotter markets this is true, and even in my area with all the newbies not knowing what they are doing folks are paying too much for things… but reality is, unless you are in a super hot market, the REO is the best and simplest way to get a deal in my experience… and with a projected 8,000 foreclosures next year in my county… there is certainly no shortage of them.

Its all a matter of your market. If you are in a sellers market, you are not likely to find as many deals period… if you are in a buyers market, you will find more than you can possibly handle.

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Re: REOs - Stuck in the Gate - Posted by Alan

Posted by Alan on August 15, 2005 at 09:20:25:

Hello, Most properties here are only on the market a few days and may even sell over market value. Even most of the REOs are at market value. What strategies do you suggest for a hot seller’s market? Get a conventional loan and buy mayve a little under value and L/O or owner finance to a new buyer and wait for appreciation? Thanks.

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Re: REOs - Stuck in the Gate - Posted by IB (NJ)

Posted by IB (NJ) on August 15, 2005 at 09:09:17:

I agree but I did say “i.e. foreclosures” which means as an example. It doesn’t have to be a foreclosure. And like you said, it depends on your market. But in this market there are plenty of foreclosures with equity. There are also those who don’t have much equity unless you short sale or discount the attached liens. There are not too many properties free and clear in NJ where folks are willing to sell at a discount.

As for REO’s, a newbie can forget it in my market. The good ones are going to the veteran investors who have the listing agent in their back pocket. Those REO’s that are overpriced are going to unsuspecting newbies who end up losing their shirts.

Good investing,

Ib

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Re: REOs - Stuck in the Gate - Posted by Sean

Posted by Sean on August 15, 2005 at 10:00:45:

Did you miss the last paragraph? If you are in a sellers market, there are fewer deals PERIOD.

What would I do in a sellers market? Personally I’d go after the STRUCTURAL PROBLEM PROPERTIES. In a sellers market the situation is in my experience is buyers don’t want to generally lift a finger when they buy… and the easy rehabs even get good money.

The approach of buying at retail and riding appreciation is just not a model I like… yes a rising tide lifts all boats… but I have seen those markets turn first hand. I have seen houses that went from 500k to 650 in a year, and then not even get anyone to look at them at 500 a year later…

The one thing I could find in that market when it was rising were stinker properties… I mean structural problem properties, that might have cost 50k to fix, but could have been bought for hundreds of k under retail.

You can play the appreciation game, and that model will work provided the market doesn’t turn and you wind up holding the bag on a 650k loan on a property only worth 500k, and no way you can cover the mtg with what market rents are going to give you.

I would do the STRUCTURAL distressed properties if I was in that market, or look into mobiles if the goal were to acquire rentals.