REO Common Denominator
When a property becomes bank owned, it means that the lender didn't short sale the property, or didn't sell the property at the auction, right?
Have you found a common factor in houses that end up being bank owned and then put on the market and listed in the MLS? Does the bank end up with them on purpose because they feel they can sell them easily, or because there was equity in the house so they should try selling it? I guess I'm trying to find out if some lenders don't want to short sell or sell the mortgage on purpose?
REO's are BAD for the banks (non performing assets). In Illinois, homes which go through foreclosure to courthouse sale and are not purchased at auction become bank REO's.
Remember the cost of foreclosure (months of zero payments, redemption period, legal fees, employees benefit costs, etc.) The bank has an obligation to the shareholders to sell this non performing asset via MLS/realtor this asset to recover the lost funds.
Eric & Rosa
[addsig]
Thanks for the reply,
It would seem that the lender would not want to actually foreclose and own the property, so is there something that causes this to happen?
Are the houses that become REO the dogs? Is there something about them that makes them more apt to become bank owned?
We all know that there are different types of loans owned by various mortgage investment groups... each with their own short sale criteria imposed upon the various mortgage loan servicers that they employ to service their investment... OK?
What if....
What if a particular mortgage investment group with a portfolio of 10,000 loans decided that it was in it's best financial interest to take back property as REO than accept a short payoff? Why?
What if the mortgage investment group had a subsidiary (national) real estate brokerage that marketed the property as REO (real estate commissions); and offered mortgage acquisition finance to propsective purchasers (more profit) and homeowner insurance, and title insurance, and .........was able to gather financial information from potential purchasers and pass that along to their credit card subsidiaries.... who would sell them furniture, carpeting, and how about NEW CARS?
It's a dynamic industry.
One of the other seriously painful aspects of REOs for a lender is that they are required to have reserves of something like 5-10 times the value of those non-performing assets on hand. Federal law. 1000's of REOs = lots of money they cant loan out.
Oh yes, we can feel their pain....
All good info, but not really answering the question. If all logic says that banks don't want to own these properties, but they still end up owning the majority of the properties that they take to foreclosure, why is this? What is a common factor that is causing this?
Rehabinator,
It is all very logical. Let's say a couple can no longer make their monthly mortgage payments. Let's say the owe a total of 80k, but the property is worth 75K. Lets say their is second mortgage on the house (b/c the couple needed a second loan to catch up on the first, but now they are behind on that too) for 15K.
That is a total of 95K they owe on a house that's workth 75K. They had no luck selling it, no investor is interested in it, so they have no choice than but to let the bank take it.
Now the bank forecloses and holds an auction. Investors show up, but the opening bid is at 85K (what the couple owed the bank). No one bids b/c they know the house is only worth 75K, so the bank ends up buying the property back for 85K (the second mortgage in wiped out).
They put it on the market in the MLS at 85K, no one makes an offer. A few months later, it drops to 75K, they get offers, but reject them b/c they are too low for what they want.
Now let's say the banks fiscal year is ending, and they have to do a report of all of their non performing assets. The couples house is one of them. Let's also say that they just so happened to receive and offer of 55K on the house, they counter with 70K, the potential investor counters back at 57K and the bank agrees.
Now they have removed a nonperforming asset off of their books even they had to take a loss, but it's better than having too many properties and they won't be able to loan money (which is what they are in business to do). Hope this helps.
Dee
Great Reply Dee
Hi Dee,
Thanks for the reply.
If I understand your reply what you are saying is that the common denominator you see in the majority of bank owned properties is that they were properties where there was no equity.
Further that would mean that properties that had equity in them rarely become bank owned. So that means that it would be very uncommon for a bank to end up owning properties with equity.
But the problem with your statement for me is that we all know that banks aren't in the business of owning realestate.
If your example of a property worth 75k is foreclosed for 95k. The bank knows going into the foreclosure that they will never see the 95k for the house, plus all the back payments and attorneys fees and all so why do they end up owning it for 95K?
If they are not in the business of owning real estate why wouldn't they cut their loses right from the start and do a short sale for 57k instead of owning it and then taking 6 months to finally sell it for 57k?
It seems to me that there is a fatal flaw in our beliefs of what the banks are really thinking and intending because their actions don't verify our beliefs at all.
Banks will always TRY to get top dollar for their properties. Unfortunately, there are some people willing to over pay for a piece of property.
Not to mention, they will try to get what is owed to them for the property. I believe it is standard rule.
Houses with equity can become REOs as well. Usually they need a great amount of work and no one wants to bid on it without knowing what all the repairs are.
Idon't think there is a linear common denominator for REOs. It depends on the bank, their motivation,and how many properties they have the on book. They play ball different in each situation. If it was uniformed they wouldn't have much luck moving those properties at all.
Dee
It is very difficult to nail down one common denominator. It can also be challenging to find a "logical" reason why banks do things.
Here are 2 more rasons why the bank will take back the property as an REO:
1. The loan is insured via PMI or HUD. For example, homeowner borrows $100k and 2 yrs later defaults. The house is in disrepair and only worth $70k as-is. Bank is guaranteed 82% of loan by HUD. Bank goes to auction for $100k, property becomes REO and bank is reimbursed by HUD for the loss. Bank nets more than selling for as-is value.
2. Upon starting the foreclosure, the bank gets a drive-by BPO. BPO says property is worth $100k. Bank bases their decisions on this estimated value. After foreclosure the bank enters the property and realizes all the walls, plumbing and electric have been removed. House is only worth $40k as-is. Bank sells REO to rehabber for $40k and eats the $60k loss.
In my experience, most REO's are not a great deal. But occasionally one pops up that is a deal....if you are prepared and pounce you'll make money. I did.
Quote:
On 2003-12-08 14:02, The-Rehabinator wrote:
But the problem with your statement for me is that we all know that banks aren't in the business of owning realestate.
If your example of a property worth 75k is foreclosed for 95k. The bank knows going into the foreclosure that they will never see the 95k for the house, plus all the back payments and attorneys fees and all so why do they end up owning it for 95K?
If they are not in the business of owning real estate why wouldn't they cut their loses right from the start and do a short sale for 57k instead of owning it and then taking 6 months to finally sell it for 57k?
A couple of things on that..
1) not sure what you mean when you say that they end up owning it for $95K. The amount that they have in it is the outstanding balance on the loan plus any arrearages and attorney's fees. The amount of the second mortgage is not part of it. That's some other lender's problem.
2) I don't believe that the bank can go looking for people to do a short sale for them. I say it like that because legally, the bank's remedy is to foreclose, not to find a buyer that can help them structure a short sale. I don't think that they are legally allowed to recruit investors who can step in the middle. I don't know, they (as a group) might be very happy to have more investors willing to step in and short-circuit the inefficient legal process and let them take their losses and move on.
3) Aside from the availability of investors willing to do the deals with them, I think that the mortgage owners and their insurance and pre-established short-sale guidelines (as mentioned above) are what hold the lenders and servicers back from doing more short sales.
Kevin,
I'm starting to get the idea that most REO suck too. Not exaclty what is shouted as gospel by the real estate investing community at large.
I have yet to have a bank entertain a 65% of after fixed up value offer yet. Around here they start at retail on a trash house and sit on them for 6 months going down $5,000 every two months.
Foto -
If 2 is true then why do banks turn down so many short sales. It isn't the case of investors getting their shortsales going through all the time it is more a case of most of them not going through, at least here.
As for 3 - that might be the real story, the banks may be willing but their hands are tied, being in the middle, however I have never heard that before now.
Rehab'r,
Not sure exactly what you're looking for in an answer here. Dee and others have given a pretty good response as to what happens.
As far as why lenders foreclose, think of it on more personal terms. IF you loaned out money to someone that suddenly couldn't pay you back, but had an old car to give instead, you'd probably take it because even though you'd lose money, at least by selling the junker car, you'd get some of it back.
REO's are altogether different beasts than the "normal" creative real estate deals that are usually talked about here. You're probably trying creative offers on a conventional seller. Chances are your offers haven't been accepted or countered because they haven't been simple enough for the lenders to consider. REO offers work best as All Cash, quick closings, little to no contingencies clauses.
Roger
Hi Raj,
Offers have been all cash with quick closing, no contigency, not even an inspection all to bank owned properties.
Example: House on market for 200 days, bank owned. Started at $180k,(when it was owned by homeowner 300 days ago) down to $132k. House after fix up should retail $150k. Needs $20k in fix up. Offer $95k all cash, no contigency, $10,000 ernest money check, quick close, not even an inspection. - answer no thanks we just turned down an offer for $105k yesterday.
REO 3/2 SFH after fix up 170k, really bad part of town. Asking $162k after 45 days on market. Needs $15k in fix up. Offer $115k no contingencies, all cash again. Realtor - thanks but no thanks just turned down a $135k offer.
REO 4/3 SFH after fix up 180k pretty nice section of town. Asking 175k, needs 10k, could put another 10k to make perfect. Offer 125k all cash no contingency, realtor -thanks but no thanks, this is a fannie mae house, if you are an investor, don't even bother trying to do a fix an flip, fannie will just fix it themselves and retail it, here is my counter $174.5k.
By the way those fix up costs are just materials, me doing the work [ Edited by The-Rehabinator on Date 12/09/2003 ]
Stop Stop, you are using logic and common sense. You are playing the part of the Reasonable and Knowledgable person and applying it to a circumstance which is surrounded with persons all making subjective judgements.
The answer is very simple and non rewarding. Each situation must be handled in response to the uniqueness of the occasion.
Like any battle you must check out the competition which in this instant is a bank. Run by bankers, responding to their rather specific stimulation.
Property goes REO. Caused not by lack of value but because it has a mass of liens, secondary mortgages and a few unrelated judgements. All removed as of the moment the nice man foreclosing says Sold!
Might even have a 20% equity present above the foreclosed amount. Buy it.
Ok hate to bid foreclosure sales? All those cashiers checks (of OPM) are heavy in the hand? then lets buy for about 10% of the face the next goodie in line behind the foreclosing mortgage.
You pick up the Deed from the nice prior owner who is leaving for Catmandu with his present close companion. You then bring the mortgage out of foreclosure. You put a tenant in even if negative flow.
You now substitute Trustee or find that nice disbared atty who works for crackers and water. You foreclose and eliminate all those things on title. Of course having bought the note for 10 cents on the dollar, you list the default at the entire unpaid balance. If you are overbid by some ruffian at sale you made 90% of the face of your note plus all the costs of foreclosure which you control. If not overbid you got a property for the price of the lst, plus advances and the small amount you put up for the second. Money in the bank, Perinos tonight, Drinks on the house. New shoes at last www.whatever.This is but one of the things you can do.
No not Bob Allen, the Quote is, Clauswitz:. 'The enemy situation is constant and can be observed. Yours is fluid, can be adjusted. He that can change direction in response to observed intelligence wins.'
Thats all of us. thats what it is all about.
Also amusing and fun. Lucius
Lufos had at least one point there, you're trying to use common logic while dealing with a beast that doesn't have it (that being the banks/REOs).
Some lenders just don't know what they have, or don't have, as the case may be. At the time, they may not feel pressured to unload these properties. There may still be something in your contract that doesn't convince them that it's a valid offer.
Are you making offers to their RE agent are through you own? That may be the key. If you don't have a buyer's agent, get one. The "we've turned down a better offer" is usually bull. It's just the seller's agent method of trying to get more money.
Rehab'r, If they don't want to deal now, wait a while and make the offer again. The longer they hold it, the more they will be ready to deal. If they don't take your deals, follow the property closely. At some point, the bank will simply auction it off. I've seen it many times, where the bank as sold off a property at auction for 1000's less than my last offer.
When you make an offer, you might consider some other things to include like, your comparables to determine ARV price, your list of repairs needed and the costs for a contractor to fix, a proof of funds letter, or better still, a copy of a check in the amount of the offer.
Roger
Hey Roger,
The offers are made through my realtor. I do include a proof of funds letter.
I have never seen a REO in Denver go to auction. Not to say that it hasn't happened, but I follow each property through to the end, waiting for it to show up in the MLS records showing the actual selling price.
I don't think the mechanics of my offers are the issue, the dollar amounts are the issue because the properties end up selling for much more money than I would offer.
My offers are on average 75-80% of after fix up retail value, and I see a lot of these houses end up being bought for 85%.
And I know the next thing would be to look at worse houses, but I'm already looking at ones that need new carpet, paint, doors are kicked in, holes in walls, mold issues, broken windows, water damaged floors from dishwashers, tototally shot bath rooms and kitchens, bad roofs, vandalized by the foreclosed previous owners ect...
The next level would be frames left after a fire.
I have wondered also in regard to what to submit, should I submit a package that has pictures, and estimates? I have asked this question to many people and the answers are all over the place, with most saying it isn't necessary or don't think it would matter one way or another since you are dealing with a bank.
I feel your pain. The lenders are living in denial in this area. I know what is owed on the property, I know what it will really sell for. I know that no one is buying anything at the auctions because they know what I know, but lenders are refusing to listen to reason.
I think there has been a lot of money flowing into real estate investing from the stock market and those people are willing to pay more than we are.
[addsig]
I believe you are on to something.
One last example
REO 4/2 ranch 1800sq ft no garage, really bad section of town.
Bank started asking 167k in August.
November they had lowered the price to 149K.
Highest priced house ever that sold in the neighborhood went for 190k 7/3 ranch 2600 sq feet.
After fixed up retail value of this house 175k to 180k tops.
House had new windows and siding and roof. Addition on the back with master bedroom suite, master bath room with garden tub. Sounds great, however wasn't finished, all drywall up, no carpet, bathroom 80% done, however tiled floor wasn't grouted yet, but if you stepped on it the floor would give up to 1 inch. (if you know anything about a tile floor you know it has to be solid as a rock)
Electrical service was inside the house in the wall of the new addition and also in the wall of the old house, a door frame ran down the middle of the electrical service. In order to get to the master bed room you had to enter through another bedroom.
Roof pitch on new addition illegal. Went to the building dept to check the permits that were pulled. No electrical, no plumbing no nothing, open roofing permit that was cancelled, open permit for construction of the addition never inspected. The house is basically a money pit if you go to try to get the permits closed or even pull new ones, roof is illegal, there is no telling what the wiring and plumbling look like since everything is sheet rocked, the electrical service God only knows, you actually couldn't close the cover on the service panel because a romex cable was running down the front of it inside the box itself. By the way the rest of the house was a mess, but I liked the shag carpet on the wall in the living room with the press on mirrors in a nice diamond pattern. The kitchen was originally on the back wall of the house and they replaced the window that looked into the back yard. However when the put the addition on the back they left the window in the wall, so you have a window from the kitchen into the Master Bedroom they added on. (Maybe for making those breakfasts in bed easier?)
I offered 115k, no contingency, no inspection, cash deal, quick close. Bank rejected. I contacted the listing realtor and discussed the house with him. He was unaware of all the issues and promised to contact the bank and get back to me.
I recontacted him weeks later to make another offer, house under contract for $150k
I can't imagine any homeowner buying the house as it was half torn up and half unfinished.
Is it possible that we just have some investors here who are paying way too much for anything they can get their hands on? It is not like we have a crazy market here, every article in the business section is about how the bubble is going to burst in realestate and how foreclosures are at an all time high.
We have an investors club here, they had a meeting on HUD homes and we had over 500 people show up.
I love to read about people in other parts of the country who talk about making offers at 50% of value to banks and motivated sellers and how they wouldn't even consider doing a deal at less than 65% of value. Or how there are so many deals out there just go to the next one if you aren't going to make what you want on this one. I would love to experience that type of market.[ Edited by The-Rehabinator on Date 12/10/2003 ]
There may be a bubble in your area. New RE investors willing (or unknowingly) paying more than they should. It may be that the buyers are buy and hold investors that will also pay more. It may be end buyers looking for a deal in an overpriced market. There are a number of possibilities.
Have you followed these properties after the sale? What is being done with them? Fixed up and sold? Rented? Homeowner? It will help you to know your competition.
Finally, at the risk of sounding like a broken record (CD?), are you looking at the right type of properties? Example: the last 3 REO's a bought were what I call "problem properties." 2 of the 3 had no major repairs at all, just some elbow grease to remove the cobwebs.
However, they all had other problems that no end buyer wanted and few investors would consider. One had a well AND a right of way road shared with 2 other homes. One had only a 1/2 acre lot in an area where 2 acres was considered small. And One had a flood problem where the driveway was washed completely away. All these problems were fairly simple to fix, but few knew how or were willing to do it. These homes didn't have other offers, so the banks were especially happy to see me.
Roger
Rog,
It crosses my mind that there are simply too many new investors doing stupid things for the sake of getting their first deal, but logic would make you think this would be a version of natural selection, how many times can you hang yourself in this business and still keep coming back, eventually you either learn your lesson or you go away.
I don't know what other properties I would look at, this is suburbia out here, lots of neighborhoods with track housing, while there are properties like you are talking about, those kinds of properties would be up in the mountains and that is a different market with different conditions buyers, it would be like you trying to go to a foreign country and doing realestate, you would be faced with a completely differnent environment in every way.
In the Denver and surrounding area, which is about 1.5 million people , according to the MLS right now there are 340 bank owned properties for sale.
Of those only 3 have been on the market for over a year. 29 have been on the market for over 6 months. 232 have been on the market less than 90 days.
I don't think the banks here are having any shortage of offers based on that inventory.
From what I have heard from people in other parts of the country the situation here is a bit different then what they are expecting.
I'm about to start investing in Nebraska.