What Should I Offer For An Bank Owned - REO???
I am interested in a property which is now an REO. At the time of foreclosure, the bank paid nearly $290K for this property, which is also the tax assessed value. There are two dwellings on the property each 2bd, 1ba, however one is a log home, and the other is unfinished and NOT permitted by the county. The bank listed the property for $245K although it needs $25k + in rehab. I have been told "if I am not embarresed about my offer, I am offering too much." Does this apply with an REO listed below the amount paid? I have determined the NOI once repaired should be positive, in addition to the equity. What do I offer? What do I watch out for with a log home? What other concerns/ conditions should I consider?
Figure out what your exit strategy would be, and then determine what is the maximum you could pay and have it still be a good deal (based on ARV/NOI etc). Offer a bit less than this maximum amount. I can't really address the log house question.
In other words, don't make an offer based on what you think the bank wants to get, make your offer based on what will make it a deal for you. And it doesn't matter what the bank or anyone else paid for it. Offering more might get you more offers accepted, but you'll eat it in the shorts in the long run. Offer what makes sense, and if they turn you down move on to the next one.
How did you come up with the 25K rehab estimate? How can this be accurate if you're not sure what to watch out for with a log home? Why is the second dwelling not permitted (construction, environment, or zoning issues)? What do you need to do to get it permitted? Sounds like you need to do more due diligence.
Determine the actual, as-is fair market value for the property.... a number that you can defend with factual data.
From that number, deduct the Owner's estimated holding costs, estimated time needed on market before liquidation, and liquidation costs.
If presented in a compelling manner, that's the number that the Lender should accept with no qualms. You may opt to offer a bit less.
Your job (as with all short sale type transactions) will be to accurately identify the prop's as-is FMV.
[addsig]
Thank you for the advice! Just to answer a few questions... At this point, the $25k est. is only based on approximates for obvious needs, ie: Kitchen cabinets, carpets/ floor coverings, exterior siding on smaller home, electrical repairs, deck repairs, other odds and ends. I plan to do additional research to be more accurate. However, I was first waiting to hear back about more details, which now... what do you think?? The county indeed had not permitted the second home, when in fact, they just became aware of it just two months ago, and refer to it as a "seperate shop." The septic info is unclear, does not state the size of tank, or number of bedrooms designed for. Just says it is "round." My concern is now that the capacity of the septic will not support the two homes, or at least not as required by the county. As for the second dwelling, the agent has informed me about possibilities of "ABC" or After Build Construction permits. My concern here is the county inspects and requires more than what would make sense, or worse, demand that I tear it down. The log home appears to be in good condition and not in need of structural repairs, I just am not positive what to look for though. My research for comps of the area so far, support this to be a great opportunity with $40k+ equity once rehab is complete (based on it having two homes). This would be my first rehab and bank-owned purchase. Therefore, I am moving a bit slower and cautious. Are there too many "red flags" here and should I move on? As it IS a nice piece of property at 3.92 acres next door to a school, what could/ should I do whereby it would be a smart investment? Thank you again for your help and ideas!
You should also subtract out any fees that the lender has incurred in taking the property back.
These may include listing fees, documentation, attorney fees, agent fees, interest, etc.
To find that out, you might have to track back to find out when the loan went into default and how much the bank really stands to lose on the property.
You should always know your exit strategy before submitting an offer as this must be determined before you can determine your bottom line.
I would start with the county. Figure out what needs to be done to accomplish what you are looking to do. This will be fairly straight forward and at really no consequence to you since you don't own the proprerty yet.
Once you figure out what you need from there figure out what you need to buy it for.
The "gurus" say to take 70% of the after repaired value (total selling price for both homes in this case) and subtract out all expenses. This would mean you have a good deal.
I prefer to simply run the numbers. Figure in realtor costs when selling, holding costs (property tax, insurance, mortgage interest, and utilities), repairs, etc. It is okay to estimate repairs when you are first looking at a property but you should get some bids to get a more comfortable idea what things will cost.
GOOD LUCK
I'm just curious.... how did you come up with the positive cash flow for your NOI....
Your big hurdles.... you have to talk to your township and find out what the problems are with the additional dwelling.... it could be anything from zoning, to the septic capacity.... a septic here in NJ can run over $10K easily...... Also, if it isn't finished, you will need licensed contractors and permits (IF THEY ALLOW IT TO STAY). You can really rent 2 br homes and get enough cash flow to cover the costs?
I would try to find someone familiar with log construction to eyeball the cabin... it could be perfect or it could be otherwise.
Again, as stated, just make sure your figures include ALL of your costs, soup to nuts, including insurance and holding costs while it's being worked on......
Have you checked to see if the property can be sub-divided so each home is on it's own lot? If not it may be harder to sell later on.
Your offer has to be based on all of your costs, your built in profit, (we won't do any more rehabs for less than $15,000 profit) and FMV.... make sure you get legitimate comps from a real estate agent.... preferably one other than the one you are talking to (if any) to make sure the values are accurate, and not just an agent trying to reel you in....
bonnie in NJ