Many new investors want to buy properties
directly from the bank. You never hear anyone
say, "I want to buy a property from a mortgage
company, credit union or savings and loan."
The attraction to bank owned properties is
understandable, as it is the bank you borrow
money from to buy a home. It is natural to
assume that the bank owns the property. Whether
a Deed of Trust or Mortgage, the title to your
property is either held by a third party or
pledged as security for the loan, so in fact the
bank does not own the property.
You borrow money from and give a mortgage to the
bank. The mortgage is the security instrument
utilized to protect the bank from loss should
you default on the loan. Unless you bought a
bank foreclosure directly from the bank, the
bank has never owned the property at all.
The Lenders Profits
The goal of the foreclosing lender is to gain
possession of the property. The financial goal
is the recovery of the principle loan balance,
accrued interest, late fees, penalties, taxes
paid on behalf of the property owner, court
costs and attorneys' fees. In most states, the
laws are written so that the lender can only
attempt to recover these widely accepted
standard losses.
The lender will add in every legitimate expense
when foreclosing. This is what is sued for: the
total the lender claims is owed by the property
owner. In most states, this is the maximum
amount the lender can collect. The laws are
written this way to protect home owners from
unfair practices.
The commonly held notion that a bank (or any
other lender) must sell a repossessed property
for the same amount it cost to gain possession
and therefore cannot make a profit is false. If
the foreclosing lender is the successful bidder
at the auction, it will take possession of the
property for the very first time. When this
happens, all the rules change. The lender, now
the legal property owner, can do anything it
wants with the property, Rent it, keep it,
whatever. It can also sell the property for any
amount it so desires.
Condition of Title
Often when purchasing foreclosures buyers are
concerned about the quality issued by the
lender. A common belief is that there may be
liens or judgments clouding the title. This is a
myth. The lender will bid at auction only if it
wants the property. The lender, typically the
senior lien holder, wipes out all junior lien
holders or judgments in the process.
If the foreclosing lender does not bid at that
sheriff's sale or auction, it probably doesn't
want the property. This may be due to excessive
superior liens, such as IRS or tax liens. (Tip:
If the lender doesn't bid for the property at
auction, you probably shouldn't either.)
The lender, in an effort to recoup its losses,
will bid on the property, wipe out other lien
holders, then pay the balance of outstanding
property taxes to secure the property's clear
title. No lender will go through the time,
effort and expense of foreclosing, only to lose
the property for a few thousand in back taxes.
Having absorbed these costs, the lender
generally adds them to the asking price and will
sell the property with clear title.
If you have heard that the lender must sell the
property for what they paid for it at auction,
forget it.
Another myth is that all banks are bending over
backwards to give away foreclosed homes. It's
true that the lenders want to sell their
foreclosures. Lenders, banks in particular, are
corporations. These corporations are driven to
make money, not to lose it. A bank has to answer
to its shareholders just like other corporations
do.
The business of repossessing properties is not
new. Over the years, many lenders have developed
effective methods of selling their REO's
quickly, with minimal loss.
Property Disposition
Lender practices and procedures vary greatly.
Some widely market their inventory of REO's,
while others practically hide them.
We know of some banks that advertise
foreclosures in daily newspapers, while others
demand that you maintain an account with them
(or better yet, become a stockholder) just to
get their list of properties.
Lenders are in the money business, not the real
estate business. This is why most properties are
marketed through recognized real estate brokers
or agencies. Some agencies specialize in
foreclosures and may represent several lenders'
properties.
Brokers may have several investors lined up just
waiting for a good property to turn up. Brokers
can also assist the lender in determining market
prices, suggest marketing strategies, recommend
appraisers or contractors, etc.
Some lenders establish a set price for the
property and will not allow the sales agent to
consider offers for less. Many lenders dispose
of their own properties. Depending on the size
and complexity of its REO inventory, the lender
may have one part-time clerk or a staff of
special asset managers handling property sales.
Lenders with larger inventories often have a
staff dedicated to analyzing and managing the
properties, while at the same time coordinating
and managing the brokers retained to market the
properties. The lender determines the strategy
and the broker markets the properties
accordingly.
Investing Overview
Purchasing directly from the bank is the most
popular way to buy foreclosures. It's fairly
easy, and less of a headache than other
investing methods because it involves less
complications and risks.
Find properties that meet your investing
criteria, those that are in your area, price
range, size and style. Determine whether you are
buying to resell or to secure a residence for
yourself. Determine if the property is a bargain
by deducting the lender's asking price from the
average market price of very similar properties
in the immediate area.
Your goal as an investor is to realize a tidy
profit. You can buy property at a 15%-20%
discount and earn a 35%-40% return. As a home
buyer, you want to buy below market value with a
low down payment, low interest rate and reduced
closing costs.
Contact the lender or the broker and meet him at
the property so you can inspect it. Record any
damages and deduct the repair estimates from
your price. Use a good property inspection
checklist.
Investors must deduct all expenses associated
with buying, repairing, borrowing, holding and
closing again, from the price they think they
can get.
Homebuyers should negotiate around the four
discount factors: price, down payment, interest
rate and closing costs. The bank, being a
lender, can negotiate all these items.
If you still like the numbers and the property,
proceed with a written offer containing the
following:
A statement indicating your intent to purchase
the real estate.
The physical address of the property.
The legal description of the property.
Your price.
Your down payment terms.
Your financing terms.
Your desired closing date.
Any contingencies.
Your deposit information.
Your name, address and phone number.
Depending on the property and several other
variables, you may want to buy a property at
15%-25% below market value. Start your offers
accordingly.
Unrealistic offers will be rejected quickly.
Learn to work with the banks. You can negotiate
around interest rates, price, down payment,
whatever, just stay within reasonable boundaries
if you want to succeed.
Some lenders sell thousands of REO's every year.
Many sell their properties at or near market
price. We know one lender who has sold almost
10,000 properties in the last 3 years, with
average sales of 99% of market value.
Not all
lenders
behave the same way. Try to locate those that
are more flexible in their property disposition
policies.
When the bank accepts your offer, close as
quickly as possible. Avoid delays and
complications from competitive offers.
Advantages
The advantages to this buying method are many.
There are no liens or judgments to contend with,
no homeowners or tenants to evict, no back taxes
due, and accessing the property for evaluation
or inspections is easy.
The fact that the property has officially
changed hands means that all that work has been
done by the lender. With all the legal work
done, the complications of buying and the
associated risks are removed.
Lower down payments, better interest rates,
reduced closing costs and a discount off the
market value of the property, taken all
together, make for a better than average home
purchase.
While you may not be able to steal a property
from the bank, a properly structured deal will
make you the envy of the neighborhood because
you will have a low down payment, low monthly
payments, and a low total price.
For those looking to save money buying their
first home, this is usually the way to go.
Disadvantages
In this industry the rewards follow the risks.
Therefore, the payoff from this investing method
is typically lower than that of buying
pre-foreclosures or buying at the auction.
An REO investor should have no problems
achieving 10%-20% discount from the market value
of comparable properties. Savings of 25%-35% are
harder to find. Savings of 40%-60% are possible,
but getting rarer.
Other disadvantages include: the lender that
moves at a snail's pace; a lender selling the
property "as is," with no cooperation in making
reparations or allowances; and the very rare,
but always possible problem of evicting a tenant
or homeowner.
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