Much attention, in some ways too much attention, in
today’s market is focused upon Foreclosures, also known as REOs (Real Estate
Owned). You can find some good deals in REOs, and they make sense for certain
investors, however, don’t limit yourself just to shopping Foreclosures. Buyers
should not overlook straight old-fashioned sales. Distressed property sets the
bar, with the level of distress factored in, but if a homeowner needs to sell
his house they cannot List it appreciably higher than the Foreclosure or Short
Sale next door, on his block, in his neighborhood.
To compete successfully in the Foreclosure market you
must understand the way things work, follow methods which are at this point established.
Here’s a few things you should know, be prepared for:
1.) Remember Foreclosures by definition represent a
home someone has walked away from. This is not an overnight process. It took
months, probably over a year to get these people out. They occupied the
premises for months and months not paying anything, waiting for the axe to
fall. Very few care about or can afford to maintain these properties and many,
in anger and resentment, pulled appliances and fixtures, perhaps even damaged
the home before they left. After that the property might’ve been vacant for
months before the Bank managed to list it for sale. If you are not in
construction, if you’re not much of a Do-It-Yourselfer, if you don’t have a
reliable and inexpensive source for remodeling, pay real close attention to how
much it might cost to whip this property into shape and make sure you factor
that into your P&L.
2.) Just because it’s a Foreclosure doesn’t
necessarily mean it’s a good deal. With distressed properties a key component
of the Listing price is how much the Bank or Lender has into the deal. I’ve had
Clients submit offers on two almost identical villas in the same complex, owned
by the same Lender, yet one sold for $20,000 more than the other. Why? Because
one had a bigger mortgage.
3.) Don’t expect logic or intelligence. One fact
becomes readily apparent when you delve into the Foreclosure market – the Banks
and Lenders aren’t much smarter about getting OUT of the mess they created than
they were getting into it. I had Clients renting a Townhouse that was getting
Foreclosed upon. They approached the Bank, offered to buy it. They had good
credit. They said they would sign a mortgage, so the Bank could make money on
the property, recoup a bit of their losses. The Bank said no, they had to move
out. The place sat vacant for months, sold for less than my Clients would have
paid.
Buyers
make offers on Foreclosures, they think they're dealing with a Banker – a guy
in a suit and tie sitting in an office with a window and a secretary. Lower
those expectations. In the basement of that building is a rat's nest of
cubicles that needed new carpeting four years ago. The whole floor smells like
B.O. In one cubicle is a broken down old desk piled with files, a bottle of
Kaopectate, the large economy size Excedrin. Behind this sits a broken man in a
rumpled shirt and an opened tie who stinks of stale coffee and cigarettes. This
is the guy who handles the Foreclosures. He makes the same crappy salary
whether you buy the place or not. And once a week he has to send a report up to
the guy with the window office explaining how much he managed to get selling
properties that were supposedly worth X-amount according to the BPO's they'd
pulled.
4.) Don’t expect much from the “Listing Agent.” Most
Realtors who specialize in Listing REOs are not going to be much help. They
typically receive a very small commission for filling out some paperwork,
putting a lockbox on the property. Their voice mailbox will be full. They will
return emails days later, if at all. I have submitted offers to Agents and they
don’t even take my call, never return my message. You would think you make an
offer on a Realtor’s Listing, they would pick up the phone. Don’t bet on it.
Sometimes they take days to submit offers to the banks. This is usually done by
email. Often the Listing Agents don’t even have a phone number to the person
they are dealing with at the bank. A week later you call up, ask what’s
happening with your offer, they say they haven’t seen any emails yet.
5.) Know the neighborhood. Drive by, look at the
property. Check the surrounding area. The more intrinsic value a property
possesses the less likely somebody is to walk away from it. See what general
state the property is in before you start getting excited, expend any time or
resources, whether the neighborhood will ever appreciate even once the market
starts coming back. There's always a reason a property is Listed for a low
price, even by the Banks. Buying a 3 Bedroom house for $35-40,000 may sound
intriguing, but fact of the matter it's liable to be within a Police perimeter
at least 3 nights a week.
6.) Be prepared to move fast. Have all your ducks in a
row. Some REOs stay on the market because they are simply not good deals. The
good deals go quick. Some banks leave their Foreclosures on the market 7 to 10
working days. Have an Agent ready to move. Have money in Escrow. Have Proof of
Funds set up.
7.) Pay Cash. The vast majority of the good
Foreclosure deals go to Buyers who are paying cash. Think about it. Why is that
property on the market to begin with? The bank’s already gotten burned. Now
they just want cash. A logical person might presume the bank would want to
finance the new owner, recoup some of the money they’ve lost. Well, that’s
another department. These guys want cash. If you are not prepared to pay cash,
then you are operating at a distinct disadvantage, especially for the
exceptional deals. Be Pre-Qualified, at least, and make sure your Real Estate
Agent has that as well. Frankly, however, if you want to finance you will
probably have a better chance getting a deal going after Short Sales.
8.) Low Ball is No Ball. Don’t even think about
low-balling. Especially on really good deals. Got 3 hours? I could tell you 10%
of the stories I know about buyers who had to get cute. The Bank sets a price,
you’ve got to be relatively close to that to stand a chance. The really good
Foreclosure deals there are usually multiple offers. I counsel clients to offer
MORE than the Listing Price. If it’s an unbelievable deal at $125,000, offer
$132,000 and finish ahead of the clowns who are trying to nickel and dime them.
We’ve done this, still not gotten the deal. It went to somebody outbidding us. If
the house was selling for 300-something 4-5 years ago, now the bank’s asking
$160k, it’s still a great deal at $165k. I’ve seen buyers thinking they can get
it for 120-130k; the place goes for $170-180k. And in 3-5 years, the guy who
bought it’s going to get $250-260k, make a $100,000 profit.
9.) Proof of Funds. Set up a system that can generate
a quick Proof of Funds letter for your Agent. This must be a letter from a
financial institution, on their letterhead, with a legitimate contact person,
stating that you have sufficient resources to purchase the property in question
at such-and-such a price. If you are offering $60,000, this letter must say
$60,000. You can show them account statements, too, or give you agent a number
of letters already filled out with pre-determined amounts, however, think how
it will look to the bank if you are offering $55,000 for a property they have
listed at $60,000 and they see a Proof of Funds letter or an account statement
showing you can afford more. I try to have my REO investors set up some email
communication between myself and the contact at their financial institution. We
start putting a deal together, I email the contact, copying the Client,
requesting the POF, and I can usually have the letter by the time we’re
submitting the offer.
10.) Highest and Best. When a Foreclosure represents
an extremely good deal the bank will receive multiple offers. I have gone after
properties where there were 8 or 9 offers. I did a deal on a great house in
Coral Ridge; it was on the market 2 days and they got 6 or 7 offers, many for
more than the Listing Price. Many time the bank will go back to the parties who
have submitted the better offers and ask for their “Highest and Best Price,”
trying to get Buyers to up their bids. Be prepared for this, though I cannot
offer much in the way of advice how to handle it.
11.) Be prepared to sign their “Act of God” Addendum. If
you prevail, win the deal, the bank sends you an Addendum to sign which pretty
much supersedes all the terms of the offer contract you submitted, and protects
them (the bank) from anything up to and/or including nuclear war and an
asteroid collision. You have to sign this. If not they simply give the deal to
the next guy in line. READ IT FIRST, however. Most times these Act of God Addendums
pretty much reflect the terms of the deal you submitted with only minor, if
any, modifications. But MAKE SURE.
12.) Check the Utilities. Many times you find notices
from the Water or Electric Company hanging on the front door of these
Foreclosures. Make sure you check with the Utility companies, find out if there
are any outstanding balances, include them in the Closing. Otherwise you could
be on the hook for a couple extra hundred dollars which you will never be able
to collect afterwards.
These are the basic rules to survive in the REO
market. Still, if there’s one thing we hope you remember from this article it’s
what we said above – don’t restrict your shopping to just Foreclosures. Short
Sales are a royal pain in the you know what, but you can get good deals if you
weather the storm, but a regular Homeowner who’s trying to sell his house
cannot price it significantly higher than the REOs and/or Short Sales in his
neighborhood. I’ve had a number of Clients come to me, interested in distressed
properties, and after putting up with the ridiculous rigamarole through a few
frustrating failures I bring them a regular old-fashioned sale, where you have Listing
Agent who actually works, and you can make an offer, negotiate a deal between
human beings, and come away with a property which doesn’t need work and an
immediate infusion of capital to become liveable.
