Why you can't low ball a bank.

When pitching an offer on a Bank Owned property you have to understand both the way the game is played, and the motivation of the entity you are dealing with.

The owner of the property is a bank and they have a problem.  They own hundreds, maybe thousands of homes across the USA and they HAVE to get rid of them ASAP.  They also have to recover as much money as they can.

Firstly it is irrelevant how much the previous owner owed.  That money is already a loss to the bank and is history.  They now have a “non performing asset” that must be liquidated.  Here’s how it works.

The bank requests a Broker Price Opinion from someone like myself as an initial estimate of how much the property will sell for in the current market.  They use that as the starting point and pitch the initial price a few percent above that level.  The details go in a computer and an Asset Manager assigns the property to a local real estate agent for sale.

Every day the computer sets the minimum price at which the property can be sold.  The minimum price reduces rapidly overtime.  The speed at which the prices reduce is dependant on how much of the banks inventory has been sold this month.  When the minimum price gets to about 90% of the listing price the selling agent is given permission to reduce the listing price.

Whenever someone makes an offer below the current minimum price the system can accept, it counters at today’s minimum acceptable price.  If the offer is too low it is automatically rejected.   Please note it is the computer system that does this.  The asset manager has very little input, unless you are close (within about 10%)  of the current minimum acceptable price.

Here are the magic numbers, and remember there are some exceptions to these rules, but this is what happens with 95% of all offers.

If your offer is above 85% of the current asking price, it is likely to draw a counter offer somewhere between 90 – 100% of the current asking price depending how long since the last reduction, and how fast they are reducing.  Below 85% and they will likely just reject the offer.

Now you need to be aware that most REOs are already well below current market value, whatever that means. Often the asking price is less than 70% of what I get when I run a current CMA.  Sometimes they are even lower.  I can always do that for you before I make an offer.  If you think the price is too high you can wait and see if it comes down, but of course you run the risk of someone else buying it first.

Look at this another way.  In Charlotte County today prices are around 60% of the peak at the end of 2005.  Bank Owned properties are selling around 45% of 2005 prices.  That translates to about 75% of current market value.  

Once the bank starts negotiating a sale the price freezes.  That doesn’t mean you are out of the game.  If they get a better offer, (higher price, fewer contingencies) they will put the current offer on the back burner and negotiate with the new buyer.  So it’s always worth making an offer even if yours is not the first. Lot’s of people are making very low offers.  Only a few of them stick.

So in conclusion, once again if you want to buy Bank Owned property you have to make offers.  The probability of success drops rapidly depending on the ratio of your offer to the asking price.   Remembering there are always exceptions to every rule, use the following as guidelines.

Below 90% of the asking price = Same as the proverbial snowball.

 

90 - 95% of asking = On a par with the Cubs winning the world series

 

95-95% of asking =  About the same as coming away from the Casino as a winner

 

95 -100% of asking = Yankees and the world series.

 

100 - 110% = Same as losing at the Casino

 

over 110% = Still no guarantee but about the same as a getting a ticket driving 100 mph on I95.

Bank Owned Foreclosures are the Sellers Game.

I know you are going to find it hard to swallow in today’s market that anything is a sellers game, but I’m afraid you will just have to suck it up and believe it.

Here’s why.

First of all the sellers (banks) are going to decide when the properties go on sale. We can be fairly certain that the banks (or maybe the government) are controlling the speed of the foreclosure process, and the rate at which properties are released on to the market. I’ve been doing this for nearly 8 years now since the market first crashed,  and in that time the number of bank owned properties on the market has hardly changed. As homes get sold new ones appear to take their places. If the market slows down the influx of new REOs slows to match it.

Secondly the sellers (banks) will decide the prices, not the buyers. Time after time I have watched buyers submit low ball offers based on the thinking that it’s such a lousy market the seller will take whatever is offered. These offers are nearly always rejected. However if you wait a while, the price will probably come down, often fairly quickly until buyers appear, and begin to make offers. The statistics still show the selling prices are on AVERAGE around 95% of the asking price, with very few dropping below 90%.

Thirdly the sellers (banks) decide the format and the speed of the negotiation. The seller will always dictate the length of time for inspections, the closing date, the format of the contract, and who the closing agent will be.  For the most part the buyer is an interested bystander, and needs to agree to the terms presented by the seller,  or risk not getting the property.

And how can they get away with this I hear you ask.  They can do it because the prices are outrageously low, and you are in many cases getting a HUGE bargain.

As long as you work with someone who knows how the game is played and what the rules are you will be OK.  So give me a call and let’s go get a Bank Owned Bargain.

The process of buying bank foreclosures

Buying property from the banks is a little different from buying from regular sellers. Here’s what you need to know about the process.

In order to get the ball rolling you will need to sign a standard Florida real estate contract.  Please ask me if you would like to see a blank sample in case you want your lawyer to review it.  Just so you know hiring a lawyer to purchase a home in Florida is neither required or recommended, but it’s your choice.
In many cases the seller will require that you complete a number of additional forms, mostly for their protection.  This is not negotiable.

The basic information on the contract will be input on a website for review by the asset manager. The asset manager is the entity responsible for disposing of the REO property on behalf of the seller.  The asset manager is not the seller but a third party organization retained by the bank to dispose of foreclosed properties throughout the USA. 

You will deal only through myself with no direct contact with the listing agent the asset manager or the seller.  You need to understand that there is a communication chain which sometimes works quite slowly.

The system will ALWAYS send a counter offer. This is important because it takes your original offer off the table and replaces it with an offer which you are free to accept, reject or counter. Even although they except the key parameters of your offer (such as the price), they always have their own paperwork you have to complete so it is technically a counter offer.

If the price is not agreed, there will then be a sequence of VERBAL negotiation, until a price is agreed or one of the parties gives up.

Once the price is agreed, the bank/seller will send their contract addendums. Mostly these are not negotiable so you have to make sure you understand and agree before going forward. Often they will change lesser details, such as the down payment amount, the closing date and the inspection period. Unless there is a glaring issue I find these are not worth worrying too much about, because there will always be flexibility, the closer you get to the closing.

The addendums may go anywhere from one page to 20+ pages. Often you have to sign and initial in multiple places. You will notice that at this time the seller has not yet signed anything. This package along with the original contract, modified as necessary and your proof of funds represents the real offer.

The completed package is now returned to the seller for approval. It may have to go through and extensive review process, particularly if you drove a really hard bargain, and there is still a risk it may not be accepted.

Only once the contract package comes back, signed by the sellers representative, do you have a deal. Now you can go forward and order inspections and get the mortgage process underway. Remember you have a limited time to complete inspections. If the inspection is unsatisfactory, you may void the contract simply by sending the inspection report to the seller and stating you do not wish to proceed. There is no penalty for doing this. However if you don’t they will assume you want to buy and you can forfeit your deposit if you don’t close.

It may still take several days for the seller to get the package to the title company. Another benefit of buying bank owned property is that the seller ALWAYS chooses the closing agent AND PAYS FOR THE TITLE INSURANCE, no matter what the local custom and practice is. This is because they want to make sure the title transfer is done correctly, and that they can control the process.

Often the title company will be slow to get organized and ask for the deposit. Also they will likely be hard to contact and difficult to deal with until a few days before the closing. This is normal.

One more thing. With bank owned properties there usually isn’t a traditional closing. The closing agent will probably be in another city, the seller certainly is not going to be there and neither will the listing agent. Usually a notary will come to a place you nominate, to get the deed signed. Often you will need to wire the money in separately, and if there is a mortgage that will be done a day or so before.

So that’s basically it. There are many different variations, depending who the seller is. I recommend if you don’t work with me, you at least find an agent with experience of bank owned purchases, to guide you through the maze.

Foreclosure 101

Everybody wants to buy a foreclosure because those are the best deals right?   Lets take a couple of minutes to understand what we mean by a foreclosure.

 

Foreclosure is what happens when a creditor, usually a bank, but it might be a Home Owners Association or a private individual, goes to court and forcibly takes possession of a property in order to get their money back.  The law mandates that the home owner be given proper opportunity to retain the property by working out a deal with the creditor.  The home owner may pay off the arrears, agree a loan modification, or sell the property via a short sale.

 

If none of this works the court will eventually rule that the property be sold at a foreclosure auction.  Papers will be served, a sale debt set, and the owners will be evicted.  If there is equity in the property (it's worth more than the bank is owed) it could be bought by a third party, but in most cases today, ownership of the property reverts to the bank.  At this point the property has been foreclosed.

 

It is possible to buy a property at a foreclosure sale, now done on line and no longer at the courthouse steps, but I really really don't recommend it unless you really really know what you are doing.

 

That leaves us with 2 options.

 

You can buy a property in pre foreclosure.  This means that the owner has stopped paying the mortgage and the lender is in the process of legally seizing it.  In Florida this process can take anywhere from a few months to several years, depending on how vigorously the owner defends their property and how good a lawyer they hired.

 

Today nearly all pre foreclosure sales are on properties that are upside down (underwater) because the mortgage is more than the property is worth so the seller is attempting a Short Sale.  This where the bank forgives some of the mortgage amount in order to facilitate the sale and avoid having to foreclose, which in most cases they prefer.

 

All short sale properties must be listed on the Multiple Listing Service (MLS) and must be identified as such.

 

Once the lender forecloses the property it becomes Bank Owned or in their terminology, Real Estate Owned (REO).  These are the most motivated sellers on the planet because they have to sell the property fast and they are always very aggressively priced.  This is where you look if you want a real bargain, but you must be prepared for a level of frustration.

 

Once again all REOs must be listed on the MLS and must be identified as being Bank Owned.

Why Foreclosures are always the best deal in town

When I meet or speak with a new client for the first time, I can almost guarantee I'm going to hear the phrase "I'm looking for a great deal".  Here's where the best deals are.

 

The best value in Real Estate is nearly always a Bank Owned Foreclosure or Real Estate Owned (REO) property.  The reason is fairly simple.

 

The banks are the most motivated sellers on the planet.

 

Once a bank forecloses on a piece of Real Estate it becomes a huge liability, much more than the loss they incurred when the mortgage went bad.  They are incurring the cost of holding a "non performing asset", but much more than that they have to place in reserve a large multiple of the value of the bad loan until the property is sold.  

 

The reasons are complex and not really relevant at this stage.  Suffice to say that when a bank forecloses on a property the law reduces the amount of money that they have available to lend by 70 times the amount of their liability.  So if the face amount of the loan is $100K the amount of money taken out of their lending portfolio is $7 Million, and it remains that way till they dispose of the property.  Think that doesn't make them motivated?

 

What you need to know is that a bank will price a foreclosure property very aggressively and will continue to reduce the price rapidly till it is sold, regardless of the actual market value.

 

A bank owned foreclosure will always be the best deal in town. 

FHA Flip Waiver extended.

This one needs a little explaining.

Back in the good old days before the Great Mortgage Meltdown, FHA government loans had a rule that said they would not finance a property if the buyer had purchased it less than 90 days ago and the new purchase price was more than 120% of what the seller paid for it.

This did not affect the vast majority of sellers apart from one very important group.  The flippers,  Not the cute shiny black fish like creatures, but the people who like to buy property dirt cheap and sell it again next day for a vast profit.

Now we can debate all day long (feel free to pitch in) whether this practice is ethical or viable or even a good idea, but the point is the way the gurus teach it is that you buy a distressed property such as an REO using a hard equity loan, which is pretty much the same as cash, paint it and replace the carpets and then sell it a week later to a first time buyer using a small deposit and a big FHA loan.

The stories of newby investors getting the first part right only to fall foul of the FHA “no flipping rule” are legend.  It’s one of those mistakes you only make once.

So…  About 3 years ago (I’m not exactly sure when and it doesn’t matter) HUD suspended the rule in order to do something, anything to reduce the mountain of unsold foreclosures.   They’ve been threatening to reinstate it for several months, but the deadline has just been extended again through the end of the year.

Good news for flippers everywhere.

I've been saying this for years.

I've been saying this for years

I hate to go down the "I told you so" route but I'm going to to do it anyway based on this article from Inman News I just ran across.

If you want to buy a Bank Owned Bargain you need an agent who has done it before, and who is still doing it. Every purveyor of Real Estate Owned (REOs) has their own way of handling their sales, and every local agent adds their own layer of indviduality to the process.  Many of them try to make it easy for us but there are some, (I was going to say "you know who you are", but most likely they don't) who seem to delight in making the process as complicated as possible.  I have to say the government sponsored agencies including Fannie Mae and HUD are among those who are doing it right.

It's not only the offer process that's a pain.  Follow up can be a major problem especially with those agents with a don't call us we'll call you attitude, who only seem interested in updating those buyers who actually win the bid.

Self Promotion Statement

I've actually lost count of the number offers I've submitted in the years I've been doing this.  I know it's somewhere more than a hundred and probably less than a thousand.  I admit I made my share of mistakes in that time.  However by now I can be pretty sure of getting offers into the hands of the decision makers and getting a decision.  Whether it gets accepted or not is another story for another day.

Can we all agree

Can we all agree that getting your home foreclosed is a terrible thing and that bad things are happening to good people every day?  It is not my purpose or intention to make judgment on or to take advantage of people caught up in the foreclosure net.

Can we also agree that once property has been foreclosed and is in the hands of the bank, that there is nothing we can do for the previous owner so as buyers of real estate and real estate agents we should do everything we can to take advantage of the situation.

That means that while we should have sympathy for this folks caught up on the wrong end of the current push to clear the foreclosure backlog in Florida (see related article below), it does mean that there are opportunities on the horizon and that in a few weeks or month we will likely see more foreclosure property on the market.

I ran across this article this morning. I don't know if this applies to other counties in Florida but as I used to live in Palm Beach it got my attention. As a Realtor I ran across a number of situations where homeowners were simply sitting in their homes, not paying the mortgage and waiting for something to happen. I'm not talking months here but years, in some cases as many as 5. Filing bankruptcy seems to make it worse. It;s tough when you lose your home to foreclosure through no fault of your own, but many of these cases are just people taking advantage.

http://news.yahoo.com/homeowners-steamrolled-florida-courts-clear-090000198.html

What shall we talk about?

So I did the easy part and got this all set up and now I have to decide what to write and how to make it relevant.  Of course I could simply rehash the thousands of words I wrote for my best selling free download “Buying Bank Owned Bargains” and then skillfully broken into bite sized pieces for my never ending email drip campaigns,  but that would then defeat the objective of my directing you to my website at www.mikesalino.com where you can find all that already.

No!  I’m going to have to write some new stuff, to get the ball rolling them I’m hoping my readers will jump in and get involved so we can get a nice multi way conversation going.

For starters I’m going to bring you foreclosure related news, that crossed my desktop  with my own personal slant added.

Next I’m going to let you in on my own personal journey to find a new home and some more investment property.  Practicing what I preach means I will have to buy foreclosures.  There’s nothing like a few personal war stories to liven things up.

Also I need to tell you about my new home town of Punta Gorda (or Port Charlotte or Englewood or whatever).  Remember that as well as educating the world about Bank Owned Bargains the other purpose of this is to help me personally sell property so I need to promote the area I live in.

And because one of the motivations for moving here was to take advantage of the fantastic sailing destination that is Charlotte Harbor I’m going to weave in a theme about buying bank owned waterfront property.  Yes that is something you can do.

There’s also a risk that I might drop in some of my favorite motivational pieces to keep my inner cynic in check.

Now I really have to start coming up with some content.

Since the great Mortgage Meltdown I've made it my passion to study the foreclosure industry to understand how it works and share this knowledge with home buyers and investors.

Originally this was simply a reaction to the great Real Estate Crash of 2007 and a way to jump start my fledgling career as a Realtor, and at that time I didn’t really see any relevance beyond my local market in South Florida which was certainly at the time the epicenter of the foreclosure boom.

Recently I shifted by home and my business to the other side of Florida to the “quaint” little city of Punta Gorda.  Effectively I’m starting over in the business, and that has caused a lot of thinking about what I’m doing and why.

As a result of all this introspection I’ve realized that my “stories” and the events that led to them have value and meaning beyond simply trolling for buyers.

This is the doorway to my years of study and experience. It doesn't matter if you are a first time home buyer, or a landlord with a hundred rental units, or even (heaven forbid) another Realtor,  I'm sure you will find something to interest you here.

I’m still in the business to sell Real Estate so this blog is not completely altruistic, but I’d like to start something a little bigger so I invite you to join the community at www.mikesalino.com or make a contribution here and let’s see where it goes.