Investing In Bank Owned Properties
Posted on July 6, 2007
Almost every day there are news stories revealing the growing problems in the real estate market. As the sales market cools, people with adjustable rate loans are finding themselves unable to make their new higher mortgage payments or sell their property and foreclosures are escalating. Lenders will soon find themselves awash in foreclosures and need to sell these REO properties quickly. Defaults have already led to a number of sub-prime lenders closing their doors or being sold. Sounds like a ripe opportunity for investors, doesn’t it?
If you’ve been considering investing in real estate for any length of time, you’ve seen television infomercials or been exposed to seminar leaders bragging about how you can buy bank owned properties for pennies on the dollar and then flip them for huge profits. Don’t believe it! Yes, banks do occasionally lose money on foreclosed properties, but they don’t foolishly dispose of them the way some seminar leaders would have you believe. Banks are like any other sellers, they want to get as much as possible when selling properties they own. Although they may be more motivated than most private sellers, the days of cutting fantastic deals with banks are over.
Locating bank owned properties can be challenging. Years ago, lending institutions published lists of foreclosures and all it took was a phone call to get on their mailing list. Now, with the advent of the Internet, it’s a different story. There are as many different ways of handling bank owned properties as there are banks. I recently conducted interviews with the special asset managers at banks ranging in size from small local banks to the largest ones in the nation and I discovered that there is no such thing as the right way to locate foreclosed properties. There are commercial websites where you can sign up and pay a fee to get what they claim are lists of foreclosures, but I’ve found that it’s just as easy to get the information for free. Another problem is that much of the information these paid sites provide is gathered from public records and often outdated.
Banks use real estate agents to sell nearly all of the single family residential and other small properties they acquire through foreclosure actions. Occasionally small banks may sell a property directly, but that’s the exception rather than the rule. Don’t think that just because properties are listed with real estate agents, you can’t get some good deals. As I mentioned earlier, banks want to get as much as possible for their properties, but as with any other sellers, cash offers with quick closings and no contingencies will always get more consideration than higher priced offers that are contingent upon financing and delayed closings. If you are able to buy for cash and close quickly there are some great deals available from all sellers, not just banks.
Here’s a tip! Don’t read this article and go running to your local bank and start asking about their foreclosures. In one of my interviews, the special asset manager at a large national bank said, “You wouldn’t believe the number of people who have come into my office over the years wanting to buy our foreclosed properties and their fingers are still orange from the Cheetos they were eating last night when they watched that late night infomercial.”
You will be much better received when you are in the position where you can buy for cash and close quickly. Banks are in the business of renting money not properties so the quicker they can convert a non performing asset like real estate into cash the better it is for them. One reason the banks say the late night gurus cause them so much grief is that they flood them with unqualified buyers wanting to get rich quick.
If you’re interested in buying foreclosures, I suggest you start by checking out bank websites. Bank of America has a great website at www.bankofamerica.com where you can find a listing of all their REO properties complete with descriptions and contact information. Several smaller banks also have similar information on their websites. Other banks; however, don’t offer any REO information on their websites. Wachovia Bank, for example, turns all their properties over to the Real Estate Transaction Network. You will find their properties listed at www.res.net. Still other banks work with local Realtors and don’t provide any comprehensive listings. Remember, although their methods may differ, each bank wants to get as much as possible for properties that they have unwillingly taken into inventory.
A bit of information you need to know before you try buying bank owned properties is that when they are taken into inventory, these properties are put on the bank’s books at what they refer to as Net Realizable Value or NRV. That’s the amount they expect to net after paying all expenses including real estate commissions. When this value is less than the amount they have in the property, the loss is taken at that time. Banks will always try to get at least the NRV, which may be 15-40 percent or more below appraised value, when they sell their foreclosures. Since the properties will probably be offered for sale at close to the appraised value, knowing this information will help you understand why banks may accept an offer less than the listed price.
While foreclosures offer some good opportunities, I don’t recommend focusing entirely on them any more than you would the dozens of other opportunities where deals can be found. They should be viewed as just another potential prospect to be added to the collection of opportunities you will use in your search for bargains.
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