Lesson
Three
Buying After the Foreclosure Auction
The Simple,
Safe Way to Buy Foreclosures
Perhaps the easiest way to buy foreclosed property is buying REOs
("real estate owned"). An REO occurs when the lender takes back the property
and becomes the outright owner. The lender, however, does not normally want the
property and is
usually motivated to move the property quickly. However, the fact that they
don't want to be carrying these properties does not mean that they will
make things easy for us by selling cheap.
If a bank has a large portfolio of bad
loans and they do not want to carry them on their books they sell the loans as
a portfolio at a discounted price to companies like
Fairbanks Capital Corp. If they have taken a property back and now own it,
good business practice and responsibility to stockholders requires that they
get as much as they can for it as quickly as they can get it.
Purchasing
directly from the lender 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.
REO buyers
should use following ten steps:
- Make
friends with every banker you can, but
particularly loan officers and whoever is in charge of foreclosures in
your local banks.
- Make
friends with appraisers. The government uses a select few appraisers in every market
to evaluate VA, FHA and HUD properties that they take back.
Those appraisers are a foreclosure investor's most valuable asset.
- Register
for HUD foreclosure mailing list.
- Register
for the VA foreclosure list
- Contact the broker. A few real estate brokers in every market
specialize in representing lenders with foreclosed properties. Locate and
befriend them.
- Research
the properties that are for
sale on your own. Contact the local assessor and ask for a copy of the
assessor's work sheet for preliminary information on each property. Check
with the municipal building inspection department for any complaints or
other records.
- Inspect the property.
- Predict the profit. Determine the property's fix-up costs, potential rent and/or
resale price and profits
- Negotiate the best possible purchase price and buy.
- Repair and resell
or rent it as quickly as
possible.
Sometimes it's what you know
If you have been paying
attention to foreclosure sales, perhaps even attended auctions, you know of
some lenders who have properties to sell. You may even already know enough
about the property and the lender's position to make an early, intelligent
offer.
You can also learn of lender
or government owned properties in the newspapers, by researching them at the
county courthouse and on Internet sites. Drive through neighborhoods looking
for vacant property. If there is no sign on it, stop and ask a neighbor.
Chances are it is a foreclosure.
More often, it's who you know
You will
always have a much better chance of finding foreclosure bargains through who
you know. A sad fact of life is that you will not likely learn about any real
deals through the normal channels until after the fact. I'm sorry, but that is
the real world truth.
Very few investors
have access to all of the information about what properties are, or will
become available. If you want to be one of them, you must know the right
people.
-
Everybody knows somebody who knows somebody. Make
sure that all of of your friends, neighbors and relatives know you are
looking for foreclosures to buy.
-
Bankers talk to other bankers. They know
more about what loans are going bad than anyone else in town. Make sure
you talk to bankers. They belong to the golf club, the Rotary, serve on
the United Way Board and work out at the YMCA. Some of them go to church
and lead scout troops
-
The
government uses a select few appraisers in every market to evaluate VA,
FHA and HUD owned properties. Those appraisers are a foreclosure
investor's most valuable asset. Each appraiser has some friends who will know
about REOs before anyone else does.
-
There is a real estate broker who specialize in bank and
government owned property will likely market those properties in your
area, and present your offer to the lender or their agent. The broker's
relationship with a buyer may determine how soon the investor will know
about new listings and how hard the broker will work to sell a low priced
offer to the lender.
Buying blind is dumb
Once you learn of a property that meets your criteria for
location, price range, size and style, determine if the property is a bargain
compared to similar properties in the immediate area. If you are buying
through a broker they will be able to provide the market data value for you,
with a list of the comparable properties they used to reach their
BPO (Brokers Price Opinion). If there is not a broker involved, you will need to be able to access the data to do the
market analysis yourself. Remember, investors need to buy right if they are to
make a profit in the short term.
If you can't buy the property 15% to 20%
under market value, it may not be a good investment; unless the market values
in the area are undergoing rapid appreciation.
When you meet the
lender or broker at the property, be prepared to do a thorough inspection
right then and there. If the property is a bargain it won't last long and you
may not have another opportunity. Use a good property inspection
checklist so that you can quickly determine repair estimates to factor into
your decision on its value to you. Remember to include all of the expenses
associated with buying; repairing, borrowing, holding and then reselling into
your cost in the property.
Whenever
possible, negotiate around the four discount factors: price, down payment,
interest rate and closing costs. Since you will be buying from a lender you
may be able to negotiate all four of them.
However, some lenders will do not want to finance
their own foreclosed property again. Something about being burned once. When
that happens you can usually counter with a lower price.
When you like the bottom-line numbers, the terms
and the property, proceed with a written offer containing the following:
-
A statement indicating your intent to
purchase the real estate, including any appurtenances and personal property in
or on the property.
-
The complete physical address of the
property.
-
The legal description of the property.
If you don't have access to the legal description make sure you include a
request to review it as a contingency. Don't be unpleasantly surprised to find
that the neighbor own the driveway.
-
Your price.
-
Your down payment and financing terms.
-
The date you would like to close on the
purchase.
-
Any contingencies. (Environmental,
attorney review, 1031 exchange.)
-
Your deposit or a statement of when and
how it will be provided.
-
Your name, address and phone number.
-
A statement of your financial ability to complete the purchase
as agreed.
Low-ball loses all
Unrealistic
offers will be rejected quickly and you will likely poison the well for future
opportunities. The broker will have to present facts that can be taken to the bank
to explain why your offer should be accepted. The seller's agent will have to
justify their recommendation to a boss or a board.
Try to work honestly and realistically with the
broker and lender's agent. Remember, however, nothing is ever really cast in
stone. You should be able to negotiate interest rates, price, down payment,
amortization, just about anything as long as you stay within reasonable
bounds. If you can't get your terms try to get your price. Professionals will
understand that investors need to make money as long as they don't see you as
too greedy.
Some lenders sell thousands of REO's every year.
Those that do become experts who learn how to sell their properties at or near
market price. However, not all lenders are marketing experts or work in the
same way. Try to locate those that are more flexible in their property
disposition policies.
Time kills all deals
When the lender, or any seller accepts your
offer, close as quickly as possible. Avoid delays and complications from
nitpicking every detail. If a better offer shows up before closing, the seller
may well call their lawyer and start looking for a loophole in your agreement.
Remember the axiom; time kills all deals.
And now . . .
The good: The foreclosing lender is almost always the
senior lien holder, thereby wiping out all other liens and
judgments, with the exception of government liens, at the auction. This means an REO
property will have a clear
title. That saves a lot of time, expense and worries when buying
foreclosures. If necessary, the lender will have
taken whatever legal action necessary to quiet
title and perfect the deed so that they can sell with a
Warranty Deed.. Most
likely, the lender will also have evicted any occupants and
paid any property taxes in arrears. The lender may either repair the
property to acceptable standards or allow a discount to the buyer to
accomplish the repairs.
The bad:
Rewards relate to the risk in
any investment. Buying a REO property is a
low risk investing method and so the
profits can be on the low side as well. If you are
not able to make an offer
before the lender has renovated the property to prepare for sale you may have
to pay near market value, negating the reasons to buy foreclosures.
The ugly:
Once the lender takes ownership they will market the property for the highest
price they can get and retain all profits. There is not any
standard that lenders use for either price or disposition of foreclosure
property. Some lenders market their inventory of REO's as widely as
they can, while others
practically hide them. Some lenders advertise
foreclosures in newspapers or list their properties with real estate brokers, while others may require that you
maintain an account with them or even have an inside
connection to get their list of properties. Some other lenders now
charge substantial fees just to see a list of their foreclosures and still try
to sell them at market values.
 
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