Many new investors come to me asking how to buy foreclosure properties directly from the bank. The interest is understandable, as it is the bank you borrow money from when you buy a house, so it is natural to assume that the bank owns the property. But that is not the case.
Whether you used a Deed of Trust or Mortgage, it is the security instrument utilized to protect the bank from loss should you default on their loan. The beneficiary of your loan is either held by a third party or pledged as security for the loan. 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, and 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 and 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 cannot make a profit is false. If the house is not sold to an outside bidder at the auction and the foreclosing lender wins the property back by default, it will take possession of the property. 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, or sell it for any amount it desires.
The State of Title
Oftentimes, buyers of foreclosed homes are concerned about the quality of title issued by the lender. A common belief is that there may be liens or judgments clouding the title. This is a myth. The lender, typically the senior lien holder, through the foreclosure auction, wipes out all junior lien holders or judgments after the auction is complete.
If a junior foreclosing lender does not bid at a senior foreclosing lenders auction, it probably doesn’t want the property. This may be due to excessive superior liens, such as the amount of the senior first mortgage, IRS or property tax liens. (Tip: If the junior 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 lienholders, 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, it is not true. 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.
The Truth about REO Property Sales
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.
(Foreclosures.com can provide you with tools for every aspect of foreclosure investing including invaluable negotiation techniques. They also offer a variety of tools for your investment business such as list services. Foreclosures.com Listings will help you find motivated sellers and REO lenders that have NOT listed their home on the MLS. Find leads that your agent is not showing you and get in FIRST. http://www.foreclosures.com/lists/)
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. Other lenders dispose of their own properties. Depending on the size and complexity of its REO inventory, the lender may have a staff of asset managers handling property sales, or they may outsource this task with an outside asset management firm.
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.
You begin by locating bank or government owned properties by researching them at the county courthouse or subscribe to an accurate data service that does this work for you, such as www.Foreclosures.com. You may also contact a Realtor to see what is listed on the Multiple Listing Service (MLS). However, you will be quite surprised to find out that only a small fraction of the bank REO foreclosures are actually listed for sale. The majority of these properties are being held back (AKA Phantom/Shadow Foreclosures) for sale at a later date by the bank. If you want to find all the properties that are bank owned in your area, not just those listed on the MLS, you must do your research.
The good news is Foreclosures.com has done this research for you. You will find all foreclosure properties as they are recorded, made available to you 24 hours a day, 7 days a week. Try a Free Search for properties that meet your investing criteria, including “search for equity” and “search by bank name” to find the best deals.
Determine whether you are buying for immediate resale, or for long term cash flow rental, or to buy to live in for yourself. Check to see 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 30-50% discount and earn a 15% quick profit in less than 90 days. 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 their listing agent and them some questions about their goals for this property. Are they looking for a quick as is cash sale or would they rather wait for a full price offer contingent upon outside financing? If they are ready to discount and sell wholesale, how much of a discount are they offering?
Try to negotiate as much as you can before you get in your car to see the property. This will save you a lot of wasted time seeing houses that will not be a good deal for you. When you do go to finally see a property, make sure you get a good inspection before you write an offer. Record any damages and deduct the repair estimates from your price. 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:
• Cover letter summarizing your interest.
• The physical address and 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 should structure your deals to buy at property at 30% off resale after repairs, and deduct the cost of repairs as well. Make sure you qualified that this lender is actually looking to sell quickly, as is, for a wholesale price.
Unrealistic offers will be rejected quickly. Learn to work with the banks and have a great follow up system. Another buyer may seem to pay more than you, but if they fall out of escrow, you want to be there as a backup. It is not uncommon to get the deal being second or third in line, after the lender finally gets motivated to discount and close the deal. Patience is a virtue here.
Some lenders sell thousands of REO’s every year. Many sell their properties at or near market price. 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.
REO Advantages
The advantages to buying REO foreclosed properties are many. There are no liens or judgments to contend with, no homeowners or tenants to evict, no back taxes due, and accessing he 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.
A properly structured REO 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 a great way to go.
REO Disadvantages
Some of the disadvantages to buying REO foreclosures 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 common use of “non-standard” real estate contracts and addendums that may bring you some added liabilities. I highly recommend you get competent real estate legal advice on any real estate transaction that includes special language written by the lenders. Never trust and always verify!
Here’s to a successful REO investing career… Alexis
Wednesday, October 6, 2010 6:00pm Pacific
Attend this FREE Live Webinar given by ForeclosureS.com President Alexis McGee. She focuses on getting you started in the lucrative world of foreclosure investing, without using any of your own cash or credit.
From Real Estate Agent to Real Estate Entrepreneur
How to Implement Your Passive Income Machine
Wednesday, October 13, 2010 6:00pm Pacific
Attend this One-Time, Live Professional Investors Webinar given by Tim Rhode – Foreclosure Investor, Real Estate Broker and Coach. Learn proven strategies on how Realtors (and anyone) can transition from where they are today into a full time real estate investor. Tim will share is indepth experience as both an investor and broker and help you implement your successful investing plan today. Alexis McGee will moderate and share her tips throughout this Interactive Call.
Wednesday, October 20, 2010 6:00pm Pacific
Attendees of this Live, Interactive, Mastering Clients Private Study Session Webinar with Alexis will learn her Most Current Tips and Strategies to Mastering Foreclosure Investing. She will include her successful client Guest Investor Panelists and Coach Proteges. This months webinar will show you Step 7 “How to Put Profits in Your Bank” by finding the right buyer (or tenant) and closing quickly so you can move onto your next deal. Don’t miss out.
For more information about our Live Webinars, please call 800-310-7730 x2
