I attended a seminar yesterday in which a very successful investor was explaining how to purchase REO/Foreclosures directly from the bank. She explained that you can buy directly from the bank and use the equity in the property you want to buy to finance the sale. I understand all of this, but what I’m not clear on is where do I go to get this funding? From who? If anyone has done this before or does this, I would be grateful for some insight and advice.
We’ve bought some foreclosures directly from the bank and we’ve bought other ones thru a Realtor off the MLS like any other listed house. Some banks will service their own portfolio like that while others will just list the houses with a Realtor to get them sold. I remember seeing someone post on here about how the bank that foreclosed won’t finance that same house to another buyer - that they will only sell it for cash. That’s not been my experience.
This investor talking about equity and funding…was she meaning you could get no money down financing for one of the bank foreclosures if the amount they were asking was well under the market value of the house? Maybe someone with several other properties could convince the bank to finance 100% of their asking price just to get it off their books, but for a newbie I don’t think that would happen. We rolled the bank’s foreclosures into part of a bigger deal and put 15% down for the entire package deal.
Yes, she was talking about exactly that, I.E a REO that is selling for 32k and the FMV is 150k. Using part of the 118k in equity to finance the purchase of the property 100%, I really truly believe this can be done I just need to understand who funds it and how I can contact them.
And you think the bank is going to give you a $150k house for $32k? :shocked
If that’s all her seminar was about, you should ask for your money back. I know you were probably just using extremes to get your point across, but consider the example you just gave: if you were a homeowner and your house was worth roughly $150k, and you had a $32k principle outstanding on your mortgage, would you let that go into default? Of course not. You would never let the bank come take your $150k house for the $32k that you owe them… if for some reason you lost your job and you couldn’t pay the mortgage, you would just sell your house and sit on the $117k in cash after paying the outstanding mortgage off. Even if the bank had taken over a $150k house for the $32k loan default, do you think they’d actually sell that to you? Hell no. They aren’t dumb… they wouldn’t sell you something for $32k that they can get anywhere from $125-150k by taking it to market.
Unless the bank in question is the local credit union, your hopes for buying directly from the bank are pretty much gone. Every major bank uses a servicer (even in-house) to handle REOs. The servicer has a fiduciary duty to sell the asset for as much as they can for the bank, and the bank has a fiduciary duty to the shareholders to recoup as much of their lost investment in the original loan as they can.
I am of the opinion that the successful investor’s should have answered your question during the seminar and not let you figure this out yourself especially if you were charged for the seminar,which i presume you were.
The REO bank will finance your purchase IF you have good credit. We’ve done it many times. If you don’t have good credit, you’ll probably have to find a hard-money lender and pay a high interest rate. You can try a mortgage broker but again, your credit score will be the primary factor in getting a loan commitment.
Your credit rating helps the bank decide at what level of risk you are as a borrower. Your income shows the bank your ability to repay the loan. Lenders require both to secure a loan.
In my experience, national banks will not use the “equity” in a property to use as a down payment. They base their loan on the appraised value or the purchase price - whichever is lower. Sorry. Maybe a little local bank would make an exception - but I doubt it.
Additionally, when a bank sells a foreclosure property, they are obligated to give the original homeowner the difference between the sales price and the amount owed the bank plus fees, interest and legal costs.
I agree. And since most homes are in a negative equity situation (otherwise they most likely wouldn’t have been foreclosed) the bank is trying to get as much as they can for the property, and as I said earlier the bank will not give you any property below market value. If the home is worth $300k, they will try to get $300k. The REO asset managers will not accept any lower offers unless the property has been listed for a considerable amount of time. Listing agents will start to lower the price slowly until they get traction. If the $300k home was foreclosed from a $100k loan, that means two things: 1. the owner/borrower is a moron and 2. the bank just inherited $200k… they are not going to sell it to you for the loan balance, they are going to sell it to you for market value ($300k).
I disagree on this point. Lenders would like to sell it at market value, but they are interested in covering their debt and not in holding real estate. Once all the liens are covered, anything over this is returned to the original owner. For example, if you have a property that is worth $300,000 but the first mortgage is for $100k, the lender needs to sell the property at $100k + fees. If the property sells for $200,000 then the lender takes his $100k plus every fee they can tack on. If there is a second mortgage, they take their amount out of what is left… and so on. The remaining amount is paid to the owner.
Thus, the lender is not forced to sell at market value. In fact, the average REO discount calculated by RealtyTrac from 2010 to 2012 by comparing sales prices of REO properties to sales prices of non-foreclosed properties ranged from 33 percent to as high as 41 percent. According to a survey conducted by Harris Interactive in April 2011 for an ongoing RealtyTrac and Trulia study, American adults expected to pay 38 percent less for a foreclosed house than a similar house that was not in foreclosure.
Does this account for their condition? I see a lot of REOs that are about 30-35% below market but they need so much work that you end up spending the equivalent of market value once all the work is complete. I’ve not had luck getting a bank who lists its property 30% below market to also subtract an additional 30,000 from the price so I can do repairs. Their comeback is “as is” baby.
Technically, their list price should reflect the “As Is” market value. Without an official real estate appraisal completed by a licensed professional, it is sort of a “he said, she said” number. The bank wants to get the highest price possible, the listing agent also wants the highest price to increase commissions and of course the investor wants it dirt cheap to make a better profit on the resale.
My experience is that banks are generally unwilling to lower the value substantially to allow repairs. One way to get around this is to have one or two estimates prepared by a licensed contractor (um not yourself) and present them as evidence to justify your offer. Do not hold your breath, banks can be a stubborn as a mule sometimes.
The real estate is the collateral for the loan. I don’t believe they “owe” anything back to the defaulted borrower. I could be wrong on this, but it’s a ridiculous scenario anyway - someone with equity in their home isn’t going to let it be foreclosed on - which is what I was trying to point out to begin with.
And I don’t care what RealtyTrac says, they’re a bunch of economists/analysts looking at numbers on a spreadsheet, not investors who actually SEE the real estate. The “33-41%” is extremely inflated. If you don’t believe me then pull up any REO listing and see if it’s that far under market value. It’s not. And for a number of reasons… Many defaulted borrowers feel robbed because of “predatory lending” so when they’re foreclosed on they just squat in the house, living there for 3+ months while not paying a dime to live there, until the sheriff shows up to kick them out (at least in CA). Many times this results in investors paying the borrowers “cash-for-keys” so they can leave. This can be $5k+. If they don’t squat on the property, chances are they made off with the appliances, cabinets/doors, AC units, pool pumps, etc… Anything they can sell on craigslist they take. We’ve purchased many homes that needed 20k+ in repairs just to damages from PO’d homeowners.
Additionally, most of that “discount to market value” is derived from investment company like ours who go non-contingent day 1 and put up 20-100k+ hard, and close all cash in 7 days. The asset managers know that some of these properties have a little (or a lot) of wear on them, and anyone who sells homes knows that lender required repairs are a pain and can delay escrow and closing (or collapse deals), so If a company like mine offers 10% below a traditional buyer looking to put financing on the deal, we win 9 times out of 10 because the asset manager knows that if they took the traditional buyer, chances are the new lender is going to require certain things to be done before they’ll lend on the asset.
Regardless, I’ve said this before and I’ll say it again, they will not sell the home for less than it’s worth. Now it’s worth might be temporarily deflated due to the circumstances of the deal or quality of the real estate. REO and SS brokers are typically forced by the asset managers to list the property at or near “market value” for an equivalent non-distressed deal. Then in order for the broker to get a deal approved by the asset manager below that price, they need to show that the deal has been seasoned on the market, meaning that they tried it at 500k (for example) and had no biters, then 490k, then 475k, then 450k, etc… before they’ll take your $425k offer.
I don’t believe they “owe” anything back to the defaulted borrower. I could be wrong on this, but it’s a ridiculous scenario anyway - someone with equity in their home isn’t going to let it be foreclosed on - which is what I was trying to point out to begin with.
I made this same assumption and someone else called me on it so I did some considerable research on the topic and found out that if the property sells above what is owed the lender, they are required by law to pay the remaining equity back to the borrower. But, it is amazing how lenders can come up with all sorts of fees, late charges, penalties, legal costs etc to make sure they do not “owe” the borrower a dime.
The law says they do. Reality says they never pay.