Real REO success & failure stories

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Real REO success & failure stories

S Man
Atlanta, GA · Member since 2008 · 20 posts · 0 votes

A while back there was a helpful thread where people talked about actual, specific experiences with REO's. Many of these stories ended in banks not accepting the offers (which is good information because a lot of people need to realize that it takes a lot of offers before you get one.)

So, here's my first REO story. I'm in Atlanta. In May '08 I found a great brick duplex in high-end neighborhood inside the city by scouring websites. Found the foreclosure notice buried online (it hadn't been reliably listed in any of the MLS systems). Got myself a REO specialist buyer's agent, found through this website. Went to look at it, along with 5 other properties that day that did not meet my requirements.

The agent called the listing agent for the code and to confirm it was still available. It was in great shape for a 1920's bungalow. Needed some minor work but was separately metered, good electrical, and basically could be rented out in 2-3 weeks after closing.

Did all my calculations, and it would NOT have cash flowed positive, even at $1500 rent per side. Now, we all know we're supposed to walk away at that point, BUT we saw this as a potential future primary residence for us, and were willing to take a hit for 1-2 years because all other area properties were selling $475k-600k and the bank asked $417k for this one and it foreclosed for around $480k on the mortgage.

A week later I had a structural engineer look at some step cracking in the brick, and he said it was no major problem, a very solid house. That meant I would make an offer, probably around $370k on a $417k ask with about 1 year DOM.

While we were there I noticed a bunch of things had been moved into (and out of) the house. The for sale sign was still up and the lockbox still on the door. I called my agent to find out what was going on. It took him 2 days to get the listing agent to call back, who said it had been sold and closed A WEEK BEFORE MY AGENT HAD EVEN TAKEN ME INSIDE. So, I was looking at a potential purchase that had already been sold.

Even the attentive REO managers and listing agents are overworked and can't keep up with their own properties. So, the search continues and I await the county records being updated so I can find out what it sold for.

End result = NO SUCCESS

Any other entertaining stories?

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  • S Man
    OP
    Atlanta, GA · Member since 2008 · 20 posts · 0 votes
    18y

    I just made an offer on a 3-1-1 REO SFH in a good location. In great interior condition, just needs to be washed/mopped and install a washer/dryer. Exterior I will fix some minor roof shingle issues and dye the parched lawn.

    It auctioned in May and is listed on MLS for only about 2 months so I know the bank may not be hungry yet.

    Offered $148k
    Earnest money $2k

    Listing price $223k
    -but the foreclosed loan was only $185k; listing agent must have an inflated opinion of the property.

    ARV $230k+

    Bank (GMAC) requires closing with their attorney.

    Contingencies/special requests:
    - inspection (including termite)
    - bank pays closing costs up to 2% of purchase price (wanted to request more but lenders are limiting this # for investment property loans)
    - bank pays seller and buyer transfer taxes
    - bank pays buyer's title insurance policy
    - bank provides recent property survey
    - [wanted to allocate most of purchase price to BUILDING vs. LAND for depreciation purposes but my realtor doesn't know how]

    Must close Aug 7, 2008.

    Giving them 2 days to respond.

    At $148k purchase and expected rents of $1500/mo, this should cash flow a bit positive for me.

    Any thoughts on this offer?

    Will let you all know what happens.

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  • Matt DuSold
    Lender · Phoenix, AZ · Member since 2008 · 351 posts · 40 votes
    18y

    How are you getting that to cash flow "a bit positive"? Just a question. Up here I need to find property for about 75-80K if I am going to rent it out for 1500.

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  • S Man
    OP
    Atlanta, GA · Member since 2008 · 20 posts · 0 votes
    18y

    Sure Matt, here are my calculations. Thoughts or questions?

    purch price $148,000
    repairs $3,000
    down pay $29,600
    closing costs $4,000
    mortgage $118,400

    Holding costs (PITI) $1,233 Total
    monthly mortgage paymt $727 assume 6.25% rate on $118k
    monthly maintenance $50
    insurance (monthly) $83
    Utilities (avg monthly) $10
    taxes per month $333
    property mgmt fee $-
    termite bond $29
    advertising fees $-
    HOA fees $-

    est'd taxes $4,000
    taxes per month $333

    opp'y cost -down paymt $92 [I assume a 3% non-compounded rate per month]
    ttl per month cost $1,324

    rent > this amt to not lose $ $1,324

    fair market rent in area $1,500

    VACANCY CONSIDERATION
    annual costs $15,892
    # months rented 11
    projected monthly rent $1,475 491.67 per person at 3 occupants
    amount income $16,225
    profit (loss) $333

    Total annual rent $16,225
    Yield on cash outlays 44.3%
    Yield on cash outlays + annual exp 30.9%

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  • Matt DuSold
    Lender · Phoenix, AZ · Member since 2008 · 351 posts · 40 votes
    18y

    Got it. I just saw your numbers at first and looked at it and didn't see where you were coming from.(I only used the 50% rule and 2% rule) Thanks for sharing I always like looking at peoples numbers. Just being a newbie it helps to see how everyone looks at things.

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  • S Man
    OP
    Atlanta, GA · Member since 2008 · 20 posts · 0 votes
    18y

    The 50% rule is a good one; I'm not familiar with the 2% rule. Keep in mind that my calculations don't really set aside a good rainy day fund for those occasional repairs/replacements that many of the experienced posters here talk about. I may get a home warranty to deal with a lot of that stuff, and I will likely be the Prop Mgr for a while until rents creep up enough to afford one, but if I can cover my costs (or come real close) the first few years then I expect rents to rise along with my equity and it will become a more solid investment.

    In the spirit of full disclosure, I don't want you to think that you can pick up a bunch of deals that cash flow like this and sit pretty as a landlord; maybe 1 or 2 at most until the rents edge up, and even then only if rents increase faster than other costs. I'm really counting on buying it below market value and then getting some additional appreciation, what some would call "speculation," but I'm willing to do this based on factors such as location (intown Atlanta and near a major university and hospital, historically low county property taxes, good condition home, potential to add onto the home for forced appreciation).

    Anyway, let's see how the bank responds to my offer...

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  • S Man
    OP
    Atlanta, GA · Member since 2008 · 20 posts · 0 votes
    18y

    Just heard back from the bank on my offer:

    ============
    Offered $148k
    Earnest money $2k

    Listing price $223k
    -but the foreclosed loan was only $185k; listing agent must have an inflated opinion of the property.

    ARV $230k+

    Bank (GMAC) requires closing with their attorney.
    ===========

    Bank flat out rejected my offer, no counter. Interestingly, the Listing Agent said he now had permission to drop ask price from $223.8k to $199k! I am walking away and will check back on it in 3-4 weeks to see if they've come to their senses.

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  • Michael Dorgan
    Real Estate Investor · Lynnwood, WA · Member since 2008 · 66 posts · 9 votes
    18y

    I've done 1 REO - my 2nd flip attempt. Did it 3 years ago in the height of bubble-mania up here in W.Wa. Boy did I learn alot :)

    Found it via a realtor I was working with, listed for under an hour as a 3/2 colonial for 190k. We went and looked at it. It was actually a 4/2 (on septic for 3) that had only surface cosmetic issues and would be worth 220k arv. We put an all cash offer of 170k with only an inspection clause (3 days) in place, which in hind-sight was far too good an offer. The next day, they said they had another offer and wanted us to raise ours. We declined. The next day, they countered at 180k and we said we would stand pat at 170k. They accepted. Yeah, sort of.

    So, we had the place inspected and it turns out there was a fairly major pipe-leak in the up-stairs bathroom. We told the bank and they actually offered to fix it for us in place of lowering the price. Sweet I thought. They had it fixed in under a week and we closed. Spent roughly 1 month doing cosmetics (I didn't really know what I was doing, but I was learning.) and roughly 12k on patching drywall, painting, new carpet, re-graveling the driveway, and landscaping/stump removal. Tried to sell for 6 weeks as a lease option without gettings even a nibble (didn't know how to advertise well either.) Listed it with my Realtor for 220 and sold it a month later for 210k. A very thin, lame deal.

    It gets worse though. I let the buyers move in 2 days early on a lease to allow them a place for their stuff due to their previous lease being up before close. Dumb. It turns out the bank actually had not fixed the leak in the wall, but had just cut the old drywall out and replaced it with new! Uh oh. Now, because I rented the place to them, I was in a bit of a bind. Luckily, they accepted a 1.5k check for the defect and said they'd fix it themselves. Now for the numbers of my "Killer" deal:

    210k - 170k purchase - 12k repairs/holding - 20k closing costs - 1.5 oops check = 6.5k of profit. Woohoo party. I made bumpkins for the risk and work I had to put into the place. I did earn a lot in education though.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    18y
    Originally posted by "atl2008rei":
    It took him 2 days to get the listing agent to call back, who said it had been sold and closed A WEEK BEFORE MY AGENT HAD EVEN TAKEN ME INSIDE. So, I was looking at a potential purchase that had already been sold.

    I'm buying REO property in ATL as well, and what you may have seen was a property that had been put under contract, but with a due diligence period. Generally, the bank won't take the property off the market (or give any indication that the property is gone) under after the DD period has ended, which could be 7-10 days later...

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  • Ingrid Nagy
    Property Manager · Passaic, NJ · Member since 2008 · 369 posts · 83 votes
    18y

    This is an old REO story but was a successful one. In 1996 I offered $30K each cash on 2 2 bedroom condos in a complex that I was familiar with. In 1988 these condos had sold for $90K each. The lender accepted; closed in 30 days, rented 30 days later at $1000/mo, net after tax/maintenance was $800/mo. I continued to rent until 2005 (height of the market here). Sold one for $150K and the second for $160K. I'm hoping those days will come back again real soon!!!!!!!

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