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Pros and Cons of Buying From Banks Instead of Directly From Motivated Sellers

by Danny Johnson on February 20, 2013 · 16 comments

  
pros and cons of targeting bank-owned properties

It’s not that banks aren’t motivated sellers – but what I mean by “buying directly from motivated sellers” is buying directly from homeowners.

It seems that most investors either work one or the other for deals. Some work both. I’ve switched back and forth over the years as circumstances dictated. In this post, I’m going to talk about the pros and cons of buying REOs from banks. If you are getting started flipping houses, this will help you decide whether to hunt for deals by targeting bank-owned properties.

We Targeted Bank-Owned Properties When The Time Was Right

My wife and I started by buying directly from homeowners when we got started. This is achieved by marketing directly to these ‘motivated sellers’ with the typical ‘We Buy Houses’ advertising. This worked well for a long time.

Then, when the market took a dive around 2008, the competition really thinned out. At the same time, the number of bank-owned properties rose dramatically. Lots of cheap houses and not much competition, an investor’s dream. We quickly switched to buying mostly REOs.

Of course, all good things must come to an end. The competition came back and we realized that it would be wise to return to marketing directly to homeowners. So that’s what we did.

I’ve attempted to ‘chase’ some of the bank-owned properties from time to time only to become frustrated with the level of competition. There are a lot of investors that buy REOs though. They are willing to fight for the deals. This got me to thinking about what the pros and cons to buying deals this way were.

Pros of Buying Houses From Banks

  • Don’t need to market for deals
    As bank-owned properties are typically listed through Realtors, you can find them easily. There’s no need to market to find them.
  • Not having to negotiate directly with a person
    Offers you make on bank-owned houses are submitted through a Realtor, so you don’t have to stand face to face with a homeowner and negotiate the price. A lot of people feel uncomfortable negotiating such a big purchase with someone they don’t know.
  • Not having to deal with the emotions of a motivated seller
    Many motivated sellers can be emotional about the sale of their home. Sometimes the situation is touchy and you never know what will happen. This is obviously not the case with a bank.
  • Get to view vacant houses when it fits your schedule
    You don’t need to schedule with someone to see their house. Bank-owned houses are almost always vacant and you can schedule to see them as your schedule permits, even if it’s late at night or super early in the morning.
  • Look at as many as you have time for
    You don’t need to wait for your phone to ring, you can usually get a good sized list of these houses from a real estate agent or online. Go and look at as many as you have time for.

    One piece of advice though: If you find that there is a lot of competition for most of the houses that were listed recently (not on the market long), start focusing on ones that have already been on the market over 30 days.

Cons of Buying Houses From Banks

  • Need MLS access or Realtor to send up-to-date leads
    You will need to bug somebody to always send you the leads or get access to look them up yourself. Some of the websites that have information about bank-owned properties can be innacurate and may show properties that are already pending as still being for sale.
  • Higher earnest money
    Most banks are going to want at least $1,000 earnest money. When you buy directly from homeowners you can often get away will very small amounts for earnest money ($10 and $25 is common).
  • Much more competition
    At least where I am, there is a lot more competition for the listed properties. This is why I haven’t bothered with them for a while.
  • Contingencies hurt offers
    If you need to put contingencies in your offer because you need to be able to have an ‘out’, it will hurt your chances of getting the deal.
  • Proof of funds needed
    If you are making cash offers, you will need to show proof of funds. They are going to want to see a bank statement showing a balance high enough to cover the purchase. If you are going to be getting a loan, they will want to see a preapproval letter.
  • More complicated when it comes to wholesaling
    When wholesaling, you won’t be able to assign the contract. You will have to work around it by using land trusts (assign beneficial interest in the trust to your buyer) or an LLC (sell the LLC to your buyer). In addition to this, many investors don’t like looking at wholesale deals that were on the MLS. It’s just the way it is.
  • Record of what you paid for the property is easily found
    In disclosure states (where the sales price is public record), this probably isn’t as big of a deal. But, in non-disclosure states, people don’t typically know what you paid for a property unless they find the SOLD listing on the MLS with what you paid. This can hurt you when you go to sell a property and the buyer’s agent uses the information to try and beat you up in negotiations because they think you are making a fortune anyway.

Now that you know some of the pros and cons of buying houses from banks, you can better decide whether it is right for you.

No matter which way you decide to go, the key is in realizing that this is a numbers game above all else. Be persitent and it will work for you.

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{ 16 comments… read them below or add one }

John McCombs February 20, 2013 at 8:52 am

Thank you for giving the pros and cons both and not advocating for your particular approach. This will help other investors approach this from a more informed position.

Reply

Danny Johnson February 20, 2013 at 12:21 pm

No problem.

It’s always good to look at both sides of things.

Reply

Ben Leybovich February 20, 2013 at 9:15 am

Good article John,

The most basic premise of what we do is that the more the competition, the less favorable is our negotiating position. Personally, I prefer to fly under the radar and stay away from listed properties of any kind. I find I get the best deals this way…

Reply

Danny Johnson February 20, 2013 at 12:22 pm

Thanks, Bob.

I completely agree and do the same.

It’s Danny, btw. :)

Reply

Arthur February 20, 2013 at 11:08 am

These are some great points Danny. I would really love it if your follow-up post could be about the other side of the coin. Pros/cons of buying directly from motivated sellers.

Best,

AG

Reply

Danny Johnson February 20, 2013 at 12:24 pm

You’ve read my mind, Arthur.

I’m glad you enjoyed it.

Reply

Ben Leybovich February 20, 2013 at 12:33 pm

Sorry Danny, and it’s Ben btw lol :)

Reply

Danny Johnson February 20, 2013 at 1:16 pm

That’s OK. I’m sure I’ve done it before. :)

Reply

Bill Wallace February 21, 2013 at 9:07 am

Another con (especially on Fannie Mae) – they will force the buyer to pay for bogus closing charges. $100-150 rekey fees, HOA doc fees and higher than normal title fees are the norm.

Reply

Danny Johnson February 21, 2013 at 1:49 pm

Thanks, Bill.

Excellent addition to the Con list.

I should have also added that they usually dictate the title company and the ones they choose can be some of the worst to deal with.

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Michael February 25, 2013 at 8:59 pm

Great analogy Danny & I find myself adjusting as we speak on new ways to find deals.
Inventory is drying up & investor’s are paying more than I want on REO’s. Sounds like your a few steps ahead of your competition.

Reply

Danny Johnson February 26, 2013 at 10:45 am

I guess the good thing is that we both know that there are enough deals out there as long as we work hard enough to find them.

Reply

Karen Rittenhouse February 26, 2013 at 9:17 am

Very comprehensive list, Danny.

Thanks for the post.

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Danny Johnson February 26, 2013 at 10:45 am

Thanks, Karen.

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Donn M March 7, 2013 at 7:59 am

Great list and well thought out. We do both and find your ideas are right in line with what we are finding. The competition is hot for bank-owns so our realtor is our best way to find them and offer quickly! Long lead times for banks to accept the offer is the biggest difference we find today.

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Danny Johnson March 7, 2013 at 10:57 am

Don’t you just hate waiting? More time for those dreaded multiple offer situations.

Reply

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