REO vs. uninformed buyers

24 Replies

Hello All,  I have a question regarding bank fantasy pricing vs. buyers totally overpaying. 

This is the scenario. Bank bought back foreclosure, loan amount was for $208k a couple years ago. Buyer realized he overpaid by approximate value of two brand new trucks....and walked without doing a stitch of work. Bank is pricing it at approx. $245k. Market ARV is realistically $270k. It needs about $80k worth of work and that doesn't include any margin or profit. Realistic buying price is about $136k vs. bank asking price of $245k...and that will give you 20% profit if you're lucky. (I'm in construction, I know pricing)...

This has been on the market for 6 months.  My question is this..........  What will give first in this situation.  Will the bank realistically price it eventually or will some uninformed dreamer cough up the money again and lose $80k?

Let the bank sit on it. I used to buy bank REO's and they always do this. Just be patient and wait it out, though you might be for a long wait.

I once bought at a public auction, a condo complex where they had over 60 vacant condos. They only managed to sell 30 out of sixty for $40K where they originally sold for $120K.

Then, a year later I inquired and despite this, they insisted on selling them for $65k. I offered 40K on a take it or leave it basis and they took it.

Now, my wife was a VP at a loan company where they did RE loans and handled REO's. The prices they will accept has nothing to do with the market value, but everything to do with how much they have to write off. So realistically pricing properties has nothing to do with it. How much they're willing to write off has to do with how many years they had it. When they're ready and willing, it's sold at a public auction, absolute basis, where the lowest bid wins, not before. The home I lived in I got at an absolute auction, $100K below market, after the bank sat on it for 3 years.

Greg, it's an old multi-family. Even if it was a SFH at $180k you would be doing all the work for no money for yourself for managing the gut / reno. I still don't think you could do it for $65k either.

@Jay M. The banks always price their properties for the uninformed primary home buyer. I frequently see those kinds of numbers where if I were to do the math my offer is less than the banks asking price. Many times it sells like that to the uninformed buyer! Sometimes it is an uninformed investor, or an investor that doesn’t value their time. So they will get it for $10k more than me and either blow the budget on the rehab or do all the rehab themselves to “save money”, while spending 6 months working on the property and paying themselves $5/hour.

I bought a house for $110k that was originally listed st $275k. They dropped and dropped and dropped. I got in before it got low enough to spark investor interest and was able to use a contractor quote to get it for well under their lowered asking price. The truth is a lot of flippers will overpay in this market. Just make sure you aren't one of them!

@Jay M. I am seeing this situation everywhere. I don't know what banks are thinking. For example, I saw a house today where the exterior looks nice but the interior is gutted except for the 2x4 frames and I don't think the roof is fully repaired from the leak that caused all the drywalls removed because of mild. Bank wants $200,000 and the ARV is $235,000. Come on, man!

@Jay M.

My question is this.......... What will give first in this situation. Will the bank realistically price it eventually or will some uninformed dreamer cough up the money again and lose $80k?

I honestly don't know. Why do you care? 

The answer should not affect in any way how you handle this deal. You have no control over what the bank will accept or how long before they will drop the price. You also have no control over what some fool will pay. You have total control over what you offer and how often and diligently you follow up.

The amount of work a property needs may not have any correlation to its value. I know neighborhoods where a fully redon house will go for $420k and a dated house in thay same neighborhood that needs $100k in work sells for $400k. 

Originally posted by @Alex Martinez :
@Jay M. I am seeing this situation everywhere. I don't know what banks are thinking. For example, I saw a house today where the exterior looks nice but the interior is gutted except for the 2x4 frames and I don't think the roof is fully repaired from the leak that caused all the drywalls removed because of mild. Bank wants $200,000 and the ARV is $235,000. Come on, man!

I done REO's for a while. What the average RE investor thinks and what a REO banker thinks are in two different universes.

I initially went to courthouse step auctions, I hear bids of let say in the $120K to $150K range. Then the bank would step in and put in a bid of $200K. How did that get that? As it turns out, that's the outstanding mortgage.

As I mentioned above, I bought my home at an REO auction, ARV of $310K but I got it for around $200K. The bank that owned the foreclosure was there and the banker who handled the property said the mortgage was $300K and they wouldn't take anything less than $280K. At a certain point the protocol calls for the property to be auctioned and whatever the auction rules are. At the auction I was at, the 1st 20 properties are sold absolute, meaning the lowest bidder wins. So the auction house rules apply, not the bankers rules.

In all the times I done this, never heard a banker mention the condition of the house, cost of rehab, ARV. That's investor talk. Its always the outstanding mortgage. So they would say "Come on, man, we have a mortgage of $300K". If your question is "what is the bank thinking?", well that what they're thinking.

The house I picked up at auction was almost new, 8 years old, was in foreclosure for 3 of those years, the bank kept it in pristine shape, in move in condition. Sometimes you luck out.

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In all the times I done this, never heard a banker mention the condition of the house, cost of rehab, ARV. That's investor talk. Its always the outstanding mortgage. So they would say "Come on, man, we have a mortgage of $300K". If your question is "what is the bank thinking?", well that what they're thinking.

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  There is a realtor around here who specializes in bank owned properties.  In fact it looks like that's all he lists....  Anyway, you'd think he'd say to the bank on some of these...."you know you're asking about $100k too much for an investor / flipper and a homeowner isn't going to touch this".....They he probably lists it and say's to the banker, "okay, we'll talk next year when I haven't shown it"....

Originally posted by @Jay M. :
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In all the times I done this, never heard a banker mention the condition of the house, cost of rehab, ARV. That's investor talk. Its always the outstanding mortgage. So they would say "Come on, man, we have a mortgage of $300K". If your question is "what is the bank thinking?", well that what they're thinking.

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  There is a realtor around here who specializes in bank owned properties.  In fact it looks like that's all he lists....  Anyway, you'd think he'd say to the bank on some of these...."you know you're asking about $100k too much for an investor / flipper and a homeowner isn't going to touch this".....They he probably lists it and say's to the banker, "okay, we'll talk next year when I haven't shown it"....

 I've seen it done the way you mentioned, as it seems to be common sense. But given human nature, greed, it could lead to unbelievable scandals.

You suggested the realtor saying "you know you're asking $100K too much …". However, the bankers have no idea of any of this or what anything is worth. You might as well say "you know you're asking $150K too much.." as well,  and they wouldn't know the difference.

My wife as I mentioned came in as VP of a finance company set up by a large insurance company that had excess cash to invest, too much, so they decided "why not a finance company?". The top officers appointed to head this finance company were life long insurance salesman rewarded for their years of service.

Fast forward a few years, they had bad debt problems, and more REO's than they know what to do with. What happened? They worked with realtors that found buyers and flippers. These same guys found them the original buyers that defaulted. What's wrong with the picture? These new buyers would underpay for properties, often by as much as $100K after paying cash bribes to the finance company officers. Of course, you would need appraisers as part of the scheme. Various real estate schemes, banks doing the lending usually has no idea what a property is worth, an appraiser in on it with a credible report is all that's needed. So who would know.

Since it was a finance company, run by insurance people no less, the usual protocols for banks were not followed. From what I heard, when they were found out, company officers were saying "but the realtors said this or that, and I believed him. I only thing I did wrong was make a commission and not report it on my taxes."

@Jay M. The mentalities of real estate investors like us and the decision makers for REOs can be vastly different. You never know exactly what you’re going to get on the lender side. When my company takes a property back as REO, we are going to make the best decisions necessary to make the best profit for our needs, whether that’s a full rehab or a trash out and selling as is or anything in between. For the banks out there, you are typically working with employees with no direct ties to the return of any particular asset. They are just doing their job and get paid the same whether the bank loses or profits on that asset. They are typically directed by higher ups who are more concerned about the big picture and quarterly numbers. They can accept large losses on particular assets by making up for it on others. For banks, it is what it is, and their decisions may or may not make any sense to you. Internally, it may or may not make sense to the bank. Unbelievably, they may not even care. That’s the way it is. In general, I don’t believe that banks are waiting for the “uninformed buyer.” That would be giving them too much credit
The short and simple is the bank and realtor are in the game to make as much money as possible on the property. If condition is fair (without major defects to the structure) then the realtor is going to run comps and price it accordingly. As some point before that house went into foreclosure it appraised at a higher value and in theory would appraise in the same ballpark with the new owner. If you feel it’s over priced then make an offer, present your reasoning why and negotiate. If it’s obvious that a $200,000 home is being sold close to retail but has a cracked foundation, cracks through walls and broken tile then bring it to the sellers attention, submit an offer and go into inspections. But if your opinion of “it needs $80k in work” is because it’s outdated and needs tile, granite, open floor plan then your looking at it wrong and need to adjust your plan. Sit and wait is always an option but banks nowadays are starting to invest money into REO’s much like flippers to make a profit in the market.

@Jay M. There are some realtors in Florida that only work with Foreclosures. I have some good friends in that situation, one that was #23 in the country a few years back in terms of the sales of foreclosures. Now he had to kiss a lot of tail and do stuff that is kind of slimy with investors of big tapes of properties in South Florida, but foreclosures are cyclical. A rise in rates of 1-2 % can send some people into foreclosure quickly, and rising rates are doing just that to many people. 

Back to your post the bankers couldn't find their rear ends with both hands. They only know performing vs non-performing assets. They do not know values. Its why they have realtors do BPOs. If the money aint coming in, they start the process in 90 days, in Florida. All the foreclosures I have bought, I say the uglier the better. I know the value per square foot and if the bank will not accept, so what, on to the next one. There is always another. 

Originally posted by @Jack Bobeck :

@Jay M. There are some realtors in Florida that only work with Foreclosures. I have some good friends in that situation, one that was #23 in the country a few years back in terms of the sales of foreclosures. Now he had to kiss a lot of tail and do stuff that is kind of slimy with investors of big tapes of properties in South Florida, but foreclosures are cyclical. A rise in rates of 1-2 % can send some people into foreclosure quickly, and rising rates are doing just that to many people. 

Back to your post the bankers couldn't find their rear ends with both hands. They only know performing vs non-performing assets. They do not know values. Its why they have realtors do BPOs. If the money aint coming in, they start the process in 90 days, in Florida. All the foreclosures I have bought, I say the uglier the better. I know the value per square foot and if the bank will not accept, so what, on to the next one. There is always another. 

 I think you're being sarcastic so I won't poke holes in your assessment of bankers.

@Ron S. I got royally screwed by my Doctor partners, then by Regions, then by the Vulture Capital group Regions sold our 5 notes to in 2011. If I want to say that Doctors, Lawyers and Bankers deserve to be at the bottom of the ocean, I've earned that right. The same you can say about Lawyers applies to Bankers, you know they are lying when their lips start moving. The shame they must feel for their actions.....or apparently not. 

Originally posted by @Jack Bobeck :

@Ron S. I got royally screwed by my Doctor partners, then by Regions, then by the Vulture Capital group Regions sold our 5 notes to in 2011. If I want to say that Doctors, Lawyers and Bankers deserve to be at the bottom of the ocean, I've earned that right. The same you can say about Lawyers applies to Bankers, you know they are lying when their lips start moving. The shame they must feel for their actions.....or apparently not. 

 Well...I knew there had to be a motive for the story and your personal experience would show that motive. It makes sense now. Still, the fallacy of your statement doesn't bode well for your message. Argue with logic. Defend your argument with emotion. Looks like an emotional argument instead.

@Ron S. Call it what you want, but when the Vultures pick you apart, get back to me and let me know your outcome.....

Originally posted by @Jack Bobeck :

@Ron S. Call it what you want, but when the Vultures pick you apart, get back to me and let me know your outcome.....

They've tried. I was not immune to 2008 but at the same time, set myself up to ensure the vultures were not able to pick me apart. A lot of good business people got railroaded. A lot of bad people got away with murder, literally if not figuratively. I worked for Lehman Brothers! Trust me, been there done that.

We live, we learn, we move on. Hopefully the decisions we make today are reflective of what happened last time. I know mine are and have been.

If your offer is indeed realistic, submit the offer and 'get on the books'.  Email the listing agent and let them know you understand the numbers don't align. They may get a new appraisal in the future and tell the listing agent to call that buyer agent back.

The house I picked up at auction was almost new, 8 years old, was in foreclosure for 3 of those years, the bank kept it in pristine shape, in move in condition. Sometimes you luck out.

 Frank, there is no luck involved there.  You made a smart play and put yourself in position to succeed.  Excellent information man.  Thanks.