Do banks want to profit from foreclosures?

11 Replies

I am looking at investing in a bank owned property. It was last sold two years ago for around $150K and they were trying to sell it for $185K. The house is beat up and the appliances are all gone including the dishwasher and range hood. Clearly the house is not in prime condition like it probably was two years ago when it sold for $150K. I am assuming the bank loan was less than $150K. The agent told me the bank just wanted to get out the money they had in it. I questioned how they could have more than $150K into it and he just said market appreciation. Our market may have gone up around 8% in two years, but with the condition and missing appliances, I cannot get to their listing number. Is it is common for banks to try to profit from foreclosures? If I submit an offer is there anything I can do to increase the likelihood they will accept my offer? I am thinking of sending a cover letter detailing what I think the value is in current condition. Would that help the bank rationalize my offer as fair? If my offer is higher than what they are owed, are they likely to take it or are banks using foreclosures as an income stream?

Depends on the bank and market.

See if you can get the foreclosure unpaid balance or look up the mortgage issued from the previous sale via public records.

I would figure your best number and offer it or wait it out.

@Joe Splitrock

There is a pod cast that talks about how to sweeten you purchase offer.  I cant remember the show number, maybe someone else will remember upon reading this.  The guest talked about offering things like.

Large earnest deposit, guest said something like 40k.  That high IMO.

No inceptions.

No finance contingency.

Banks are businesses , profit is the goal . The more the better .  So yes banks want to make a profit when they sell a property . 

I would think they are required to make a profit when possible.  But they don't want to hold real estate because they can't lend against it like they can with deposits.  I believe it actually hurts their balance sheet my a 10x multitude.   

You'll find that the unpaid principal is not the only cost in a foreclosure.  There is unpaid interest, lender paid taxes/insurance/property preservation, court costs and attorney fees, etc.    What the previous owner paid for is irrelevant anyway, the bank is going to try to get a close to current market value as they can.   If they aren't getting any offers then yes, it may be over priced.   Make whatever offer you feel is the price you want to pay and if it sits on the market resubmit it again.  

@Patrick L. thanks for pointing out the other costs. That is a good point that their all-in number ends up being more than just the loan amount. 

@Account Closed I had thought about offering no inspection contingency and I have a good track record of closing on deals, so I could make it trouble free for the bank. I would be willing to offer a good chunk of money for earnest money, but my wife sees too much risk. Her thought is just in case we need to back out for some reason. My feeling is that I am putting the money down anyway. 

If anyone knows which podcast it was, I would love to have a listen to it.

@Joe Splitrock - I find that agents answer to be a bit odd "the bank, just wants to get what they have into it." Actually sounds like total BS to me! There are other costs but like @Patrick L. said they are irrelevant. The value of the property is all that matters. Banks are in the business of loaning money not selling property. I would say it is uncommon for them to try and make money off a foreclosure. A large portion of foreclosures are failed short sales (the bank taking a loss) In that case, the loan amount exceeds the value of the home and that's before all the appliances are ripped out or any other damage is done. Banks want it off the books, minimising liability; that's why they sell. Many REO's are not owned by the original lender, the loan may have been sold several times. Many times bad debt is packaged up and sold off in bulk for pennies on the dollar to companies who specialize in buying non-performing loans, foreclosing and then selling the property.

As for your offer, here is what I would do. First and foremost, I would let the listing agent represent me as the buyer, even though I'm full time agent. Typically the banks give more commission to the buyer's agent than the listing agent. It is in the agents' best interest to sell to his own buyer. You have a better shot of getting the deal if the agent knows he has both sides. Basically, when doing a deal I focus on the profit not the commission. You will also be more likely to have deals sent your way in the future. I would also put the offer in with no inspection and as little contingencies as possible. Buyer to pay for all municipal certs and inspection (typically already mentioned in the listing). You can always do the inspection anyway and still cancel the contract for another reason. Cash and a quick close is a HUGE factor to likely land you the deal. EVEN IF there is another buyer offering more money, with a mortgage contingency. Asset managers want that property off the books ASAP (I have heard this is a factor in performance reviews and bonuses). One other thing you can do to both save money and possibly make your offer stronger is use the title company of the sellers' choice. Banks/REO asset management companies will typically pick up a portion of the title charge on the buyers side if you use their company.

Hope this is helpful!

Happy Investing!

Yes, banks do want to make as much money on a house as they can.  At the same time you have to keep in mind that their holding cost are higher than your normal small time investor.  In addition to risking vandalism while the house is empty and paying for property taxes, they also have to pay a property manager to take care of the house and various bank employees are involved in reviewing offers and deciding what to do with the house.  All that adds up to pretty high holding cost.  In some cases it makes sense for them to sell at sub optimal levels rather than hold out for the absolute highest price.

Great advice @Joe DiGirolamo ! I didn't think about the agent portion, but that makes sense. Unfortunately, I have an agent that I am signed up with. Plus I have done several deals with him and he is a good guy. My fear in flipping from an agent is not being loyal. We are in a small market and I feel loyalty as part of my reputation is important. 

@Joe Splitrock - Loyalty is very important and it's nice to hear someone mention it when money is involved! I too think loyalty is so important. Here is my opinion on this.

If you are buying REO's, they probably do not carry a hefty price tag. I work for about 7 different asset management companies/banks. Almost all of the listings contracts for properties under $50k are a flat commission of $2500.The bank takes $500 and the $2000 get split between the agents. If the sale price is over $50k then the commission is 6% BUT the bank takes 1% referral and the agents split the remaining 5%. I have even seen the bank offer more on the selling (buyer) side.

If you're flipping, you know that you make your money on the buy. First off, if you can't get the deal then nobody wins. If you are buying something below $50k, the agent makes the same no matter what the sold price is. The agent is supposed to get as much as possible for the bank, yet they make the same commission. As the listing agents buyer, do you think they might be more inclined to get you a better price, especially if you are a nice loyal guy? 

My point is that if this strategy will get you the deal or a better price on the deal. Then relist the property for retail sale with the realtor you are signed up with. You are still doing business with him! Keep in mind you could use this for your REO acquisitions only. I don't think it's unfair or not being loyal. It's just business. Maybe throw your guy some bonus cash! By the time the commission is split with his broker he is probably ends up making $700-1000. I'm sure the agent who has both sides could get your sale price a low enough to offset the cost of the bonus.

happy investing!