How to acquire REO's as investment properties
Investor · Short Gap, WV · Member since 2016 · 160 posts · 38 votes
@Dakoda Spencer Banks sell REOs to cash buyers and never heard of a bank financing an REO, and you will need to make your offer through the realtor the bank is using. Good luck.
I have seen the bank that owned the REO give a buyer the loan to buy an REO exactly once. It was a smaller local bank that did portfolio loans, the loan that was foreclosed was one of their portfolio loans, the building had six units (so no conventional loan products for this), and the buyer was willing to pay more if they funded it. So basically the bank turned their non-performing loan into a performing loan by doing that. It sure seems to make sense for a banks to do that, but in spite of that it does not appear to be so common ...
So how can I verify if the appraisal is adequate on a property? Do I just ask the bank that is selling the property?
@Dakoda Spencer when a bank does a loan, they will get an appraisal done to ensure that the property is worth at least what you are purchasing it for. If it comes in above the purchase price, great! If the appraisal comes in below the purchase price, then you would need to make up the difference (thus his comment about 25% could become 30% to make it work).
Also, the property needs to not have any health/safety issues, which is probably what he was really referring to. Call a few more banks/reach out to some lenders. You should be able to find some (there are a bunch on BP too) that can get you in with less than 25% down.
Thank you @Ryan Landis, I really appreciate the help! Should I just start another discussion in the forums about where to find some lenders or is there already a place to look for those?
Of course I will call around to all my locals banks to see what they can do for me. Are there any particular questions I should ask when I'm talking to my bank? All I know to ask is what do I need to acquire an REO as a first-time investment property.
Thanks!
@Dakoda Spencer, are you sure you want to spend so MUCH time into trying to beat the Banks - whose business is: to make as much money THEMSELVES out of their assets as possible?...
@Brent Coombs, I'm not sure if I understand. Are you stating that I won't be able to make good returns on REO's?
I am a new investor so I don't know the processes for even the most basic things. I'm under the impression that I can acquire an REO property at a discount rate (compared to FMV) and be able to flip it, hold for cash flow, resell using seller financing (which is what I'm considering right now), and many other strategies. Could you please explain what you said? Any assistance would be greatly appreciated!
Thanks!
It may be helpful to look up previous threads about this very topic. (There are 100's). I had a couple of things to say on this previous thread over a year ago:-
https://www.biggerpockets.com/forums/16/topics/197...
I reckon some of the things @Jeff Morelock wrote are very relevant:- "It is still possible to get a good deal on an REO - especially if your a buy and hold investor, but if you're looking for huge paydays and swinging for the fence, you'll need a time machine to return to 2010 & 2011" - "no matter what the gurus are teaching"! (Is guru-speak how YOU came "under the impression"?)
My usual take on the subject is this: why treat REO's any differently than any other property for sale on the MLS? They're either a bargain or not, and you should walk away if not!
In other words, why not divide up your time putting in Offers to ANY Seller, because you won't know where your bargain is coming from UNTIL one of your lowball Offers is accepted! Cheers...
@Dakoda Spencer, oh, and anther thing: your original post asked "Do I need to be sure to tell the bank that it's going to be a rental", whereas now you tell me you probably want to "resell using seller financing"? So, even though you'll be borrowing 80%, you expect to sell it to some sucker at say 30% more than you're responsible for, at a higher interest rate than you're paying, and probably having to settle for not getting all (or any of?) your deposit back from your "buyer" because they're the only sort of people who could possibly be swayed by those onerous terms - but you expect no drama along the way?
Or perhaps you WANT the drama of being able to foreclose on them - so you can look for ANOTHER sucker? Sounds like guru-speak to me! But, just who IS the sucker here?...
@Brent Coombs, I'm sorry. Yes that was my original question. So, let me tell you the full story. I was looking for people interested in selling their homes with seller financing, since I am low on capital. During this process, I was approached by an individual who likes REI and we started talking. I told them what I was looking for and that I would like to do seller financing in the future when I have some properties. This person directly asked me if I would be willing to help them acquire this one particular property (that is an REO), even if it means I will be selling it back to them via seller financing. They know all the numbers on the house, all the repairs they want to do, and they really know the area better than I do. I would love to be able to help them but I'm still very new to this.
So yes, my first question was about what do I need to tell the bank, but it was because I didn't want to make a post that only I would benefit from for just my particular situation. I have since called some banks and now have a better idea of what to expect and the trouble with not telling them if the property will be my primary residence. I'm just new to RE and don't want to feel like an idiot when I talk to the bank. I feel like an idiot when I ask dumb questions here, but I feel people are willing to help me here.
The individual and I will work out all the numbers, but again, they already know what the bank is selling it for, what interest I'll have on the loan, etc. The individual has already told me what they could put down as a down payment and a rough estimate of what they would be willing to pay for it. This is a person I greatly respect and sincerely want to help.
Thanks for your concerns and your input. I really do appreciate that you are warning me and others.
@Dakoda Spencer, thanks for telling more of the story (but I suspect, still not all). Please tell me it's not THEIR prior home being sold by the bank (at less than they owe)? If you try to be (knowingly) a middle-man in any transaction which MUST be at "arm's length", that has trouble-for-you-warning!-warning! written all over it. I hope you understand WHY the warning. No need to admit it here, but if true, quietly, and quickly, back away. But if not true, how can you help anyway?
If THEY are the ones with sufficient deposit, why aren't they able to borrow the rest? On the face of it, it looks to me like you're in a worse position to help them out than the other way around.
(Or maybe THEY are trying to trick the bank on behalf of the original Owner?) What am I missing?...
An REO is just a bank owned property i.e. owned by the bank instead of an individual or company, etc. However, because it is owned by the bank they have separate disclosure requirements than a standard purchase and sometimes are discounted (not always; market conditions may vary) especially if they are distressed as the bank doesn't always want to make repairs, etc. If on the market, the bank wants the best price and terms.
As long as the lender can qualify you for the home, and you are comfortable with its condition (get an inspection), and you can make a compelling offer, then why not?! If you are purchasing as an investment keep in mind that your loan rate and down payment requirements will be different than if you are buying as a primary residence, so it is imperative that you get approved from a lender first.
@Brent Coombs, no it's not their previous home (unless they aren't telling me the full story). And the reason why this person is unable to get it themselves is because they only get 1099 income since they are self employed. They have the finances, but the banks aren't willing to loan them since they don't have w2 income. When they approached me about this whole deal, they knew that it would be a slim chance but they wanted to ask anyway. I told them that I would love to help but I need to learn more about the process first (of course) before I felt comfortable moving forward. I want to make this a win-win-win situation for everyone involved (me, the bank, and the end buyer). I have great credit and low capital, they don't have any credit that a bank would consider but they do have the capital. I would really like to assist this individual get their home (that they have been watching, even before it was bank owned) but I want to make sure all necessary steps are taken to protect everyone involved.
In no way am I attempting to cheat anything or anyone. I just want to see if this would be possible. If it isn't, I'll just tell the individual and they will understand. If I ever do post anything wrong (even if it isn't related to this topic) I definitely want people to caution me. That's what keeps people out of trouble and saves everyone from a lot of headaches and nasty paperwork.
@Heather Boren, thank you for your input and assistance! It's a lot different than I thought it would be but still not that complicate after I start to get the basics of how they work. To be honest, I'm starting to like talking to the banks about properties more than the regular seller. Thanks!
@dakota
@Dakoda Spencer no problem! I also suggest making solid relationships with the asset managers too.
@Dakoda Spencer You are working on something that in theory sounds like it should be able to work, however there are a lot of moving parts. I can say that almost for certain you are going to be violating some term of the loan that you are attempting to acquire. Generally speaking you aren't supposed to tell the bank you that are wanting to do X with a house that you are purchasing while you are planning on doing Y. What you are trying to do, in very broad terms, is what I do on a regular basis. Here is the BIG difference: I use private lenders to create the loan and everyone that is involved has 100% disclosure about what is going on. Traditional banks have a very complex and far reaching set of rules that they need to follow when loaning money. Private investors on the other hand have very few rules that they need to follow in comparison.
In numbers here is how my typical deal would work, for ease of discussion I am going to assume the FMV of the house to be $100,000.
I would arrange to purchase the house from the current owner (doesn't matter who it is, bank, probate, private party, tax sale, etc) for approximately $85,000. I would find a private investor that would fund a loan for $70,000 on the house. The buyer that I find would be agreeing to purchase the house for $110,000 (a premium of $10,000 to $15,000 is normal regardless of price.) I would have the buyer putting at least 10% down, in this case $11,000. Then I would loan the difference of the $70,000 and the $99,000 ($29,000) to the buyer as a second position loan. Now.... Let's do the math:
Purchase price -85,000
Private Loan +70,000
Buyers Down +11,000
___________________________
Net of funds other than mine = -4,000
So I end up with a loan that has a face value of $29,000 that I only put $4,000 into. The interest rate that I do on those is very modest for the $29,000 but when you look at the return on what I have into it i am closer to 60%.
This is not the easiest deal to structure and explain for most investors, for others it is even more difficult to understand.
The reason that I went through this exercise for you is to make this point; You need to start with a more experienced investor and work your way into REI. You are attempting to basically get around the system in such a way that is borderline loan fraud in my opinion. I realize this is a fairly harsh observation and may be hard to take, but if you want to get into REI and be successful at it you need to crawl before you walk. Based on the conversations here and the questions that are being asked I am seeing that you are needing to start with either a more simple deal, or a partner with the type of experience to guide you through the process.
I have found that most successful investors are happy to share their knowledge and help a new investor that is willing to put in the time and do a lot of legwork. They are normally interested in helping others and sharing their knowledge and they understand that there is way more than enough to go around. Others have recommended this and I strongly agree.
Most importantly, don't give up and don't get overwhelmed with any of this and keep learning.
You should consider speaking to one of local realtors about how different real estate transactions work. Also, if this is your first real estate transaction, I suggest you stay away from any complicated deals like this one. Not sure how seller financing comes in place here because you can't offer seller financing with a property you don't own outright.
Sounds like what you need to look for is someone who is willing to offer you seller financing for the property you are purchasing from them.
@Dakoda Spencer I gather from your posts that your perception is that REOs are good deals. Yes, they can be. But not always. I've come across a number of REOs that banks are trying to offload at full ARV. Always verify a property's value on your own and with your team (real estate agent you can pull recent sold comps of similar homes in that area).