Getting a deal on an Overpriced REO Property

Buying & Selling Real Estate
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Getting a deal on an Overpriced REO Property

Eric Frissell
Investor · FL · Member since 2015 · 7 posts · 0 votes

Hi guys, long time listener, first time caller... I have found an REO home in Florida that needs some work that I would like to fix up and move into. It's a dream house, in a dream location, but has a few issues that would need to be taken care of before I can move into it. The bank has held the property for 7 months and is asking way too much for the house given the work that needs to be done to it.

The situation: First and foremost the original wood siding is rotting all along the base, under some windows, a bit under a gable, and a few random spots so it NEEDS to be replaced and I'd prefer to replace all the windows at the same since they're single pane and will need to be replaced eventually.  In the interior there is some mold on an interior wall from a leaking toilet valve and the A/C will need to be replaced. Outside of the siding and windows the house is what an investor would look for to have an easy flip; carpeted floors, laminate kitchen counters, old paint etc... .

The financials: The house was sold last in 2004 for 500k, was foreclosed on in October of 2018 and went to auction for 650k where it didn't sell.  The bank has then listed it for 650k but has come down to 400k.  Comps in the area have it priced between 400 and 600 with all the repairs finished.  I don't want to pay any more than 280k to buy the house and complete the siding and windows so if the bank isn't willing to negotiate I'll walk away and find something else.  The house is 3,200 sq ft so I estimate vinyl siding and windows to be approximately 40~50k (25~35k for vinyl siding, 10~15k for windows).  Full disclosure I grew up in Michigan where vinyl is the siding of choice so if vinyl is a no-go in Florida then I'll have to refigure the cost for siding. 

What kind of financial tools do I have? I will be taking out a mortgage loan for the property and would prefer the mortgage covers the house and repairs. I believe my realtor has suggested making an offer of 270 but having 50 of the 270 placed in escrow for repairs to the siding/windows/air conditioning so that it's livable however I've never dealt with an REO nor placing money into escrow for repairs. If this was you how would you do this?

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William Robison
Real Estate Consultant · Kansas City, MO · Member since 2013 · 388 posts · 200 votes
7y

Great advice Brant.  Yes, the trick to those, which are far fewer these days than several years ago, was to provide a very professional scope of work with the offer to substantiate why their listing is worth far less than they believe that it is.  Here is why:  Typically, a bank hires a BPO (Broker Price Opinion) or an agent to provide a estimated value in the current condition.  While many agents are professional and understand the value of needed repairs, many others are not.  With that, the bank often gets too low of an estimate and believes that their asset is worth more.  With substantive formal presentation to the asset manager, an investor can sometimes impact the perceived value of the asset.  I used this successfully several times in the frenzy of short sales, and the last time it was effectively used in the current hot market, was late 2016 on a house bought for myself.  I was able to use this tactic with Bank of America, so even the big banks can be swayed with the strategy, but it takes work on presentation....and some luck.

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  • Brant Richardson
    Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
    7y

    I was just watching a video on youtube last night about buying short sales and foreclosures from the bank.  Check out Phil Putejovsky's channel he makes great real estate videos.  Basically the bank has the property inspected and value assessed.  They will be willing to take a certain percentage of that amount.  Each bank has their own percentage, it changes and it is not public knowledge, 84% is the example he used in the video. They pretty much won't budge lower unless you can show why their assessment was wrong.  With that said, my real estate agent in Kansas City was able to get the price way down on a short sale that had foundation problems, about 66% of their asking price.

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  • William Robison
    Real Estate Consultant · Kansas City, MO · Member since 2013 · 388 posts · 200 votes
    7y

    Great advice Brant.  Yes, the trick to those, which are far fewer these days than several years ago, was to provide a very professional scope of work with the offer to substantiate why their listing is worth far less than they believe that it is.  Here is why:  Typically, a bank hires a BPO (Broker Price Opinion) or an agent to provide a estimated value in the current condition.  While many agents are professional and understand the value of needed repairs, many others are not.  With that, the bank often gets too low of an estimate and believes that their asset is worth more.  With substantive formal presentation to the asset manager, an investor can sometimes impact the perceived value of the asset.  I used this successfully several times in the frenzy of short sales, and the last time it was effectively used in the current hot market, was late 2016 on a house bought for myself.  I was able to use this tactic with Bank of America, so even the big banks can be swayed with the strategy, but it takes work on presentation....and some luck.

    2Reply
  • Eric Frissell
    OP
    Investor · FL · Member since 2015 · 7 posts · 0 votes
    7y

    Thanks Brant, I'll check out his channel when I get home!  Does that mean that banks do not mind holding on to houses?  I could be totally wrong but my understanding was that banks generally don't want to hold onto a house so if a house hadn't sold after 3 or 4 months they would be more willing to accept a larger loss?

    66% of asking is pretty good!  Do you know if the bank took the appraisal value minus repair costs to get the price down?  Unfortunately for me I think the land the house is on is worth 250 alone

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  • Brant Richardson
    Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
    7y

    Haha, William Robison is my man in Kansas City that made investing out there possible!

    1Reply
  • Eric Frissell
    OP
    Investor · FL · Member since 2015 · 7 posts · 0 votes
    7y

    Thanks William!  That is great information! Did you have someone quote all the work that needed to be done or did you use estimates based on your location and the going rate for the work that would have to be done?  Did you need to have an official inspection that you could point to tell the bank an inspector has determined such and such needs to be done, here is a quote from a general contractor for that work?  When the contractor quotes it can you use that tell the bank the property requires xxx in repair costs but keep some of the work for yourself such as redoing the painting and the floors if that is a mess?

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  • Eric Frissell
    OP
    Investor · FL · Member since 2015 · 7 posts · 0 votes
    7y
    Originally posted by @Brant Richardson:

    Haha, William Robison is my man in Kansas City that made investing out there possible!

    With that kind of knowledge I bet!

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  • Brant Richardson
    Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
    7y

    You are right, they definitely mind holding on to properties, the longer it sits on the market the softer they will get.  There's nothing wrong with making an offer that works for you.  Get the negotiations started and show them why it should to be less.  

    I was knocked off my feet when that short sale went through. I think the original offer was 6 months or more prior and I kind of just wanted my earnest money back.  That was 2015 I think, the market has changed quite a bit since then.

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  • Eric Frissell
    OP
    Investor · FL · Member since 2015 · 7 posts · 0 votes
    7y

    Oh and another question William.  There is some mold growth on a first floor wall from a leaking toilet shut-off valve in an upstairs bathroom so in the scope of work are you able to state something to the extent that to completely remove the mold it will require new drywall and removal/re-installation of carpets?  Or will you have to get a quote from a mold remediation specialist and do whatever they recommend? 

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    The bank already knows what’s wrong with it. The bank is not going to escrow anything for repairs. You’re not going to get this house for $300k any time soon....they will drop the price in increments over time. 

    1Reply
  • Brant Richardson
    Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
    7y

    Yes, like Wayne Brooks said.  For the most part, the way they soften up is by dropping the price.  Then they will only accept a certain percentage less than the new price.  If it sits for a certain number of months they will drop the price more and only take a certain percentage less than that and so on.

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  • Eric Frissell
    OP
    Investor · FL · Member since 2015 · 7 posts · 0 votes
    7y

    So, to keep this post alive, here is what I offered and from a GAAP accounting standpoint I think it's reasonably generous.  To sum it up they have a property that requires $65,000 in immediate repair - siding, new AC unit, and an unknown amount of mold remediation which I planned to do (drywall removal/installation and paint).  The property was foreclosed, according to the realtor it was then purchased at auction by the bank for $255,000, originally listed by the bank for $650,000 and has been trickling down to $400,000 and the most recent offer they've had was "between 300 and 350."  The property is 3,200 sq ft, last sold for $500,000 in 1994, and fixed up may be worth $650,000.  The prices in the area are very inflated and most properties in the area that are listed above 400,000 are on the market for 6 months or longer.  This one is no different and has been on the market since October.

    The offer: 280k for the house, 60k into an escrow account for repairs, and I'll take out a mortgage through the listing bank at a 4% interest rate which is slightly above market for a mortgage.  Generous for the bank because GAAP accounting allows the bank, upon selling the mortgage, write the profits of the entire mortgage into their books.  It's called "mark to market" accounting and they would be able to record a sale of the house for 280, credit 60k for the escrow, then record the 280k mortgage as a debit of $480k.  Pretty reasonable of an offer to put the repairs on the mortgage because it inflates the value of the mortgage while still giving me some $$$ to do the repairs.  The bank would probably sell the mortgage at this point but they'd still be able to record decent profits on the sale of this house.

    Here's what I did; I called the listing agent and asked if she would be interested in dual representation and naturally she said yes.  Viewed the property with the field manager, she bragged about how most of her business is hedge funds, and when she asked what I was thinking basically walked off and said the bank is going to put the money into fixing it themselves.  Okay lady, I'm sure those hedge funds will take care of you when you need it just like you did them.

    I have no contacts at the bank and the realtors are going to make the process impossible so I've decided to walk away and save myself the trouble of doing 3 months of drywall and dealing with contractors.

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  • Brant Richardson
    Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
    7y

    The numbers don't work and you walked away, nothing wrong with that.  Next price drop shoot them an offer that does work.  Don't let rejection bother you.  Dual listing agent was a good idea, she's already been dealing with this property for 10 months, I'm sure she's ready to get it done with double pay.  

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  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y

    REOs dont make repairs. Your agent sounds like they are unfamiliar with purchasing foreclosures.

    [email protected]301-893-4635Podcast Guest on Show #192
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  • Eric Frissell
    OP
    Investor · FL · Member since 2015 · 7 posts · 0 votes
    7y

    Agreed, it was such a weird thing for her to say.  I think she watches too much HGTV

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    @Eric Frissell You’re attempting to convolute apples with watermelons.  Regardless of your interpretation or “logic” with GAAP accounting....

    -you are offering $220k net on the house.....they have declined “$300-350k”.

    -any potential "profit" from your offered to them from a mtg from them is totally irrelevant, the REO disposition dept works purely with the asset and who you give the mtg to, and what possible profit that may generate, is irrelevant. Besides, a 1/2% "premium" is only worth about 4 points.

    Also, they didn’t “purchase the house for $255k”.....they were owed Much more than than that and they “simply refused to accept $255k (the highest 3rd party bid) for the collateral” at auction.

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  • William Robison
    Real Estate Consultant · Kansas City, MO · Member since 2013 · 388 posts · 200 votes
    7y

    Sorry I missed this notification. When I negotiated with the bank on the cost of repairs, yes, I did give them estimates on the larger items on the contractor estimate form. For the rest of the house, I used my own, which they knew I was developing. As for the banks knowing what they have to sell. I couldnt disagree more. REO and Short Sale agents are now in a volume business. They have so many reports to complete for the lender, but rarely does this include a comprehensive look at the property. When the agents do have a deeper scope of the needs, they often do not know the true cost to remediate/renovate. This does not include the great agents on BP. Most of them have good knowledge, but there are so many agents without this skillset that are making these sales and lacking the overall knowledge of the renovation industry.

    Further, yes, this is 2019 now, and much has continued to change.  The smaller the asset company, the better chances of a realistic conversation now.  Timing can also be important with the bank asset manager.  The have monthly or quarterly goals.  If they are short, they can be more aggressive, if they have hit their goal, they prefer to not even sell until the next cycle.  I like closings that are fast because it is closer to goal time, and I pay attention to these time cycles.  Close early in the month or quarter, or offer to close fast at the end of a quarter.  

    On the REO deal with the dual agent...I agree. Keep presenting offers. In some states, you can ask for verification that the offer was presented. They are more interested in dealing right before price reduction time than they are after a reduction has been made. They expect the market to bear a bunch of offers with the reduction and will want to wait for the new full price offer. If there is a pattern to their reductions, find it, then offer 7 days before you expect the next reduction.

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