Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
17y
Vacant homes depreciate fast--vandalism, theft, squatters, unfixed problems get worse. They cost money to manage. Propery taxes must be paid on them. Banks are in the money business, not the real estate business.
Real Estate Investor · Oakland, CA · Member since 2008 · 63 posts · 17 votes
17y
Jon touched on this, I wanted to elaborate: The main reason is that the bank must be able to balance its fixed/floating assets and liabilities.
For example, think of the bank's books when you take a loan. You pay a fixed mortgage with fixed interest rate. This is a fixed asset for the bank. The liability is floating. If interest rates change, the bank loses. For example
1. Interest rates go up - bank could have sold you that same loan at a higher rate - therefore, bank is at a loss.
2. Interest rates go down - you can refinance and payoff early - bank is at a loss.
The bank loses as soon as the market interest rate changes.Therefore, as soon as the bank enters a contract, they want to close out their position. Instead of holding on to your loan and facing the risk of interest rate change (since bank receives fixed payment from you for 30 yrs in exchange for lump sum) - they will sell this (to someone who wants to submit a lump sum in now exchange for receiving fixed future payments for 30 years, like an insurance company).
The bank is an intermediary between buyers and sellers of assets - they make a cut on the spread and transaction costs. Their specialty is managing liquid assets and hedging the risk - not easy with the current volatility of real assets.
Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes
17y
I agree that banks generally don't want to hold on to REOs, but I wonder how the TARP money is changing their attitude. It seems with banks receiving so many billions that they might be less motivated to sell off their REOs.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
17y
I wonder about this, too. The RTC did actually sell off big tranches of properties. So far, it seems the TARP funds are being used to clean up banks balance sheets and to buy other banks, and the feds are getting a bunch of marginal or bad debt. I really wonder if banks are going to hold off on foreclosing, and then just sell the bad note to the government.
Real Estate Investor · Oakland, CA · Member since 2008 · 63 posts · 17 votes
17y
I mentioned the banks always lose when they enter fixed contracts, so they want to balance their exposure immediately.
FNMA & FHLMC were sponsored by the government to securitize mortgages and sell them on a secondary market - the purpose being to loosen/increase the cash flows available to banks for lending. Fannie & Freddie made money from interest rate spreads and transaction costs - and like the banks, their specialty is liquid assets, not real estate.
Real Estate Coach · Knoxville, TN · Member since 2009 · 7 posts · 0 votes
17y
The simple answer...Banks are in the business of lending out money not in the business of owning real estate!
On top of the fact that every non-performing asset requires the bank to hold more money in its reserves, money which it cannot lend out! Thus minimizing the amount of lending (the banks primary business function) the bank will be able to do.
That may all be true, but it doesn't mean the banks are willing to negotiate. I just offered $550k on a $615k REO that's been on the market for several months and the bank didn't even counter! :roll:
Real Estate Investor · Valencia, Spain., Select a State · Member since 2008 · 55 posts · 6 votes
17y
Originally posted by OneTimeBuyer:
That may all be true, but it doesn't mean the banks are willing to negotiate. I just offered $550k on a $615k REO that's been on the market for several months and the bank didn't even counter! :roll:
Was that a 'cash on the table' offer or was it mortgaged or leveraged in any way?
Banks don't like holding REOs because they are still making payments to whoever they borrowed the money from. Plus, management, taxes, damages, etc.
With regards to the Fannie/Freddie rental policy, they will be marketing the properties for sale while they are occupied. It is not their goal to allow the tenants to live their indefinitely.
Real Estate Coach · Centennial, CO · Member since 2008 · 31 posts · 2 votes
17y
Originally posted by OneTimeBuyer:
That may all be true, but it doesn't mean the banks are willing to negotiate. I just offered $550k on a $615k REO that's been on the market for several months and the bank didn't even counter! :roll:
Jon Klaus hit the nail on the head -
Vacant homes depreciate fast--vandalism, theft, squatters, unfixed problems get worse. They cost money to manage. Property taxes must be paid on them. Banks are in the money business, not the real estate business.
There are so many good comments concerning internal matters. Many bankers here in Denver don't know much about much! They think if they hold out they'll get their asking price regardless if they have a BPO. The external factors can cause a property value to go down very quickly.
Real Estate Investor · St. Petersburg, FL · Member since 2008 · 190 posts · 91 votes
17y
OneTimeBuyer,
Follow up with this house. Wait 3 weeks or so and resubmit your offer.
Most of the REO deals I get are ones that I have already offered on. I keep resubmitting my offers every 30 days until either I get the house, or someone else does.
I've had banks reject my offer with no counter, and then made a lower offer 30 days later and they accept it.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
17y
To Steph's point, I've bought 3 REOs in the past two months where my purchase price was LESS than my original offer price. The bank rejected my original offers, eventually lowered the price to below my original offer, and I offered even lower than that. In one case, my purchase price was 50% of my original offer price ($22K vs $44K).
It happens all the time...banks (and listing agents) just aren't all that on-the-ball these days...
That's what we've been doing. Original offers a few months ago were much higher than their current asking price. I get the feeling banks can't accept an offer below a certain percentage. We are waiting for another price drop before we submit another offer.
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
16y
Originally posted by M Read:
Are you all submitting offers through an agent, or directly to the bank? Must be the listing agent, right?
Offers generally cannot be submitted directly to the bank. The listing agent has the job of receiving the offers and then submitting them to the asset manager (the guy at the bank).
So, you should be submitting offers either directly to the listing agent (if the listing agent will allow it), or through your own buyer's agent...
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
16y
Originally posted by M Read:
Next question, HOW MUCH lower than the mls price should I go?
First, pay no attention to the MLS price. Determine how much the house is worth to you as an investor, and offer no more than that amount (preferably less).
In many cases, that will put your offer much lower than the MLS price, in which case it's up to you whether you want to submit it or not, but there's no reason to look at the MLS price first, and make your bid based on that. Just because the seller thinks it's worth a certain amount, doesn't mean it's worth anywhere near that amount to you.
As these wiill be rentals, do i follow the 2% rule?
On a house that will rent for 1250/ .02=65500 - repairs, even though it's listed at $199500?
So I offer $62500?
I would recommend the 50% rule before the 2% rule when making a purchase price estimation.
In other words, if the house will command $1250/month in income, about 50% of that ($625) will go towards all your expenses. That leaves $625 for debt service and pre-tax profit.
If you want to make $100/month in profit, that means you have $525 left to pay a mortgage. At 7% for a 30-year fixed loan, you can afford to carry about $79K in mortgage.
Of course, make sure that your numbers actually support the 50% rule in your area. Are your taxes ridiculously high? Do you plan to property manage yourself? Are there upcoming capital repairs? Etc...
All these things will contribute to the 50% rule not necessarily applying to this property...
Investor · Tucson, AZ · Member since 2009 · 171 posts · 27 votes
16y
Thank you very much. You've been a big help, and I voted for you.
I will check the other numbers as well as I can. I've been trying to learn this math.
MRead