Handyman · St Petersburg, FL · Member since 2008 · 32 posts · 0 votes
Hi,
This is a bit of a follow up from my previous post. I'm very interested in a REO property that's about to come on the market soon. I tried to buy it as a SS but it ended up at foreclosure. The bank had accepted my offer but couldn't get it all together before the other department foreclosed. I'm trying to get the jump on it as soon as it hits the market. It has numerous issues that would put most, but not all, people off. I will be using bank financing @ 80%. I can go 70% if it helps any. I'm quite familiar with the property and all it's major $$$ issues. I was going to have my offer go in with no inspection contingency and no appraisal contingency, ( my feeling that the property is easily worth what my final offer would be, especially if I put down 30%) so the bank financing should be covered there. Just wanted to see what other investors thought about going about it this way, or any advice they could give.
Thanks in advance,
Mike
Our agent was told by a FNMA rep that they (FNMA) were required to make repairs before they put the home up for sale. This seems counter to just about everything we've read or been told about REO properties. Can't see why they would put money into a home that requires a complete gut now and possibly mold remediation since no one bothered to clean place after the pipes burst. No work has been done to date. It looks like someone finally came last week to clean the ceiling collapse debris off the floor but that was it.
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They will do things to make the property "safer" to go through so there can be showings with less risk. Drywall boards will be screwed to the ceilings, but not properly hung and taped - just screwed over the areas that are collapsing.
Stairs will get railings - nothing fancy, just pieces of wood to allow for handrail. Windows will be boarded if broken. Electricity will probably be turned off so that poses no hazard. Exterminator will fumigate if necessary.
Those are the types of repairs they will do.
Now, if the mold is severe, or if it is determined to be the hazardous black mold, then the bank might require the prospective buyers to sign a release form before going inside. Respirators are a good idea for this scenario, if it is encountered. Many types of mold fortunately aren't seriously hazardous.
For what it's worth, I've seen electricity on in a few cases. One where they wanted people to realize that the central AC worked fine. Another where the basement had a sump pump that had to run 24-7 - seems that there might have been a natural spring too close to that house. Good flashlights, and spare batteries just in case, are essential if you are going in to see REO properties.
Trying to buy a specific REO will break your heart. The best offer would be at or above their listing price, all cash, no contingencies and a 14 day close. Unfortunately, sounds like your offer will be financed. Are you sure your lender with come through if the property has major issues?
My usual advice is to find 10-20 REO properties that you could live with and make offers on all of them. But maybe this doesn't work in your case.
No, not all REO's are cash. But, what JON is saying is that an all cash offer, quick close, looks more likely to close to the bank/seller than one with a financing contingency. But, no inspection would help, and get a pre-approval(not prequalified) subject ONLY to appraisal/clear title. This may, or may not, cost you a few hundred bucks to get actually approved.
Not sure I understand what Wayne Brooks is saying, either, but he's correct about what I was saying about cash. I've bought REOs with financing, but a cash offer is better. And, if the REO is in poor condition, which you sort of imply is the case, conventional lenders won't finance it. If the property is in poor condition, the bank will say "cash only" or some such in the listing.
Michael, you may have to pay an "application fee" because your lender is actually going to do some work. In addition to your credit report, they will verify your income, verify your employment, expenses, other debts,etc. They will do the full underwriting on YOU, same as if you have a property under contract. In a typical "prequalification letter" they pull your credit report, and "take your word" for the rest.
The only problem I may see come up is what Jon was eluding to as to the condition and my bank. The property is very livable but needs a new roof. Few water marks on ceiling. Dock needs replacing. Big ticket but nothing that prevents anybody from moving in. It also has a floor issue that necessitates it being replaced. This is the item I am concerned about regards the bank financing. It's not an immediate repair and is only in the kitchen. area. It will be a "spooked" thing as opposed to an actual structural issue. I'm thinking if I just leave the appraisal contingency in and the bank doesn't like the floor then I should be able to use that to get out of the deal. I have submitted to credit reports and W2's and 2 yrs tax returns. No problem on my end with all that.
Bad roof will more than likely kill a deal if someone goes out to look at it. Appraisal just talking about an aged roof is difficult to get around. Depending on the bank you might have a leg up as an owner occupant.
Don't wait for it to "hit the market" if your heart is set on this. Contact the REO department, get the listing agent's information and send the contract directly to the listing agent using them as the buyer's agent. You also might want to try to get in touch with the asset manager directly and send the offer to them. It can be done, but it is a lot of work. My expectation is that this house needs enough work that they aren't interested in dealing with a loan.
Your lender will look to the appraisal to establish the condition of the property. If the appraisal says that there is a bunch of stuff wrong with the house, they will most likely either require that those items be corrected prior to closing (not going to happen) or deny the loan.
The bank that owns the property is most likely aware of the condition of the house, and they know that a buyer with financing is going to have that problem so they will favor cash offers or offers with such high down payments that the buyer's lender might look the other way.
You might try private money financing. You can typically obtain this at 70% LTV and property condition items such as you described will usually be tolerated so long as you can demonstrate a plan and the ability to remedy them. That type of financing is more expensive, but it might get the deal done and you can refinance out later.
As to your question about whether REOs are all cash, Wayne Brooks and Jon Holdman are absolutely correct, cash is not a requirement. My question to you, is this an investment or do you plan to live in it? If it's an investment, you need to buy at a discount to market value in order to make a profit, and cash gives you better odds of obtaining that discount. For example, we just bought a property listed for $471,000 that is worth $625,000 after it's fixed up. The property had two offers besides ours, one for full price, and one for $500,000. Our offer was accepted...our offer price was $450,000 cash. The other offers were financed. If we were proposing to finance, do you think we would have gotten this deal?
More to Jon's point from his original post, it sounds like you're planning to get a conventional loan on this property. A conventional lender will require that the property pretty much be in move-in-ready condition in order for underwriting to approve the loan.
In other words, something as small as a non-functional water heater, a broker stove or a missing railing going up the stairs can deter a conventional lender from approving this deal.
It sounds to me like this property has more severe issues than that, which would lead me to believe that if you're planning on a conventional loan, you may be unpleasantly surprised.
Make sure you talk to your lender about property condition requirements before going any further...
All you can do is put your best offer forward, and let the chips fall where they may. If you are planning to live in it, discount isn't as large of a consideration so perhaps you can play to the seller's greed and make a strong offer price-wise. You might look to the private financing option if that is available to owner occupants in your area.
Bank addendum's on REOs almost always has an inspection period. Even if you don't include one. Its usually short, though. If you don't put in a financing contingency, and you lender doesn't come through, you won't be able to get your EM back on that basis. If all contingencies expire and you've not backed out the bank will keep your EM. As would I in their position.
I'll go back to my original advice. REOs are a good way to get a good deal. But they are heartbreakers. Make 10-20 offers and you have a good chance of buying one.
Here's my experience with an REO property I closed on last week:
Property worth about 180-200K after repairs, but in need of about 40K in repairs.
Property listed at 150K, dropped to 120K. In no condition to get financing. After much negotiations where I held my ground (bank didn't want to budge) I got it under contract for 85K, CASH, 1K EMD, 10 days inspections, closing in 30 days. Bank allowed inspections (10 days) but did not want to extend the inspections period due to CO wildfires in the area, road closures (I could not reach the property for over a week) and also would not sign off on a release to do a septic inspection. So, I've withdrawn my offer as a result of the inspections, but continued to watch the property.
A month later, property goes to another listing agent (bank wasn't happy with the 1st one, after asking him to list at 150k) and dropped asking price to 100K. This time knowing what I'm in for, I go in with my strongest offer, 75K cash, no contingencies on inspections, 5K EMD and 14 days closing.
Asset manager at the bank probably recognized my name as I had it under contract just 1 mo before but the new listing agent didn't, or so I think. Anyway, after lengthy back and forth, with my "highest, best and LAST" submitted several times, bank seems they didn't want to drop below 85K (coincidence? my last contract price) but I was stubborn, so they finally accepted 75K. It still took them about 30 days to close, last week. So, I'm hoping would be an interesting rehab project on this. To note that this is a mountain cabin that I expect to hold a while before finding the right buyer, not a house in the middle of a city where you get 20X more traffic. I couldn't get close to those in my city, people are fighting like nuts over any REO and driving the prices way up to leave any decent margin for profit.
So, my lesson learned here: be persistent, even stubborn, stick to your price and make cash offer with little or no contingencies if possible.
Just thought I'd share that with the group, now I'm ready to start my rehab, hope to turn out a nice cabin out of this project!
Michael, find a hard money lender who will give you 6 months to get the house in good condition and then refinance it. With 30% down or so on an REO purchase many should be ok with it.
It's gonna add to the cost of things of course, but might be worth it in the end. If you get your back against the wall give me a buzz, I just moved to spring hill and can more than likely help you out if the #s make sense.
This is to answer your questions about Hard Money...but make sure you read the last couple sentences.
Hard Money comes from "Hard Money Lenders". They are people (or companies) that specialize in Real Estate loans on properties or to people that banks won't lend on/to, such as the ones you're discussing here. For that specialization and service, you pay a premium.
They'll still run your credit & ask for financials just like a regular bank, but they'll also look at the deal, to make sure if they have to foreclose, they can make money on your deal. Since you're going to live in it, it will be handled a little differently than an investor Hard Money Loan would be, but similar steps.
Many will require you to have the property under contract before they'll even talk to you...catch 22. If they're interested in the deal (which means if you don't pay up, they'll be ok handling the property themselves), they'll charge you "points" to make the loan - anywhere from 2 to 10% of the loan amount. In most cases they'll also ask for some "skin in the game"/down payment, which looks like you have no problem based on your previous posts. And then they'll charge you a very high (compared to banks) interest rate, usually in the neighborhood of 12-18%. The terms of the loan are usually 6-12 months with a balloon payment at the end, with options to extend costing more points.
The answer to how much, is usually still close the 70% rule. They'll typically lend up to 70% or the ARV. And they WILL pull their own comps to decide this. So you have to know that you'll be able to buy the property, fix the property, and PAY THEM BACK when you're running your numbers.
The general idea behind this type of financing is what Aaron Churnick mentioned Above:
You get the HM loan, fix the property in a few months, then go to a bank and refinance into a normal mortgage (which pays off your HM loan). Another note here, some banks require 6-12 months of payment history (seasoning) to be able to re-fi.
***READ THIS***
Now, all that being said, when faced with multiple offer situations, the likelihood of you getting your offer accepted with a financing contingency on an REO, is very low. Cash & no contingencies is king. So a Hard Money Loan is probably not your best bet for THIS deal--especially considering you probably can't even get one until you're under contract.
But later on down the road, once you get your feet wet, HML's can be deal-savers.
@Micheal
We're in a similar situation. We were three days from closing on our ss purchase in January when the pipes burst in the home. Bank never accepted the new offer they requested from us and the deal fell apart. Place went to auction in May. We've been waiting for the listing since then. Plan to do a cash offer now.
Our agent was told by a FNMA rep that they (FNMA) were required to make repairs before they put the home up for sale. This seems counter to just about everything we've read or been told about REO properties. Can't see why they would put money into a home that requires a complete gut now and possibly mold remediation since no one bothered to clean place after the pipes burst. No work has been done to date. It looks like someone finally came last week to clean the ceiling collapse debris off the floor but that was it.
Anybody have any insights on whether or not FNMA would spend money to make repairs on a home where the HVAC is dead, electrical box is out of code, electrical fixtures are down from ceiling collapses, pipes bursts, appliances and toilet ripped out, and more? There's probably mold now, too. Place is uninhabitable. Can't see any bank approving conventional financing given the significant damage. Doesn't seem like FNMA would put enough in for it to present well so why would they bother? Why won't they let us really take it "as is" and let our contractor do the work once we own it? We already have an estimate for full renovation costs since we needed it to make our revised offer.
Seems like it just shouldn't be this hard but I've read enough here to know that it is! :-)
Kelly D. hope it works out for you!
Where is the property located? Just being nosey, nothing like a hot summer followed by the recent rains to stimulate further mold growth. Hope that's not the case for you, or if it is at least that helps your negotiating position!
Our agent was told by a FNMA rep that they (FNMA) were required to make repairs before they put the home up for sale. This seems counter to just about everything we've read or been told about REO properties. Can't see why they would put money into a home that requires a complete gut now and possibly mold remediation since no one bothered to clean place after the pipes burst. No work has been done to date. It looks like someone finally came last week to clean the ceiling collapse debris off the floor but that was it.
...
They will do things to make the property "safer" to go through so there can be showings with less risk. Drywall boards will be screwed to the ceilings, but not properly hung and taped - just screwed over the areas that are collapsing.
Stairs will get railings - nothing fancy, just pieces of wood to allow for handrail. Windows will be boarded if broken. Electricity will probably be turned off so that poses no hazard. Exterminator will fumigate if necessary.
Those are the types of repairs they will do.
Now, if the mold is severe, or if it is determined to be the hazardous black mold, then the bank might require the prospective buyers to sign a release form before going inside. Respirators are a good idea for this scenario, if it is encountered. Many types of mold fortunately aren't seriously hazardous.
For what it's worth, I've seen electricity on in a few cases. One where they wanted people to realize that the central AC worked fine. Another where the basement had a sump pump that had to run 24-7 - seems that there might have been a natural spring too close to that house. Good flashlights, and spare batteries just in case, are essential if you are going in to see REO properties.