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.
I spoke to my bank regards the purchase. He said it may not fly due to the property condition. Looks like the owning bank won't list for another 2 months. I feel that by the time it gets listed I could have the cash together to make it a cash deal. I think the property will have limited interest due to it having to be a cash deal. When it was last listed 8 months back the price was dropped to $400k before any offers came in. The highest was $385k. Financed 70/30. Which the bank accepted. (this was the short sale)There's probably about $50-80k in repairs. Could be worth about $470-490k, done. Am I likely to have competition from flippers using these amounts?
Mike
If the property is worth $470K - $490K, and needs $50K - $80K in repairs, the flippers would most likely be under $350K. That being said, you could potentially have competition from owner occupants. I doubt buy/hold investors would want it unless rents in that area are really high, but surprisingly, I've seen it happen more often than it should.
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.
Wouldn't you lose your EM deposit on the the other properties you bidded on?
No, for several reasons:
1. It's unlikely your bids will be accepted as-is;
2. Even if more than one of your bids is accepted, until you sign all the extra paperwork that comes along with REOs, it's not a finalized deal. If you don't sign the paperwork, the deal isn't finalized and the EM doesn't go to the bank;
3. If you have any due diligence contingencies in your offer, you can always use those to back out, even after the paperwork is signed.
Brent F., J Scott is absolutely correct about the final escape hatch of backing out with a due diligence clause. But use that advice wisely. You don't want to get a bad reputation in the (very small) real estate community by being the type of investor that gets into contract and uses the inspection clause to back out of a lot of deals. If you find yourself in a bind, use it, but don't make it your standard operating procedure.
One of the reasons we get a lot of very good deals is that everyone knows who we are and how we operate. We do what we say we will do and make every effort to make transactions smooth and not back out of contracts. Establish that kind of reputation, it will make you money.
That being said, there is a practical way to utilize Jon Holdman's advice without making a bad name for yourself.
1. Submit your offers with 1 or 2 day response deadlines.
2. Only submit offers on a property you want, at a price you want.
3. Unless you do a lot of volume, don't submit all of your offers on the same day.
If you make 3-5 offers per day, with short response deadlines, the chances of you getting 10-20 accepted contracts all at once is eliminated. If you are lucky enough to get more than one signed contract back, either you offered too much or you now have twice the likelihood of making a profit. If you can't buy both, take the one you want, and wholesale the other...or get a partner or private money loan or borrow from family or do whatever it takes to make the most of your good luck. Or, if all else fails, use a provision in the contract, such as due diligence, to back out.
One additional piece to what Brian Burke wrote is to including in your offer "Earnest money to be provided by certified funds within 48 hours of mutually executed contract." Mutually executed contract (MEC) may be a CO term, but the idea is simply that when you arrive at an agreed upon contract that everyone signs, you hand over a certified check. Sometimes they want a personal check with the offer, or, more commonly, a copy of a personal check. They can't cash a copy. So, they will want certified funds in any case.
I didn't mean 10-20 offers all at once, either. If you're actively searching, you'll be doing good to look at 10 houses in a day. To do that, you might review 20-30 potential listings. Out of the 10 you choose, a couple will be withdrawn, under contract or something. Go see the rest. Write 2-3, maybe four offers with short deadlines, as Brian says. If you're like me, you do this once a week, so getting getting enough offers made takes weeks, maybe a couple of months. If you're making offers sight unseen or have helpers, this can go faster.
Even after the offer officially expires, the bank may still respond. If you're still interested, respond back. If not, tell them "no thanks."
Keep in mind the WORST possible response you can get on your first offer is ... "we accept." You just left some money on the table.
Banking on one REO is not the way to go. In addition, Banks are not to keen on accepting offers with financing, especially if they have to make repairs to bring the property up to move-in condition. Your best bets are either a cash offer at or above list price, or find other REOs similar to what you liked to place an offer on.
Thanks. I got some great advice on here. I decided to nix it. I had an opportunity to view with no furniture in it. I spotted tons more issues. Good news is I have a contract on a nice property that will fit my situation much better.
I am not sure how much advantage ALL CASH has. I buy properties to hold and rent, and typically do it all cash, and will refinance after taking possession.
So far the all cash hasn't really been that beneficial from what I can tell. Last 8 REO offers went no where.
Right now I have bids on two REO properties and after submitting initial bids and they asked for best and highest, resubmitted bids and gave 48 hours of offer acceptance deadline and both expired without any response. My offers are usually CASH, AS IS, INSPECTION CLAUSE, 10% EMD rounded to nearest 1K.
How much advantage will it give me if I waive the inspection? I am not sure. I could spend $500 to do an inspection prior to the offer, if needed.
Someone mentioned FNMA doing necessary repairs. I also found that to be very subjective. I actually had a deal on a FNMA property last year. Listed at 180K, after a series of back and forth we reached a deal at 160K. The title agent they assigned is an idiot and would not respond to my attorney's repeat request to examine the title and lien search work, then 1 day, yes 1 day before closing they said they had a title defect, some typo in the legal description discovered during a survey which I paid for, prevented them from selling. They had to contact previous owners to have them sign something, or they have to reforeclose the house. That's after I spent $500 on an inspection, $200 on a termite/pest inspection, $350 on a survey, $300+ for HOA document fees and application fee...I was pissed off. They cancelled the contract. Listing agent promised to give me first shot when it's relisted.
Six months gone by and one day I noticed the property's back on market for a week. No one told me. I called my agent to follow up, yup they have gotten the previous owner to sign some affidavit and it's all set. I sent in the same offer, with an additional contingency - I need to walk the property once more, to assess if a reinspection is needed. They accepted.
I walked into the property, WOW, musky smell, and no electric. Touched one side if the wall and it's wet. Went outside and looked and an outside light fixture had fallen off the wall socket, rainy season in south Florida has done it's damages, water gotten inside that wall, and caused the sheet rock on the inside to swell and warp. I told them I need an inspection. Got a pest control company out and did a mold test. Came back with black mold at a VERY HIGH ppm density. The mold company quoted me 10K to do the mold remediation which only include the treatment, but not the repair of the damages. That wall has the kitchen counter and cabinets against it, and it's a complicated one to repair.
I showed the bank the 10K quote I got for the mold remediation. Plus it's their fault for letting the electric service to run out, and the entire summer rainy season water has been penetrating inside and no air conditioning. I said either reduce price by 10K or have the mold remediation completed before my purchase.
FNMA says the deal was 160K, mold or no mold, take it or leave it. They will not reduce 1 penny, or treat the mold.
Yep Sam,
FNMA is ridiculous right now with their short sale and REO valuations. For REO 's in good shape, that want to sell it for 20% over FMV, using their Homepath financing which doesn't require an appraisal. I just had a FNMA short sale at $135K, and FNMA countered at $180K. Buyer paid for FHA appraisal that came in at $145K. FNMA said, $180K, take it or leave it.
Usually, I don't waste time viewing a property until offer accepted. Sometimes I might do a drive by if it's convenient to another property or I'm in that area...Banks in my area usually say highest and best and I increase $100 no more...I never get into a bid war for any property, too many out there...
FYI...Bank accepted an offer, I went to view, severe floor joist in 2 rooms, went back to bank and asked for 1,500 reduction, bank said no...FOUND BETTER PROPERTY!!! house was not for me....case closed...You have to be prepared to walk away from a deal....
Wayne, the way FNMA operates doesn't make sense. I wonder if it's more the individual asset manager or whether it's some sort of policy guiding them? Do the AM have much latitude in deciding?
I was asking them to either discount 10K (for mold remediation only, not for the repairs), or to handle the remediation themselves. That's all. Even the listing agent when I told them about the test results said "Oh we can't sell properties with black mold..." then they called my agent and said "NOPE, FNMA said they will do nothing, take it or leave it."
Oh and I was buying a townhouse in a development, where similar properties are all over, and at the time most recent sale for the same house on same street was 145K and 132K. It was the most frustrating experience, and throughout the whole process they changed AM on it three times.
@Sam Leon
It's FNMA itself, and it's nationwide. There are petitions circulating nationwide through the short sale community. I had an appraiser call me the other day to verify a comp, and he told me one problem was FNMA wanting a value 120 days out. In their short sales, BPO agents tell me their guidelines are to Not use REO's and short sales as comps. Of course in some areas these are 80% of the comps. I tend to stay away from FNMA REO's and short sales.
Another thing that's really annoying about FNMA. When they counter you the first time, they sent back a whole bunch of REO addendums for me to fill out and sign, which basically nullifies every item in the FAR/BAR contract. What I didn't know, was that day was the "Acknowledgement Date", which was what all the subsequent events measured from.
So while I was still back and forth with them on prices, closing dates etc, the clock was ticking on the acknowledgement date, which I assumed (incorrectly) was the same as the "Effective Date". So once all the terms were agreed upon, and both parties signed, it was day 7 from their initial counter date - acknowledgement date. On their form I had 10 days from AD to perform inspection and cancel contractor. I read the REO addendum again and noticed the term, called my agent, who told me AD is same as ED...called my attorney, said same thing, don't worry AD is another term for ED. I pressed my agent to call listing agent, who had to go check with listing broker and came back to tell us, AD was 7 days ago, you have 3 days to inspect and decide.
Sent us on a big rush to hire the inspection, and it was a long weekend too.
I thought it was totally unreasonable to start the clock on the first time my offer was countered.