Inside Bank Foreclosures:
Fact and Fiction
By The Real Estate Library
Many new investors want to buy properties directly
from the bank. You never hear anyone say, '"'I
want to buy a property from a mortgage company,
credit union or savings and loan.'"'
The attraction to bank owned properties is understandable,
as it is the bank you borrow money from to buy
a home. It is natural to assume that the bank
owns the property. Whether a Deed of Trust or
Mortgage, the title to your property is either
held by a third party or pledged as security for
the loan, so in fact the bank does not own the
property.
You borrow money from and give a mortgage to
the bank. The mortgage is the security instrument
utilized to protect the bank from loss should
you default on the loan. Unless you bought a bank
foreclosure directly from the bank, the bank has
never owned the property at all.
The Lenders Profits
The goal of the foreclosing lender is to gain
possession of the property. The financial goal
is the recovery of the principle loan balance,
accrued interest, late fees, penalties, taxes
paid on behalf of the property owner, court costs
and attorneys' fees. In most states, the laws
are written so that the lender can only attempt
to recover these widely accepted standard losses.
The lender will add in every legitimate expense
when foreclosing. This is what is sued for: the
total the lender claims is owed by the property
owner. In most states, this is the maximum amount
the lender can collect. The laws are written this
way to protect home owners from unfair practices.
The commonly held notion that a bank (or any other
lender) must sell a repossessed property for the
same amount it cost to gain possession and therefore
cannot make a profit is false. If the foreclosing
lender is the successful bidder at the auction,
it will take possession of the property for the
very first time. When this happens, all the rules
change. The lender, now the legal property owner,
can do anything it wants with the property, Rent
it, keep it, whatever. It can also sell the property
for any amount it so desires.
Condition of Title
Often when purchasing foreclosures buyers are
concerned about the quality issued by the lender.
A common belief is that there may be liens or
judgments clouding the title. This is a myth.
The lender will bid at auction only if it wants
the property. The lender, typically the senior
lien holder, wipes out all junior lien holders
or judgments in the process.
If the foreclosing lender does not bid at that
sheriff's sale or auction, it probably doesn't
want the property. This may be due to excessive
superior liens, such as IRS or tax liens. (Tip:
If the lender doesn't bid for the property at
auction, you probably shouldn't either.)
The lender, in an effort to recoup its losses,
will bid on the property, wipe out other lienholders,
then pay the balance of outstanding property taxes
to secure the property's clear title. No lender
will go through the time, effort and expense of
foreclosing, only to lose the property for a few
thousand in back taxes.
Having absorbed these costs, the lender generally
adds them to the asking price and will sell the
property with clear title.
If you have heard that the lender must sell the
property for what they paid for it at auction,
forget it.
Another myth is that all banks are bending over
backwards to give away foreclosed homes. It's
true that the lenders want to sell their foreclosures.
Lenders, banks in particular, are corporations.
These corporations are driven to make money, not
to lose it. A bank has to answer to its shareholders
just like other corporations do.
The business of repossessing properties is not
new. Over the years, many lenders have developed
effective methods of selling their REO's quickly,
with minimal loss.
Property Disposition
Lender practices and procedures vary greatly.
Some widely market their inventory of REO's, while
others practically hide them.
We know of some banks that advertise foreclosures
in daily newspapers, while others demand that
you maintain an account with them (or better yet,
become a stockholder) just to get their list of
properties.
Lenders are in the money business, not the real
estate business. This is why most properties are
marketed through recognized real estate brokers
or agencies. Some agencies specialize in foreclosures
and may represent several lenders' properties.
Brokers may have several investors lined up just
waiting for a good property to turn up. Brokers
can also assist the lender in determining market
prices, suggest marketing strategies, recommend
appraisers or contractors, etc.
Some lenders establish a set price for the property
and will not allow the sales agent to consider
offers for less. Many lenders dispose of their
own properties. Depending on the size and complexity
of its REO inventory, the lender may have one
part-time clerk or a staff of special asset managers
handling property sales.
Lenders with larger inventories often have a
staff dedicated to analyzing and managing the
properties, while at the same time coordinating
and managing the brokers retained to market the
properties. The lender determines the strategy
and the broker markets the properties accordingly.
Investing Overview
Purchasing directly from the bank is the most
popular way to buy foreclosures. It's fairly easy,
and less of a headache than other investing methods
because it involves less complications and risks.
Locate bank or government owned properties in
the newspapers or by researching them at the county
courthouse. You can also contact a realtor, or
use a good listing service. We believe we offer
the best foreclosure service on the market. Decide
for yourself. Visit us at ForeclosureNet. Find
properties that meet your investing criteria,
those that are in your area, price range, size
and style. Determine whether you are buying to
resell or to secure a residence for yourself.
Determine if the property is a bargain by deducting
the lender's asking price from the average market
price of very similar properties in the immediate
area.
Your goal as an investor is to realize a tidy
profit. You can buy property at a 15%-20% discount
and earn a 35%-40% return. As a home buyer, you
want to buy below market value with a low down
payment, low interest rate and reduced closing
costs.
Contact the lender or the broker and meet him
at the property so you can inspect it. Record
any damages and deduct the repair estimates from
your price. Use a good property inspection checklist.
Investors must deduct all expenses associated
with buying, repairing, borrowing, holding and
closing again, from the price they think they
can get.
Homebuyers should negotiate around the four discount
factors: price, down payment, interest rate and
closing costs. The bank, being a lender, can negotiate
all these items.
If you still like the numbers and the property,
proceed with a written offer containing the following:
A statement indicating your intent to purchase
the real estate.
The physical address of the property.
The legal description of the property.
Your price.
Your down payment terms.
Your financing terms.
Your desired closing date.
Any contingencies.
Your deposit information.
Your name, address and phone number.
Depending on the property and several other variables,
you may want to buy a property at 15%-25% below
market value. Start your offers accordingly.
Unrealistic offers will be rejected quickly.
Learn to work with the banks. You can negotiate
around interest rates, price, down payment, whatever,
just stay within reasonable boundaries if you
want to succeed.
Some lenders sell thousands of REO's every year.
Many sell their properties at or near market price.
We know one lender who has sold almost 10,000
properties in the last 3 years, with average sales
of 99% of market value.
Not all lenders behave the same way. Try to locate
those that are more flexible in their property
disposition policies.
When the bank accepts your offer, close as quickly
as possible. Avoid delays and complications from
competitive offers.
Advantages
The advantages to this buying method are many.
There are no liens or judgments to contend with,
no homeowners or tenants to evict, no back taxes
due, and accessing the property for evaluation
or inspections is easy.
The fact that the property has officially changed
hands means that all that work has been done by
the lender. With all the legal work done, the
complications of buying and the associated risks
are removed.
Lower down payments, better interest rates, reduced
closing costs and a discount off the market value
of the property, taken all together, make for
a better than average home purchase.
While you may not be able to steal a property
from the bank, a properly structured deal will
make you the envy of the neighborhood because
you will have a low down payment, low monthly
payments, and a low total price.
For those looking to save money buying their first
home, this is usually the way to go.
Disadvantages
In this industry the rewards follow the risks.
Therefore, the payoff from this investing method
is typically lower than that of buying pre-foreclosures
or buying at the auction.
An REO investor should have no problems achieving
10%-20% discount from the market value of comparable
properties. Savings of 25%-35% are harder to find.
Savings of 40%-60% are possible, but getting rarer.
Other disadvantages include: the lender that
moves at a snail's pace; a lender selling the
property '"'as is,'"'; with no cooperation
in making reparations or allowances; and the very
rare, but always possible problem of evicting
a tenant or homeowner.
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