Need Advice on First REO

[jmd_forest]

Took a look at my first bank REO today. 3BR/2.5 BA townhouse with very minor fire damage but lots of smoke and soot damage plus 15 years of deferred maintenance. It will take about $8K to $10K to put it into the condition I'd want before renting it out The bank is asking $189K. I bought one in similar but slightly worse condition 2 years ago for $105K.  The closest sale comp is $165K that you could move right into if you're not too picky.

I offered $105K cash, no contingencies. I expect the bank to reject the offer.

I've never dealt with a bank as a seller before, just haven't had the opportunity. I'm a reasonably new small investor, three properties all bought direct from distressed owners.

Any hints on how to soften the bank up to get them to accept.

jmd_forest

[kdhastedt]

Tell them to stop looking at pictures of it and go see/smell it.  Then tell them to imagine trying to make it not smell that way!  Smoke damage can be very difficult to get rid of.


Keith

[JaredfromIndiana]

I have found that banks just don't give a crap and are not motivated, even in these days.  They list a prop high, then lower it every 30 days or so.  Infuriating...     Please let us know how this works out for you.

[jmd_forest]

Jared,

Thanks for your insight. That's kind of what I figured.  My current plan is simply to resubmit my offer every few weeks until sold. That is, unless I get some better ideas from future responses on this forum.

jmd_forest

[JaredfromIndiana]

Good luck JMD, I would watch this one to see when it comes down in price...

[NorCALInvestor]

Are you making the offer directly? THe banks are being notoriously tough right now because they're losing HUGE amountsof money, so they say.

OFfer lower than previously offered if they reject this offer.  OR wait and see what their counter is.  You'll want to LOOK CLOSELY at their counter because it may contain language that is fitting to you at first, but a closer glance may have you paying extra for transfer taxes, or being penalized for not closing on time.

I let my last REO fall through on bank error. 

Sascha Wayne

[jmd_forest]

The bank has the unit for sale through a realtor. I placed my offer through the realtor. She says she knows it's overpriced but hasn't been able to convince the bank to lower the price. It's been on the market 2 months, but the bank's been carrying it for about a year. I figure their carrying costs are about $1500/month. She says they've turned down offers of 165K but:

1) I have no way to confirm any previous offer actually existed
2) If it did exist I have no way to determine the terms of the offer.

Either way, I offer what make good business sense to provide the cash flow that meets my purchase criteria, NOT to own a money losing property. The closest comp is the one I bought around the corner 2 years ago for $105K.

I'll make sure I review any counter offer closely for language. If I can buy at my price I'd pay a few junk fees just to let the bank feel they got one over on me.

Still trying to figure out how to modify the offer to make it more compatible to the bank.

jmd_forest

[NorCALInvestor]

Problem with Junk fees is that they add up to your costs.  I missed where the deal was, but out here city/transfer tax (Oakland CA) is pretty expensive, look at an extra 10k to your costs in addition to any financing/holding costs you will have, does it still make sense?

You're on the right path
Sascha

[jmd_forest]

Transfer fees would be $837. This is in South NJ.  ARV is about $190K. My offer is about
55% of ARV. In this area you really can't cash flow unless you're total acquisition cost (purchase+carrying+rehab) is less than about 65%.

Even in this market, deals are few and far between. And I'm very picky about what and where I buy.

Thanks for the encouragement.

jmd_forest

[Dave T]

The bank has the unit for sale through a realtor. It's been on the market 2 months, but the bank's been carrying it for about a year. I figure their carrying costs are about $1500/month.

What are the carrying costs that you are adding up to get to  $1500/month?

Property taxes and HOA fees accrue until the property is sold.  Insurance premium and winterizing costs are one time charges.  Maintenance and upkeep are not done, so no cost.  Utilities are turned off.

I don't see that a bank really has any monthly recurring cost for an REO.  Would you please explain?

[jmd_forest]

Opportunity cost on their $196K (upset price) is about $900/month (est) + taxes of about $320/month + HOA of $150/month + insurance of about $150/month (est).

These costs may not be realized until sold or may be a one time charge but they are real costs the bank pays that can be allocated monthly. The longer it sits, the more they add up.

jmd_forest

[Dave T]

I can't imagine a basic hazard insurance policy (no liability, no contents) costing more than $600 per year for a $150K policy limit. 

I don't get the opportunity cost.   The bank did not pay $196K to buy the property at the foreclosure auction, they just took title for the cost of the foreclosure (most likely between $5K and $15K). 

[jmd_forest]

I was quoted $875 for a six month uninhabited dwelling bare bones policy (fire and liability  only - best price I could find after shopping several insurance agencies) on the one I own around the corner from this 2 years ago. And it was non pro-rateable should I complete the rehab prior to the end of the policy.

Every month they don't have the proceeds from the sale they have lost opportunity cost on that money. If they didn't have an opportunity cost for that money, they would have no reason to sell ever.  They make money by lending it out and people paying interest. Tthey can't make money from money they have tied up in a non-performing property.

jmd_forest

[Dave T]

You said the bank is asking $189K, so they probably expect a full price offer to be around 95% of their asking price.  Then assuming they are paying a 6% sales commission plus accrued property taxes and HOA fees (if applicable), I expect the bank is expecting to net $165K on this property.  This assumes that the buyer is paying all other closing costs. 

If you include lost opportunity cost as a carrying cost, wouldn't it be more reasonable to base your opportunity cost on $165K, rather than $196K ?

Don't take my comments the wrong way.  I have never done a short sale.  I am just trying to understand why your offer should induce the bank to accept.

[jmd_forest]

I don't take the comments any wrong way. I'm still learning here and appreciate the responses.  Although I offered significantly below what the bank had loaned on the property, its not really a short sale. The bank bought it at the Sheriff's auction in September for $100. No other bid because their upset price of $196K was more than the property was worth.

I didn't actually expect them to accept my offer( I found out late today they rejected the offer) but figured I'd give it a try.  As Jared mentioned earlier in the thread, it seems the banks are still thinking like its the boom market of a few years ago.

They are significantly overpriced, even for a retail buyer. A similar model well worn townhouse around the corner, but you could move in and live there if you're not too picky,went for $165K earlier this month. The bank is asking $189K and this one you could not move into. It is covered with soot from floor to ceiling, has boarded up broken windows, has had a small electrical fire, tile is falling off bath walls, kitchen is beat, but cabinets MAY be salvageable, at minimum needs fridge,dishwasher,cabinet refinishing, and countertops and carpets have already been removed from the entire house.  However, it is structurally solid, good roof, siding, and trim, and the HVAC looks about 5 years old.

Regarding the opportunity cost: the actual figure will be based on the future sale price. I am using my estimate of their carrying costs  simply to try to guesstimate how motivated they might be.

AFAIC, it's worth an absolute maximum of about $110K. It will cost me a minimum of around $10K ( or so) plus 4 months of MY labor to put it back into shape. If I can't buy it at the price I need to meet my criteria (minimum 10% yield on rental income), I'll let them keep it. or sell it to someone with a more liberal criteria.

I'm was hoping on the bank having a swollen REO inventory and realizing things are not getting better anytime soon, plus an all cash offer with no contingencies.

jmd_forest