I Make Offer, Bank Makes Offer...(!)

[furnishedowner]

I went to the bank yesterday and put in a bid of $22,500 on one of their repo listings at $35,000.  Ancient cute adobe casita fronting the park, but it needed 10K of work.  I had repair bids.

The bank wouldn't budge off of $30,000.  Said it had an appraisal of 35K from Jan. 2009.

Then the bank V.P. caught me by surprise.
BANKER:  "We have 7 repo'd houses here and we don't want them.  We have 500K in them.  Why don't we just sign them all over to you with no down payment".

ME:  "Unhh..."

BANKER:  "We will charge you 6% interest for 15 years on those houses.  You can sell them on carry-back loans, charge 10% interest, and earn $250,000 over the next 15 years."

ME:  "Unhh...!"

Banker:  "Heck, okay then, we'll even forgo interest for 6 months until you get them all sold.  Here's the keys, go take a look.  We'll work with you on this.  Come back to us with a proposal.  You'll make lots of money."

ME:  "Unhh,  don't know...  Okay, I'll take a look."

I took a look.  All the houses seemed over-priced.  One had been gutted.  Every one had a Realty sign lying dead in the 2-foot tall grass in front.

What to do with this "gift horse"?  One of them seems possible, but it needs an AC/heat system, plus the usual rehab.  I am not a flipper, but...

Should I try to come up with a plan, or do what Allagash just wrote:  "I focus on what I know and keep refining it"?  I know furnished rentals.  But I could grow.

I could use your thoughts on this.

Furnishedowner

[jmd_forest]

Any reason they all couldn't be furnished rentals?  Work the numbers and make offers that ensure they make money.

jmd_forest

[IRO]

On one side of this, I see the danger of uncertainty.

If I understand what the bank V.P. is proposing, it is a venture which speculates on the future value of homes.  Sure, I absolutely agree that selling homes on carry-backs or lease options is a great way to make money.

One problem is I’m not quite sure how you would “carry back” a loan amount if the bank is the beneficiary on the deed.  If he suggesting that you take a seller second, then realize that, at least in my state, seller second defaults are non recourse.

So that leaves you with the option of selling these homes lease option.  What kind of position will you be in in 3 years if all your lease option tenants decide not to exercise because the value of the home has fallen another 50%?

So, I’m not sure if I like the plan that the bank V.P. is giving you, I think it depends on gross rent multipliers.

On the other hand, YOU are the investor.

He asked you to give him a proposal.  Are you in a position to give him one?

I’m sure that you have a formula that you follow for cash flow (unless your all cash, and I wouldn’t blame you for that.)  Do you have the capacity to grow by  7 units?  Can you put together a lending proposal where the terms (such as duration and interest rates) will make sense from the standpoint of cash flow?

Maybe you could have the best of both worlds, refine your focus and capitalize on this opportunity.

Good luck with this one…

[furnishedowner]

The way I understood the bank's proposal, each house is deeded to me individually, no downpayment.

All are between 35K-95K, the bank's supposed valuation/investment.  So a 75K house at 6% over 15 years is $633/month.  Then I sell the house, supposedly for more money and wrap a new loan of 10% around the old loan.  The escrow agency would collect, pay the underlying bank loan, and send me the balance.  That new loan would be for 15, 20 or 30 years, whatever works.

To turn a fixer house into a furnished rental is a huge investment of time, labor, material.  I just spent $5,000 redoing a 2-bedroom and furnishing it--new flat screen TV from Sam's Club ($648), new gravel driveway ($550), paint inside and out, shiny urethaned floors, etc.

But now that house will coast for years at $65-$70/day rental income.

But I can't turn all those houses into furnished rentals, can't do 7 at once, no way.

The way I see it, the bank is wanting to unload their over-priced inventory and risk on me.  There is one house that could be an okay deal, not great, just okay.  If they let me have it with no downpayment.

Furnishedowner

[sellnbama]

 Does'nt sound like a great "deal" to me,,unless they need very little $$/work.I really go all out with our rehabs with alot of extra details that others in that price range don't have.

 I would entertain the idea the banker offered if it included you rolling the rehab cost into the loan when you're done(therefore raising the "appraisal").I'm fixing to put a house I done up for lease/purchase to see if it improves traffic.It's a beautiful house on a lake,,but the price range it's in ($179k),,attracts second time buyers who have to sell theirs first.

 I have three couples calling weekly asking if it still is there(and telling me theirs has'nt sold yet).Anyhow,,did'nt mean to ramble about my deal.I have a friend who has had good luck doing just what I told you above.He gets $2-3kdwn with a year option.They take good care of the property because they are buyers instead of renters.

 Let me know if you need any advice on anything if you decide to try it.I've ripped alot of them down to studs and started over.Alotta work,and money,,but it can make sense if you buy right.In this market we are having to adapt out of our comfort zone and get creative.Hope it goes well for you.

[furnishedowner]

Still don't know what to do.  Spent two and a half hours last night looking at every SFR and multiple unit listing on the internet.

Now I am going to drive the ones that can tell me what price per square foot that I COULD buy at.  Ones that are already fixed up and not foreclosures.

The one thing the bank list has going for it is that they will sell them to me with no downpayment.  That's huge.  But not if they are overpriced.  And I don't know if it's an all or nothing kind of deal.

I like the thought of "no payments for six months".  But I don't do a lick of rehab labor myself, other than some cleaning.  I can order people around but I am not handy.  So any work is at contractor rates.

Furnishedowner

[rookieNYC]

FO
Its clear the bank is desperate...Make them an insulting offer...with insulting terms....Let them counter...Seems simple to me...Dont stress over it..You are their life raft..Hit them over the head a few times with the paddle now...They will counter is my opinion...Much easier for them unload and write down the loss than keep these properties...Figure your numbers out and make it a no brainer for you and prepare an offer...thats it..

[fdjake]

"YOU ARE THEIR LIFE RAFT...HIT THEM OVER THE HEAD A FEW TIMES WITH THE PADDLE NOW."

THAT...... is my NEW all time favorite business quote!!!!

[rookieNYC]

my man...knew you would  like that one

[allagash]

Its clear the bank is desperate...Make them an insulting offer...with insulting terms....

Excellent advice.......

Keep the ball in YOUR court....

From "Grandpaw" on Pawn Stars:

I don't trust anybody trying to sell me something

-Mike

[Sean_L]

I would base my offer in these terms.

1.) I would not do a contract for deed with the bank. I would want fee simple title with a warranty deed or special warranty deed.
2.) Offer would be as follows [market value -5% (as repaired)] - (cost of repairs +10%) - cost of sales - holding period expenses: electric, insurance, water, taxes, marketing etc...

Good Luck

[REIER]

This isn't really an opportunity until the bank comes down to earth and starts talking about real deals here. What they are doing now is throwing out the greater fool theory.

As Rookie stated, this is very simple. Go to www.netronline.com/public_records.htm, for your state, and look for sold homes in that area for the last 3 months or so. Write up a down right emberassing offer that makes you blush and see if they react. If they counter, THEN spend some time digging and seeing how much work the places need and what your exit strategy will be. At that point, make your highest and final offer to them and go from there.

Based on what you've written, these guys sound motivated. But what you need to find out is HOW motivated they truly are. If they don't play ball move on and look for other opportunities.

[furnishedowner]

Thanks everyone for your advice.  Keep giving it, I need it!

I'm off to meet a heating/cooling contractor on the one house that I like the price of so far.  I'm pondering the whole thing, it's a big apple and I don't want to choke on that first bite.

Furnishedowner

[justin0419]

FWIW we've installed central HVAC in a couple houses we bought here.  One was about 1100 sqft and didn't require any electrical upgrades.  We put an air handler inside and the AC unit outside.  No duct work was present so our guy had to run all of that.  I believe it's a 2.5 ton unit, but I'm not positive since that was well over a year (and several houses ago). It cost around $3500 for that. 
On another house, we put in a package unit outside.  3 ton I believe.  No duct work on this one either.  It also required an electrical upgrade.  This one was about $5500, but there was extensive electrical work included in that amount. 

[justin0419]

One other concern I would have is just having that many projects going on at once.  It will take lots of people and money to get them all done in a reasonable time frame.  Otherwise, they're just non-performing assets sitting there and waiting for you to get the money and people to finish them.