Creative Real Estate Club

“Foreclosure Profit Machine” Chapter 6

Simply put, banks get stuck with properties when they don’t have enough equity in the property to get it sold to an investor prior to an auction. If there is little equity in the property, there may not be bidders at the auction who are willing to buy the property at a high market price. Therefore, the bank ends up owning the property after that auction.

Oftentimes, a bank will end up with the property, because it would not negotiate with the investors who wanted to purchase prior to the auction. The bank simply wasn’t willing to accept the offer and ends up owning a property that’s in poor condition. They may lose even more money on it. These, quite often, are the properties which investors end up purchasing at extremely low prices. By extremely low prices, I’m referring to forty to fifty cents on the dollar. Not bad.

Another situation where the bank might unwittingly end up with the property is when there is an IRS lien, or child support is attached to the property. The IRS could have 120 days to take back the property, even after the auction. Many investors simply don’t want these properties because of that risk, so the bank ends up with it. If the bank does end up with this type of property, it wants to get rid of the property quickly. It is rare that the IRS will really do much, if there is little apparent equity.

So why will banks sell properties at low prices?

Banks have to get rid of these properties, before it’s too late. If they cause the bank to incur a higher or more negative credit rating, these losses may damage the banks’ credit ratings. Like consumers who have bad credit, banks whose ratings are low pay higher interest on the money they borrow to lend. As a result, banks could also end up losing money, because they become less competitive, receive smaller margins, and make fewer loans.

Further, when banks make large numbers of non-performing loans, these banks are going to be more heavily scrutinized by the government. Again, this is something banks would rather avoid, for obvious reasons. These banks typically are labeled as being abusive and taking unnecessary risks with their clients. They don’t want that reputation.

Another thing banks consider is that they don’t really want to fix up these properties. They want to move them quickly. In some regions, we have seen a recent trend where banks do go ahead and fix up some of the properties. This only occurs in rare instances, where there is significant appreciation going on in that market. In these markets, banks can possibly make up some of their losses by fixing up properties and selling at full retail price.

Finally, banks simply don’t want to manage and maintain these properties. In most cases, they’ll hire good realtors to go out and market these properties for them, rather than do it themselves. They don’t want these properties, and they don’t want to deal with it. This is where you, as a smart investor, come in.

 

The bottom line is that these banks will dump these properties, especially if they are in disrepair. In other words, they know these properties won’t sell easily “as is,” and they don’t want to hold on to the property and incur significant holding costs over a long period of time. They will tend to sell these properties based upon the “time cost” of holding properties, rather than their financial investment alone in the property. They simply don’t want this property. It’s all about the money, and they don’t want to lose it.

 

Would you?

Many of these properties are in a fairly poor condition, for some very obvious reasons. The owner walked away. They may have abused the property. Maybe there were even some serious mental or physical issues involved, which did not allow this person to take good care of the property. Whatever the reason, the banks end up with massive liability on their hands, which needs to be to taken care of soon.

I strongly recommend you look take the free trial on our web site www.tjmarrs.com (click on the “Tools” link)

There are many REO properties listed there and updated regularly. You can also obtain other important information, such as comparable sales, tax and sale data, and more. You can even find a Realtor, also available through that same site, that can represent you in making offers on these properties. The bottom line is that this is a numbers game, and you have to make a lot of offers to be successful.

Secondly, you need to be prepared to close with immediate financing. Most banks want to close quickly, so have your financing prearranged with your mortgage broker or bank. Move in quickly, pay cash, fix the property, and then you might consider refinancing. Pull back all of your cash out of the property quickly, so that you’re into the property with very little of your own money. Remember, OPM – other people’s money – is where fortunes are made.

Always have the strategy of getting in there, buying it quickly, and then refinancing out to pull your cash out of the property and move on to the next property. Preserve your capital and lines of credit for the short term moves.

1.                  Stay away from poorly located properties. If a property sits next to a porno shop, or there’s drug dealing going on down on the corner, you might want to think twice about owning this property.

2.                  Be careful of properties that might be in remote rural areas that are hard to find or inconvenient for people to live in. Most people want to live in centrally located areas, where they have easy access to convenient services and feel it’s basically a nice neighborhood to live in.

3.                  Also be aware of hidden physical problems that properties might have. They could have zoning problems. They could have sewage problems. There could be problems with the water systems that are out there, or problems with the mold in the property, or other such conditions that you need to think of. Beware of very poor condition situations. Also be aware of the high cost of demolition and destruction, or hauling off of materials, as may be necessary.

4.                  Be very aware of what the property is really worth. My process goes like this: I contact a local title company, and I get information on “actual sales” of similar properties of similar size in that area during the last six months. DO NOT rely on “tax assessed” values. Be sure you personally see every property prior to purchase, and compare it to those comparable properties you also drive by, in person.

In choosing a real estate agent, you need to think very carefully about working with an agent who is positive about the idea of working with investors. I found many agents out there who simply don’t want to work with investors, because they’ve had bad experiences with them. 

These bad experiences might include:

1. The investor could not perform, or close as agreed, on anything.

2. The investor and the realtor could not communicate.

3. The investor made way too many offers without closing.

4. The Realtor wasn’t willing to do the work. The bottom line is, you do need to make a lot of offers when dealing with REOs, and not all of them will work out. You need a Realtor who will work with you and who will be patient with you. But you have your part to do as well.

Your agent should also be willing to find things such as:

1. Market data, time on market, and comparable sales values for you.
2. A good Realtor will do a lot of work and earn their wages, and you as an investor need to be ready to perform, which means have your money ready and be ready to close when good deals come along.
   

What should you pay to guarantee profit security? Know your “CTV”

Cost to value, or CTV, is the maximum percentage that I’m willing to go, in getting involved with a particular deal.

For example, if a property is worth

Fair market value after repairs (FMV/ARV):                    $200,000

then I might be willing to pay 80% of ARV as my maximum CTV.

In other words I’d be willing to pay 80% CTV:                $160,000

minus all of the potential costs of the property, and then I come to what my actual price would be that I offer the bank. If my total miscellaneous costs would run $15,000, I would take $160,000 minus (-) $15,000 dollars, and therefore offer $145,000 to the bank as the all-cash net price.

Always work backwards from the final value.