Bank paying a high premium

[Shmuel Waldman]

I have been involved in purchasing houses at the sheriff sale. I fix and flip all the houses. For the past 3-4 months I am finding that the banks are paying prices that simply don't make sense. I speak to other investors in my state (NJ) and they all agree that its a state wide issue. I am scratching my head trying to figure out, what is the banks thinking.

[Andy Mirza]

Originally posted by @Mayer M.:

@Shmuel Waldman

I don’t buy much at sheriff sale, but from the times I go maybe 1 out of every 50 properties sell to third parties. Only to see the bank then list it with an agent for much less than they bid at the foreclosure sale

They seem to be pretty inefficient

It is inefficient but that's the best that they can do. The biggest difference is the mentality of real estate investors versus banks. Investors will take the time to drill down on their numbers and get to know the assets in far greater detail than the banks ever will. Investors do this because they have to make profits on as many deals as they can.

REOs are a side business for banks and they do it because they have to. Their core business is setting up systems to handle the things that banks normally do. They make money on volume. Typically, the asset managers at big banks have hundreds if not thousands of assets in markets all over the country. It's difficult enough to keep track of one's own immediate area. 

The most important thing in my opinion is that the incentive structures are different between the decision makers at banks and investors. The bank employee is earning a wage or a salary and that is not tied to how any one particular asset does. As long as they are doing the job as directed by higher ups, they get to keep their jobs. The higher ups are concerned about quarterly numbers, dividends, share prices, etc. If they lose on REOs, they'll make up for it somewhere else. Completely different mentality from the RE investor.