1991 Built REO in Desirable Location - Buy or No Buy?

Question

friends, need your help!

saw a bank owned single fam home recently. 3bd 2bath 1500+ sq ft. in a highly desirable and developed area in Dallas. one of the best school districts. home is old, 1991 built, but everything was in solid shape, no foundation issues or otherwise. will get it inspected as well.

numbers as follows:

list price. 160k
taxes: 6k (500 a month)
insurance: 85 bucks/mo
HOA: $300 a year

rent: $1,500 based on comps

even at full price i should be breaking even (no cash flow) but equity buy down through monthly tenant payment of mortgage.  i have offered 120k and hoping to get a counter from the bank.

what else to look out for? what am i missing?

go or no go? what are your thoughts? tips on negotiating with the bank on this one?

i have never bought from a bank - and can use any and all help i can get from you.

thanks

Ross Verbiyan · Answer

Sunil, I work closely with large banks that try to sell NPN and REO properties in Florida. The process for the REO goes as follows: The bank files for foreclosure, evict the tenant, and later take the REO for auction. However, if it does not sell in auction then the property is stuck. I get the REO properties at 50% of the asking price. Most of my investors buy the REO properties, get a tenant so they can get paid, and once 90-120 days has passed, they put the property on the market for 80-90% of the REO value that the bank was trying to sell for in the first place. It is a great business so I advise you to get into it before its overpopulated. I'd give the note and REO business 2-3 years before it becomes too hot and people begin to understand its true potential

Jon Holdman · Answer

You have to make a lot of offers on appropriately priced properties.  Over time, the banks will drop the price.  You have to keep watching and bid when the price drops.

You have to be realistic.  If houses in your farm area are priced at $160K, and rent for $1500, you need to find a different farm area!  If you can find houses in that area for $120K, then its almost OK.

The 50% rule says NOI on a $1500 a month rental is $750. $160K @ 6% for 30 years is $959.28, leaving you with a $209.28 loss a month.  $120K @ 6% for 30 years is $719.46 giving you $30.54 in cash flow.  That's marginal, IMHO.

And, no, you don't get to take off the down payment because then your down payment is not generating any income.  I want my money to generate a return.  If you put in a $30K down payment on the $120K price, your payment is now $539.60 giving you $210.40 in cash flow a month.  That's $2,524.85 a year for a 8.4% cash on cash return.  Too low, IMHO for a pure rental.  If your goal is to build long term wealth or if you think prices will increase in five years, it might be OK.  Even the $160K price with $40K down, which is just about break even, might be OK, if that fits in with your long term plan.  If your plan is for monthly cash flow, though, you're better putting that $40K into a 2% CD.  That will give you $66.67 a month, which beats the $30.54 a month the house will generate and is WAAAY less hassle and much more secure.  If you have to drop your rent from $1500 to $1450 it turns from slightly positive to slightly negative.

Jimmy C. · Answer

Sunil if its been listed for 6+ months and had two offers that didnt close, you maybe in luck.

I would low ball like a mofo.  But I would make the offer cash, even if you have to use hard money.   Just to make the offer strong.  I would not put in a time for inspection, but definitely get one.

My favorite part about REO's is the ability to lowball without offending anyone.  Who cares if they ignore your offer?  Just make the 15-20 offers and get the one accepted at your price.

Anyway, thats my opinion.  6+ months CDOM(down here) should get a cash offer accepted at well under list.

YMMV

Jeffrey K. · Answer

I didnt know the big dogs at B of A sold individual REOs to new investors.

Sunil Kumar · Answer

Thanks - will await the message!

Ross Verbiyan · Answer

No, I'm just saying that the ones that I get are a lot less and are really good deals. The REO's that you see on the market are already good deals. You just got to pick out which ones are good investment properties. I will ask if we have anything in Texas and PM you

Sunil Kumar · Answer

Ross - basically you are saying I have to find someone like you in order to get REOs at 50% of list price?

Dallas, TX and nearby areas is where I am looking

Ross Verbiyan · Answer

No, I personally work with the senior management of Bank of America to get their NPN and REO sold. This has further expanded my business. It is a very profitable and interesting business. People can get NPN for 15-25% of the UPB. We usually sell for 18-20%. I think that you should keep your options open and look at other properties on the market. What state/city are you looking to invest?

Sunil Kumar · Answer

Ross - that is exactly what I am doing here.  Is that what you understood after reading my initial query?

Do you find banks selling REOs at 50% of what they list it at? Seems that folks on this forum are indicating otherwise?

Joe - excellent breakdown and detail as always.  You are right, the objective is long term wealth through equity pay down. Appreciation is icing on the cake.  $30 or so monthly is fine in the short term keeping long term in mind.

From your experience, what should I keep in mind when executing these kinds of deals (long term investing) to avoid both short and long term surprises?

Sunil Kumar · Answer

Jon - I have always wondered how investors are able to get such good deals on REOs when banks are not likely to budge (ie. your comment on not even generating a counter). What is an investor to do???

Ross - that is exactly the thought process here

Ben - based on the 50% rule, the numbers appear to work (i.e. insurance 85 + taxes 500 + HoA $25) = $610.  Rent is $1,500 - thus 50% is $750.   Your thoughts???

Jimmy - 6 months.  Has had 2 offers, one backed out (don't know reason) and the other one's financing failed.

1991 Built REO in Desirable Location - Buy or No Buy?

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