How Much of A Loss Will a Bank Take on an REO?

[Elizabeth Newcombe]

Hi,

I am feeling too lazy to research all the sales of auctioned REOs in my area to determine how much of a loss the banks are willing to take on these. I am wondering what my chances are of getting an auction property for $100k+ under the foreclosure amount. In your experience, how much below the foreclosure amount did you purchase a distressed REO for? The home in question has an ARV of $380k, and needs significant work to get it there, and the bid is at $240k, but the foreclosure amount is about $360k. Obviously they are not going to get $360k, which is what many lovely, move-in ready homes are going for in this area. (Attleboro) Just wondering what your experiences have been with regards to this? Thanks!

[Kevin Andrews]

Hi Elizabeth. I am not speaking from experience here but I am from seekonk not too far from Attleboro and pawtucket and I can say that it depends on the motivation of the bank and also depends on the market and condition of the house. I saw a foreclosed home here in seekonk which is a very desirable town get sold for 170000 last year and someone scooped it up and fixed it and it is now listed for 409000. From the pictures I saw it looked like a pretty high end remodel. Now I don't know if they will get 409000 for it, I would guess more like 380000, but even at that I bet they are clearing more than 50000 profit. So it really depends on the house and the demand for the house. I say put in an offer and see what happens. The worst they can say is no. 

[Elizabeth Newcombe]

Thanks Kevin, 

Yea, That is exactly the profit I am looking at, and I put an offer in, so fingers crossed! This is a great cul de sac street and very desirable neighborhood, lovely 1/2 acre lot. The house is not too bad compared to a lot I have seen, but considering how much it foreclosed for, I am wondering if I even have a chance! I guess I just have to wait and see...

[Anthony Thompson]

With all the competition lately and rising prices, I no longer find it useful to try to figure out how much of a loss on the loan the bank is willing to take - mainly because they usually don't have to take too much of a loss these days and they know it.

The kind of "how much pain can I make the bank take" formula I think you're getting at, worked a lot better in 2010-2012 but not so much these days.

It seems to me, and I could be wrong of course, but it seems like banks sat on a lot of properties/loans for 5+ years because they either 1) didn't want to flood the market with REOs and cause prices to crash, or 2) it took that long to sell, resell, and straighten out the paperwork on those loans/properties.

Either way, whether it's because the strategy of waiting actually paid off (now think about 5+ years of taxes and holding costs and see if it really paid off) or just because banks/REO agents have (finally) gotten hip to the state of the market, I don't see great deals from bank REOs nowadays.

I think there are still "good" deals to be had - but there's usually a lot of competition on them, and banks/agents know it.

Also, related, read any bank P&S/offer addendums carefully. Almost always, in the event of a conflict of terms the bank addendum is controlling (overrides the P&S/offer). The reason I mention it is that I've heard in some cases banks are insisting a "cash deal" means NO mortgage of any kind can appear on the closing statement, not even private/hard money.

There are ways around that but it's not guaranteed and your deposit could be at risk. If you can't pay all cash without a loan, or your lender isn't willing to fund you before & outside the closing (unsecured for a day, or whatever), then you might want to reconsider making the offer.

It's sad, but eventually I guess even banks had to start to catch up and become more aware of the current state of the market. I'm not sure whether to laugh or cry about that!

[Mark Weinstock]

I was able to get lucky a few years ago and buy a bank owned REO that was originally listed for $210K for $130K

It wasn't in auction I was dealing directly with the banks listing agent. I made a low-ball verbal offer of like $130K and the agent came back at me with a counter of like $160k at the same time giving me his whole spiel about how hes been doing this for many many years and hes never ever seen a bank drop that much off there listing  price and telling me don't  even think of trying to re countering 

Anyways I'm no experienced realty investor infact this is my first foreclosure purchase so I don't know where it came from but after the agent got done telling me how there was no way the bank would budge off the $160k I pulled him aside and said I have a side deal for you and told him I'd give him 10% cash of any amount below the $160k next thing you know the price dropped to $130

My claim to fame house is worth like $300 now :)

[Elizabeth Newcombe]

Wow Matt, that's inspiring! Well done:)

[Jason Krick]

I picked up this house for $17,500. After repairs I am all-in for just over $100,000. Original mortgage was $125,000 and the judgement amount was $120k-ish.

http://www.remax.com/realestatehomesforsale/5626-old-route-ste-22-shartlesville-pa-19554-gid400037463090.html

[Wayne Brooks]

It is a totally irrelevant, and thought process. The bank is looking for as close to current FMV as possible, period.

[Roy N.]

@Mark Weinstock

In these parts those kind of "side deals" would put the bank agent in the unemployment line and land you both in a very undesirable legal mess.

[Elizabeth Newcombe]

eek, I didn't think of that!

[Waylon Gates]

I have done many REO deals and I know many REO agents. There is no magic formula or number. Make an offer that will work for you and see where it goes. If it isn't accepted than way a couple of weeks and try again. The banks generally have no idea what they are doing as far as pricing. They generally get pricing info from an agent that is willing to work for less than $10 per hour, so they aren't getting the best info. Just make offers and some will stick and some won't.

[Jay Hinrichs]

@Mark Weinstock  no problem on your end.. but your agent who did that could go to jail.. 

Elizabeth.. this is totally regionalized.. in late 2000s it was common for me to fund buys from banks at 90 to 95% less than the amount they lent on the property.. this was Detroit... parts of FLA  NV   etc

out here in Oregon you were lucky to get 30% off of all time high

[Waylon Gates]

@Elizabeth Newcombe I just read through the posts again and I can't stress enough...  Just make offers and you will eventually get what you want.   If it is a property that there is no one else that might be trying to buy it than you can take the stance of trying to play the negotiation game and start really low and then go up a little and back and forth,  I have found that to be a waste of time for most of the deals.  You make money by doing volume, not by hitting it big on one deal.  Work your numbers on a property and then write a legitimate strong offer and you stand a much better chance.  I can't tell you how many times I have been the 2nd, 3rd, or 5th highest bid and end up with the property because I am serious buyer.  

As far as the agent that you use to represent you, I have found that any agent that is persistent can get your offer in front of the asset manager.  Trying to use the listing agent is a flawed approach.  Your better off to develop a strong relationship with 'your' agent and let them be your front man with all negotiations.  That way when you come back again later, or when there is another deal that comes up the other agents will know where to go to find you to offer you specific deals.  This is how I get off market deals all the time.  The active real estate agent community knows that my realtor represents 'that guy that will but a house like this and make an easy deal.'  That has made me more money than trying to second guess the bank.  

You have to also know that the auction price is set by a different group than the REO side generally. There are different concerns in the foreclosure than once the property is foreclosed and the bank actually owns it.

Here is the (not so) secret to getting deals.   Make Offers.   I truly can't make it any easier than that.

Best of luck to you in your investing!

[Eric Delcol]

After putting in numerous bids on reos and talking to other investors the general rule of thumb is 80% of FMV is about as low as you'll get in this market.

Most banks are just sitting on properties letting them go to auction every two months until they finally sell.

[Mark Gallagher]

Elizabeth Newcombe

This seems to be a common thinking among investors. I've never dealt with an REO seller that really paid too much attention to the previous loan value. Everything is based off of current market prices, demand, condition, etc.

They want to maximize return, but it's at current market pricing. So they may make repairs, fix a septic, etc. but it's the get the most in 2016 market dollars, not when they made the loan.

[Elizabeth Newcombe]

Thanks for the input everyone!