Originally posted by
@Frank Chin:
They don't have a secret handbook somewhere, so my experience is based on what I heard. I had a chance to sit with an officer would worked in it for his bank. This was at a public auction where I was the winning bidder, and the deal was the bank will provide a 90% mortgage if you bring tax returns, pay stubs. I bought these items, they reviewed them, ran my credit check, and awaiting word of my mortgage approval.
While we were waiting, I was told the property which I bid on, the bank had as REO for three years. It was newly built in 1987, the developer got a mortgage of $300K, based on appraisals of $350K. The developer wanted $399K, and figured with the crazy market going up $50K to $100K a year, he'll get that in a few month, but 1986 was the peak, it starting going down in 1987 after going up for over a dozen years.
The developer thought he'll rent it while he waits, but with negative cash flow stopped paying by 1990, when the market crash was into it's 3rd year. The bank took over.
How did the bank look at it? It's got a $300K mortgage, and they want something close to it. In 1993, I looked at similar properties in the area, and they go for $290K to $325K. Unfortunately, for most investors I talked to, once it's tagged an REO, you don't use comps anymore. If not, then what, no one can say. As far as the bank was concerned, they see it as a $300K investment.
At this public auction, they had over 100 properties up for bid that day, and the auction house announced the first 20 will go absolute. As the auction house now set the rules, the bank has no say in it anymore. I actually was going to bid on another property, a few bidders had their eye on it, so it went beyond what I wanted to pay. The property I won was the 6th one up, towards the end, it was me and one other bidder, whatever he bid, I bid $500 more. My winning bid was $208K after the other guy gave up. My target was $225K.
The bank officer of the REO said the bank would never take a $208 offer on a property for something they had a $300K mortgage on it. If you think about it, why would they if the comps run around $300K.
Interesting enough, a broker went with his client and his client was one of the other bidders. He told his client, for an REO, don't bid more than 50%, or in this case $150K particularly if you're a cash buyer. The builder completed 4 houses, and got a $300K mortgage on each one. Another bank held the mortgage on the one two houses down. Two months after the auction I attended, the house two doors down was sold to this broker's client for $150K cash. This was because they use the sale of my house as a reference point. BTW, my next door neighbor got his, also an REO at the time a year before me for $235K, but he had to pay back taxes which I didn't. He told me the back taxes ran him another $20K. He got this by calling around REO banks.
Just to complete the story, the cash buyer that paid $150K sold it 6 months later for $230K. Then a few months after that, it was sold to someone who bought it at $310K, the market price. I know that as this buyer, who later moved in, rang my doorbell late at night to ask if he offered the right price, and I told him he did OK. Don't feel sorry for this guy though, he sold it for $870K in 2006, when the market surged again. I still have mine, in the property is now worth $1.3 million according to Zillow.
