What banks are offering favorable prices to investors in California?
Submitted by wrsi on Fri, 05/02/2008 - 5:02pm.
I am an investor. I want to buy REO's but i need a 40% discount less repairs. Is anyone having success buying Bank owned REO's?
Comments:
You'll find these kind of discounts at the auctions right now, but 40% plus repairs seems a bit wishful once they are listed as REO's. Anyone seeing these kinds of discounts?
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Biggest I've come across recently is 32.5%, but even that came with provisos and special circumstances attached.
Rumor has it that the auctions are not being fairly conducted....the presense of shill bidders to raise prices, etc. Also, the auctions are not as yet "Absolute".
Has anyone had success going to Hudson and Marshall, etc.???
I should clarifiy that I was talking about the real foreclosure auctions - trustee sales, not these bank marketing events that you are referring to. I don't know that they are "unfair" but they are absolutely designed to create hype and get people competitively bidding. I also don't think these bank auctions offer any great buys. Case in point we saw a house that sold for ~$750k in 05, sell at trustee sale auction for ~$265k last week, yet a similiar house sold at a bank auction this weekend for ~$425k (I'm estimating, but this is close). Anyone found any truly good deals at these bank auctions?
I did. It was 48% off. I backed out of it though, didn't want to deal with extensive repairs.
Sean, I'm surprised that substantial discounts are available at Trustee sales. In Alameda County, I believe 90% of properties are going back to the banks as the loan amount is greater than the value. Where are you finding great deals at Trustee sales?
Joe - 97.8% of properties taken to trustee sale auction go back to the lender - but that is absolutely not due to the loan amount being greater than the value. Most opening bids at trustee sale are discounted, with the average discount being 21% off the loan balance (usually an 80% 1st), and with 39% having a discount of 30% or more.
Taking a look at recent Alameda auctions using our Track feature which provides daily updates on the trustee sales, there is certainly significant discounting taking place. Though I was surprised to see how much stronger Alameda appears to be than Contra Costa. Most of what appears to be selling at trustee sale in Alameda is older homes built 1960 and earlier. Contra Costa on the other hand has lots of fairly new homes being discounted considerably.
Check it out for yourself, go to Track, pick a county and any day in the past, then scroll down to "Sold to 3rd" and "Sold to Bank" and check out the Opening Bids vs. the Sale Amounts (total amount owed) and estimate values. You'll see that most property is being offered for below estimated value at this time.
Sean
Hi Joe,
Essentially the answer is yes to both. They are taking a discount off the balance on the note (mortgage), and since most of those mortgages were 80% first morgages, the discount often results in the property being offered at auction for less than current market value.
Lets try an example:
1. Home was purchased in 2006 for $500k, with a $400k 1st mortgage, and $100k 2nd (100% financing using a 1st and a 2nd to avoid PMI).
2. The property is now only worth $350k (a 30% drop).
3. The 1st mortgage goes to sale with a $400k balance, but is discounted to $300k (a very common discount right now).
4. The 2nd mortgage has its security in the property wiped out by the sale, and doesn't bother trying to foreclosure or protecting their postion in the property as their loan is already a total loss.
This scenario is playing out 100's of times a day in CA right now.
"Case in point we saw a house that sold for ~$750k in 05, sell at trustee sale auction for ~$265k last week, yet a similiar house sold at a bank auction this weekend for ~$425k (I'm estimating, but this is close). Anyone found any truly good deals at these bank auctions?"
The difference is the ability to pony up the cash. For some it is much easier (and worth it) to get $425k loan, than to come up with the $265K in cash.
Hi Apian - great comment, we saw many similiar results at a recent bank owned auction recently. Trustee sale auctions are not accessible to most people because of the cash requirement, but that is exactly why there can be real deals on the court house steps.
Sean -
What are the risks when purchasing at Trustee Sale?
I have heard that there are regulars at the auction that will bid up the price to push the price up to newcomers - How true is this?
BOB
Hi Bob,
I have personally "bid up" newcomers so I absolutely know it to be true. Even after having bought 150 properties, I second guess my self everytime I "win" at foreclosure auction. Basically wondering why I was willing to pay more than everyone else. But as long as you stick to your numbers and don't let anyone get under your skin you'll be fine.
Here are the primary risks:
1. No title insurance. Two primary issues here. a) that you missed something in your title research that you have to pay for - if a title company misses and you have title insurance they have to pay. b) someone makes a claim (even a bogus claim) that you have to pay attorneys to defend - again if you could get title insurance they would have to pay to defend.
2. Typically no ability to do a thorough inspection of the property. I had one house that the public records said was 2500sf. It used to be, but after a fire they only rebuilt it to 1500sf, making it worth less than I paid. Had we been inside (or frankly even paid more attention from the outside) we would not have made that particular mistake (also circling back - it happened to be in an area that was new for me and the local pros bid me up in an effort to bury me and chase me off - unfortunately for them I tend not to quit after I learn an expensive lesson)
Sean -
Thanks - very helpful - I should go to a couple and see what they are like.
Does the Bank send a representative? ie if 400k is owed on the 1st and the 2nd is wiped out - who sets the minimum bid? If the bank doesnt want the property they can set a lower minimum and let the market forces bid it up to its value.
I have a shopping center investment that is rolling in the next 3 months and I am wondering if I can make more buying some houses at auction. Quite frankly, I could use the challenge - something more stimulating then grinding w/ Banks to help Sellers. I would still do that, but, feel there should be some other opportunities.
So, if the banks sets the price at 300k, say as a minimum bid, then it gets bid up to say 320k, then the bank has no carry and further downside risk and it is off their books. Seems like win-win.
The occupant now becomes a tenant and money should be budgeted for eviction, carry and repairs..
Any suggestions on which auctions would be best to attend?
Thanks again,
BOB
Bob,
I would suggest starting by doing some paper trading. Find a few "auction" properties that look interesting and do your due diligence. Attend the auction and see what happens on the bids. Also go back in time using our track feature, and find some that sold at auction long enough ago that they have now been relisted or ideally resold (say 4 to 6 months). Then do a proforma on those and see if you like the results.
The foreclosing bank always places the first bid, and they can discount it below the amount owed. 2nds occaisionally show up to protect their loan but have to bid at the auction like anyone else.
Yes, after the sale the owner becomes the occupant, though I would suggest trying to do cash-4-keys rather than eviction when possible. Also right now there are so many properties you may just want to focus on vacant properties and avoid dealing with occupants altogether.
As for which auction, I'd start with the one closest to home. Once you get the hang of it, you can use out track feature again to compare areas and specifically how much the banks are discounting opening bids.
Sean -
Sounds like with great information you can have great results.
Does someone always show from the Bank that is foreclosing? if so, their first bid is clearly important. The more knowledge you have the more you know which Banks want to dump property. That would be a great first step. The next issue is dealing with the "pros" - its like going to a a poker parlor where you are a rookie and the experienced players know all the angles.
How much cash would you guess I would need to buy and flip 1 home per month and make an average net profit of $40,000 +/-. I own a real estate, lending and an escrow company and am very comfortable with "reading" a market.
For example, I just reviewed a condo development in Aliso Viejo - there is one active with 4 pending and 4 closed sales in the last 3 months - clearly a strong market dynamic. Conversely, in Lake Forest, I just reviewed a condo development with 12 active homes, 2 pending sales and 3 sold in the last 3 months - clearly a weak and deteriorating market. I presume the "pros" know all this and this data would affect the spread needed to make these work. And this doesn't take into account the forward pipeline that your site tracks.
I presume it isnt too late to get into the game - There appears to be another 12-18 months of strong trading that will take place to fully resolve the credit issues. Even though there are signs and stability and even strength in certain areas, we can'd have growth until this current wave of problem loans are worked thru.
BOB
I personally think you are fine on timing, this thing has some real legs and isn't going away soon.
I wouldn't worry about the other bidders. Worry about getting your research right, and then just stick to your numbers and don't get caught up with what anyone else is saying or doing.
The bank that is foreclosing doesn't need to show up, they place their bid, referred to as the "opening bid", through the trustee and it is simply announced at the auction.
As for cash it just depends on your hold time, which in turn depends a lot on the property and market. If you stick to vacant and your are quick to do your rehabs and market aggressively you can probably flip I'd suggest using 120 days as an estimate. Given one home a month you need enough cash for 4 homes, though I'd recommend 5-6x to give you some cushion. Nothing worse than to buy some home you only sort of wanted with the last of your cash to have the one you really wanted sell cheap while you are forced to the sidelines.
I'd recommend using a credit line for pulling checks to take to the acution. This allows you to keep your actual cash invested somewhere liquid for at least some return in the mean time. If you pull and return a cashiers check on the same day, there is no interest charge (though you'll want to build a relationship with the bank to avoid cashiers check fees).
Sean -
Great info again. Another great thing about investing like this is when the market starts going up again (4-6 years) there is real money to be made when prices are increasing. In the last up market I was completely focused on helping my clients buy, sell and finance homes that I didn't invest. Seems like large opportunities in the up market.
In the down market, it is all about buying the property right. Are their any quick and dirty guidelines that you use? I am not going to run Excel spreadsheets w/ IRR's but will use simple math - If I purchase a home at auction for $400k and sell it for $500k, that is 80k gross profit. Subtracting about 15% for carry, getting property ready, selling costs, etc, then that is only 5k profit... What am I missing? That purchase price would be a 20% discount from what the home would realistically sell for in this market. So, something has to give --- Is it realistic to be able to get a 30% discount at auction? That would put the net profit up to $55k and if things worked out perfectly another 15k in expenses not used and the perfect storm would be $70k on that deal. However, realistically, with cost overruns, market conditions, constrained financing, etc I would not be expecting windfalls, although it would be nice.
I can see how a review of the past auction prices relative to what the homes sold for retail would be a good indicator on what the Banks are willing to sell for. What discount from a realistic sales price would you target. It seems like lots of risk, so the return would need to be pretty strong. Also, I can leave my money in a shopping center that has returned 50% in just less then 3 years on a preferred return and I didnt do any work. If I had not elected the preferred return, then I would have received closer to 100% return.
In order to keep 5 homes going at one time, it appears I would need about $2 - $2.5 mil as peak funding. How much money do the "pros" have out there? Are they working with 100's of millions? What do they do with the properties when they acquire them? I was under the impression that here in Orange County, there is a band of 8 or so "pros" and there is definately lots of professional courtesy and oligopoly going on there.
Sean - I appreciate your sharing your experience and insights. Let's get together if you are in Orange County. If you dont make it down here, then I'll need to fly up upon closing my first profitable transaction.
BOB
I'm the son of a logic professor and a software engineer, so I really don't use quick and dirty assumptions, I pretty thoroughly research every deal I do. I've averaged around a 55% annualized return on capital before office expenses investing in foreclosures. Harder to do now than a few years ago. I think $2-2.5M would put you right in there with many of the top pros. There are certainly a handful with more, but there are certainly some working with less (they tend to focus on building wholesale buyer networks they can very quickly flip to). The professional courtesy thing is fast disappearing due to more information being available. With sites like ours it is really easy to watch the profits around the state, so when profits get too big in an area, newcomers show up and competition tends to increase until profits return to reasonable levels
I have some experience with putting together Bulk REO portfolios. There is no real structure to the business of buying in bulk but I am starting to understand the issues and the opportunites. I would be happy to discuss them further with you.
Could someone please explain what happened on this property?
38256 HERMOSA CT
Murietta,Ca
Im trying to figure out what all this information means. This home went to auction with a loan amount of $591,000. At auction one bid for $192,000 and it shows as won and sold but under winning bid there is a zero.
If someone could explain what this means or did this home actually get sold at auction.
Thanks
Ellen
Hi Ellen,
Yes that property sold at auction to a 3rd party bidder. The bidding started at $192,595 but we were unable to get the winning bid from our sources which is why it shows a winning of zero (essentially unknown).
I an new at trustee auctions. I have a house in mind to bid on. It is a 1st. If I win the bid, does the 2nd go away and what are the pitfalls I need to watch out for. Any help would be most appreciated.
Yes, the second's interest in the property is wiped out if the first forecloses. Couple of things to watch for:
1. Property taxes - they are always senior, and you will be responsible for ALL past due property taxes.
2. Other liens - you need to make sure there are no liens that would be senior to the first you are bidding on. They act just like loans and some people mistakenly think the loan is in "first position" when it is actually junior to a lien. Fairly rare, but you need to make sure you do a full title search and watch out for things like child support judgements.
3. IRS Liens - even if an IRS lien is junior they are still entitled to 120 day right of redemption - essentially they can take the house back from you for the amount you paid. They rarely do this.
4. Fraud - we've seen a couple of cases recently where there was what appeared to be a first, but it turned out the previous first that was refinanced never received funds and the reconveyance (the document that records that a loan is paid off) was a fake. Basically the mortgage broker stole the money that should have paid off the earlier first. Note that if you bought the new first after foreclosure, you'd likely still have to pay the fraudulently reconveyed first off as well as they never lost their security interest as they did not record the reconveyance. Very unlikely, but this is one of th reasons title insurance is a good idea, and you don't get title insurance when you buy at foreclosure auction.
5. No inspections - you need to be comfortable buying the house as-is with no inspections and be prepared to find some unexpected repairs.
6. Having to evict the prior owner. I usually try to offer cash-for-keys. Two to five thousand to have them move quickly and leave the place clean. Last thing is you want is a battle - that usually results in bad stuff like the prior owner flushing bags of cement down the toilets (an expensive repair).
Some of these things are very rare, but they can and do happen. If you go into it with eyes wide open, and you keep your bid low enough to make the risks worthwhile, you can do really well buying at auction.
EO homes are often considered the best way to purchase a distressed property as the seller is out of the picture. It's just the investor, the investor's agent, the bank and the bank's agent who are negotiating the transaction.
Best for some, but not for all. You can buy with little or nothing down preforeclosure, and you can often get better discounts at the auctions. So it really depends on your particular needs.
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