Quick Overview to Explain How Foreclosure (REO's) Are bought and sold TODAY
Hey everybody. I appreciate you clicking on this video. And I know you're here because you want a deal on a foreclosure. I've got some good news and some bad news on that front. But if you want an overview of foreclosures, this is a great place to start. So I'd like to tell you I have lots more information than this quick video. So if you are still interested in pursuing foreclosures, make sure you reach out to me. Tere's a lot to go over really just trying to keep these overviews to like, five minutes. And, you know, this is a really complicated process. It's changed a lot.
At the end of the day, it's just an overview. If you need more info, let me know. Most people, most of the buyers that I talked to, even a lot of the investors, they're still convinced that foreclosures happen the way they did, you know, a long time ago. So back when I started, which was a long time ago and in the old days, you know, the banks would post notices in the paper, which they still have to do. (It's required by law) Then they would do an auction out on the street and whoever showed up could get a deal and it was very difficult to get to the properties. This way, it sort of limited what you could do geographically. And because of that only a few people showed up and you know, the banks had certain processes in place so that they could sell them as many times as they wanted and build lists (of buyers) and the whole thing. But at the end of the day, it was a fairly profitable enterprise. Especially if you were pretty good at figuring out what these properties were worth.
Even if they weren't sold out on the street, if it was a local bank, a lot of times you can walk into the local bank and find the people who are dealing with distressed property at the bank and talk to them and, you know, tell them your story and maybe get a deal. So the problem with all of that is because there was sort of this inelegant system to do it, There were lots of opportunities for bank and mortgage fraud. Although it didn’t happen with every foreclosure it happened with enough of them where the banks were very eager to do something else. So they have! It's their responsibility to do something else.
Today things have changed. The first is that for a bank to actually take possession, takes a very long time, most banks will try to do anything to avoid, having to foreclose on a property that includes doing a short sale and lots of other things because it just takes forever to (fore)close. And basically, they aren’t getting paid the whole time that they're taking possession. It's not a good deal for the banks that way, but when they finally do take possession eventually, they get around to listing. And again I've seen this take years, you know, they take possession of a certain date, that six months later, eight months later. It finally comes up for sale. I don't know why it takes so long. I can't tell you. I just know that it does. When they do list it though, the process is pretty much the same today. They figure out what the market value probably is, and then, they list it substantially below the market value. Now, why would they do that? Well, they do it, so they can get multiple offers. Okay, and this is all part of the fraud prevention that they're trying to do. So if you only get two offers on the property, it might be easy for, you know, the real estate agent who's ever handling, the REO to steer the bank towards one offer, which may not may or may not be the best offer, maybe the offer might be from someone that the agent knows. But if you have fifteen offers, well, it's a little bit easier to figure out what the market value of the property is. Today they list them low, and then they collect offers and so you can run out there and see him all you want. But basically the bank is going to sit there until they get a bunch of offers. Now in a super hot market, this happens pretty quick. You still gotta hustle out there, but most of the time, in a normal market, the more beat up properties, the higher-risk properties, they can sit out there for a while,while the bank sits there and collects offers and figures out what the best thing is to do. It's not uncommon for this process to take a while. If you're writing offers on foreclosures, don't write an offer on a Friday, expect an answer on the Saturday. It's not usually what happens. First of all, nobody’s working at the bank on Saturday or Sunday. Best cases, you're going to hear on Monday, but, you know, like I said, it can really take a while and you sort of need to know the banks move at their own speed.
Most of the offers for foreclosed property are actually collected through auction websites and there's a bunch of them out there. You can go crazy going out there and looking at those websites, but it can be very frustrating because some of those websites, in order to write an offer, basically you fill out five or six fields and then you submit the offer. So the problem with that is because, it's not even a signed contract. It's just it's just me bidding on a property. So there's a bunch of problems with that. The first problem is that if they're showing you what the last bid was, you don't know if the last bit was serious. The bank doesn't know either. Right? Like, I mean, they treat all the bits the same, but some of these auction websites will show you what the last bid was. And I believe someone typed in those numbers, but a lot of times those numbers are not real and when the auction ends, they go to the buyer that put in the number and they say, “Hey you won! Now you have to give us money!” and the buyer goes. Oh, wait a minute. I haven't really looked at the property and so then they either look at the property or Bank, says listen, if you're not serious, you know, we're just going to go down the list and go to the next person. Very often what happens is the buyer that ‘won’ realizes that if he buys the property is going to ‘lose’ and the property comes back on the market. We see this happen all the time. So some properties, you know, it'll go under agreement and then it'll come back up. It'll be a new round of bidding that will go under agreement, that will come back up under agreement, come back up, three, four, times. It's not weird and it's all because there are a certain number of buyers out there that are happy to put a price on there that doesn't make any sense (once they research it). And then once they get more information about a property, they immediately run away from the property as fast as they can. I's just something that you need to be prepared for because of the system. So some of the auction websites require more formal offers and you tend to see less of the bouncing, but every situation is different. And there's not a ton of foreclosures. So it really is sort of, you know, every situation is different!
At the end of the day, the bank is collecting all these offers to reduce the possibility of fraud. It's just impossible and practice to get them to hurry up or take your offer first. It's not, they're not, this is by design the banks have no interest in taking your offer first. If they do, they're going to be worried that there's fraud going on. They want 12 other offers, you know, or whatever their number is, before they make a decision and they want to make sure that the offers are consistent from a market perspective as to what it is that they should get.
The offers are evaluated in a typical fashion, which means that they're looking not just at the price but they're looking at the financing too. So if you're a high LTV buyer, then you're at a disadvantage. You’re going to have to pay more than someone comes in and offers cash. A lot more! And sometimes paying more isn’t going to help at all. So if you pay five thousand dollars more as an FHA buyer, and they can take someone who's going to pay cash and no mortgage contingency for five thousand dollars less - You're not going to win that. That's the bank's going to take the cash every time, they're going to close in 30 days. It's what they're going to do. On top of that, a lot of foreclosures, especially the ones that are a good deal, can’t be purchased with high LTV loans. You know, you can't - if it needs a new roof immediately, if the roof is already leaking and you try to buy a foreclosure with an FHA loan.. I have to tell you, it’s not going to happen. The bank is aware it's not going to happen, and they're not going to choose your offer because they know that you're financing isn't going to get past the appraiser when it comes time to to perform. They're going to have to put the house back on the market which they don't want to do. So, they tend to favor offers where, where the financing is more secure, even if the price is a bit lower. They're very rational about this again, you know, once all those offers go in, I'm pretty sure they don't even look at the names, they don't care. They're just looking at the numbers and that's how they make decisions.
Foreclosures and value. No matter - all the time I've been doing this, it's a persistent urban myth and foreclosures are good values and easy ways to make money in real estate. I'm sorry. It's not true. It's not true. It's especially not true because banks are not here to give you a discount. I think we all know at this time, that banks are very good at looking out for themselves. When they own a piece of property, they are no different! Now, they don't want to do any work on the property. So if it's cosmetically challenged or it has physical flaws, things that need to be fixed - things that increase the risk profile of the property. Well, that intends to sell for what looks like a lower price, right? Relative to what other similar kinds of property sell for, but that's how it works when the property needs updating or needs to be fixed. The price goes down. And so I in here a simple, you know, valuation metric formula for how you can figure out the price of the property. Okay? The current value of the property is the maximum intrinsic value. So if everything was perfect, okay, for that house and that location has a maximum value. Okay minus the risk, right? So let's take an easy one: It’s a perfect house, perfect, lot. And it's worth 500. That's its max intrinsic value. And it has a failed septic system which is going to cost thirty five thousand dollars to fix. Well, it's probably going to take 60 thousand dollars off the price right? Because people don't do dollar for dollar for risk! They usually one and a half dollars or two dollars for every dollar of risk that they take on. So you're going to take 60 thousand dollars off the five hundred thousand dollars and someone will probably be willing to pay, you know, 440K for that house and then replace the septic system. So again, this is a situation where if you have an FHA loan, can you offer 460 and buy the house? You cannot! Failed septic system means you'll never get past FHA. Right? So if you have the cash to buy the house of 440, but no money to put a septic system in, will a bank let you buy the property? Sure, but then you're going to be in a world of hurt. You're not gonna be able to live there. It's got a failed septic system, and the town isn’t going to let you live there. You're going to have to replace that system. You're gonna have to figure out where to get the money from, you know, maybe you can still borrow it from the house. I guess, if you pay cash, you could probably do that.
Bottom line is, a lot of these properties need things fixed and they need them fixed immediately and you need to have the cash on hand to do that. And you need to know that you're going to have an opportunity to estimate what it's going to cost. But the bank is not going to let you go out there and do a septic design to figure out how much the septic system is going to cost. You're going to have to guess! And if it's a sixty thousand dollar septic system. Your profit is gone. I mean, that's just how it works, sophisticated investors, understand this, okay, that they are going to take a chance and hope that the numbers come out, where they should in order, so they can make money. But a lot of times, you know, inexperienced buyers are not aware of how much risk is embedded in a property and they need to be very, very careful in assessing what kind of discount they need in order to take on that risk. Okay, you should never be taking on forclosure of all things for even money, which is to say it needs 20,000 dollars and your only going to ask twenty thousand dollars off. That's crazy.
You're going to do all that work and end up right back where you started. It doesn't make any sense. So, you know, understanding how much risk is in these properties, is really, really important. You know, is there a buried oil tank somewhere? Is there mold in the property which often requires extensive repairs in order to get the mold out? It can be fixed. Anything can be fixed. But sometimes it's very, very expensive. So, you know, far more expensive so you've got to take those high-risk elements and make sure that you've got a pretty good feel for whether or not you know, they're going to come into play and if they do, run away! Because once you buy it, it's yours and there's no givsies-backsies. Okay. Bank is going to make you sign multiple documents that say, they don't know anything about the property, you know, if something bad happens on the property once you own it, it's your problem. Okay, they don't want - the whole process is designed to get them off the hook and make sure that you can’t sue them. You need to be aware of that and that means that you need to pay a price that takes into account the fact that you're taking on all this risk.
Here's the good news. Okay, you don't need a forclosure to make money in real estate. If what you want to do is find a distressed property and fix it up. There are tons of them typically out there. And you can do the same math that you're doing foreclosure, except they're easier to buy! Estate sales are often sold through the traditional process through MLS. They're a great way to find properties that need work. But ultimately, they are sound houses, without the risk that, you know, foreclosures take on. Okay, without the cash needed, right up front. A lot of times you can live in a dated house for a while, then fix it up as you go. So focusing just on foreclosures and assuming that there's deeper value there, I think is not a good way to find a house, especially if you're on a budget. Okay, if you're on a budget, you need to cast as wide a net as possible and figure out where it is. Believe me. You're not going to get the discount you think, on foreclosures.
Does it happen? Sure, It happens. But it happens with other property too, it just doesn't happen with foreclosures. Every once in a while, nobody can see the diamond in the rough. Okay, and that house sells far below where it should that, It's a good value. I mean, it happens! But it doesn't just happen with foreclosures and you don't need to limit yourself to foreclosures in order to build equity and in order to be successful investing in real estate. I hope that sort of clears up the process from how it used to work, to how it works now and hopefully you've identified whether or not this is something that you want to do. There’s not a ton of foreclosures right now, but that will change and when they come back on the market I’m sure this video will get a lot more looks. Alright, folks, until next time. See you.