3] Make Money Buying Bank-Owned Properties

As you may know, banks are not in the business of owning real estate. They are in the business of lending money. The more they lend the more they make. The more they make the more they lend. But since 2007, we have witnessed a tsunami of foreclosures as millions of Americans lost their jobs and millions more lost the equity in their homes. Homes were foreclosed left and right. In some parts of the country entire neighborhoods were blighted. One neighbor after another lost their homes. Home values that had skyrocketed in 2004-2007 tumbled stratospherically come mid 2007. In some places, come 2009, values were down over 65%. This tumble presented an enormous opportunity for people with money to buy houses cheap and either sell them to other buyers or hold them for cash flow and rent them out to people who were losing them.

You have to understand how banks work. For every dollar of a non performing asset, a bank is required to have 7 dollars in reserves. That s a very hard position to be at and that s why a lot of banks closed shop in 2008 and 2009, especially those subprime lenders. Oftentimes before a bank forecloses on a property they try working with the homeowner. There are cases where the homeowner goes for months, even years without paying their mortgage. So when a bank forecloses on a property, they want to sell that property as fast as they can and get that non performing asset off their books.

In 2009, for example, many asset managers were inundated with these assets and their performance and the bonuses and promotions that went with it were based on how fast they could move these assets.

Typically, if a bank-owned property does not sell within 30 days, the asset manager would wonder why. The agent assigned to the property must provide a monthly status report and price deduction recommendation.  I recall being asked at one point to drop the price from $693,000 to $520,000. That asset manager simply couldn t stand having the property sit on her books for more than 90 days. It was bad for her report card. As soon as I dropped the price, I received several offers on it. I ratified the all-cash offer at the asking price. Soon many more came in, much higher than what we had accepted. Can you imagine if you had come to me and bought that property at the asking price? You would have made over $50,000 instantly. By the way, that was a single family residence on Rengstorff Ave in Mountain View. Can you imagine selling an SFR in Mountain View for that price? What s more, zoning allowed for 2 houses on that lot. What a bargain for the new owner!

In October that same year, I listed a property in San Jose. As soon as the asset manager assigned it to me I started doing my homework. I found out that the property fell under the jurisdiction of Santa Clara county.  It had been boarded up and had become a dump yard for some unscrupulous neighbors.  I went to the county offices and told them that the bank had assigned the property to me. Oh, how they were elated. For some time, they wondered who owned the property. They were glad that I brought them good news and that I d take that problem off their hands hence. I did. I called my handyman and instructed him to remove the abandoned furniture, install a lock on the door and put a No Trespassing sign conspicuously.  I did my BPO (Broker Price Opinion) and gave the property a value. If it were in some other state, the bank would have simply given it away. The property was totally gutted. The siding was peeling off, the roof definitely needed to be replaced. Normally, the bank must have at least 2 opinions, mine and another agent s or an appraiser s. The appraiser was having a hard time determining whether this was a single family residence or a duplex. In my opinion, it was a duplex. He had it as a single family residence. This made the job rather difficult for the asset manager. It took her unusually long to decide the price.

Finally, she emailed me and instructed me to list it for $101,000. I knew this was a great price point. I confided in my friends and asked them to go for it. I gave them a 5 p.m. deadline but no one heeded my call. Just like a millionaire friend of mine whom I had taken to the property much earlier. He had commented that the property wasn t worth a thing. I knew it was worth $455,000 when fixed up. I knew that it d take about $100,000 to fix it up.

Early Friday morning that week, I received an email from the asset manager. She said her manager was wondering the property wasn t on the market. I replied that it d be that afternoon and that I d be able to sell it that day. Very quickly, I reactivated the property on the MLS and stated that I d be at the site at 2 p.m. I instructed that anyone interested should meet me there and I was only looking for cash buyers. Even before I got there were buyers waiting for me. By 3 p.m. I was swamped. All I had with me was a pen and my notepad. These were all hardcore cash investor buyers. They would give me their name, their telephone number, email address and the offer price. All of sudden, I became everyone s favorite friend. They d do whatever it took, use whatever technique to coax to accept their offer above any other. I left the site at 6 p.m. that day with 15 offers.

That Saturday, I traveled to Las Vegas to join other agents who were invited to celebrate the birthday of one of the premarketers. Offers kept pouring in. One lady in particular kept increasing her offer, so did one other agent. I gave both of them a Sunday 12 midnight deadline. Finally, one of them won with a $201,000 offer. The other was at $200,000. Before I went to bed that Sunday night in my cozy hotel room in Las Vegas, I submitted the winning bid on Res.net, the portal we use to communicate with asset managers. I woke up the following morning and was greeted by an email from the asset manager. Wowee, Paul, you rock.

Yes, indeed. Can you imagine if that millionaire investor friend of mine had heeded my call and bought that home all cash for only $101,000? Can you imagine if my friends had listened to me and did likewise? You could have made a whopping $100,000 in no time. Do you know that once we had gone pending a contractor offered to buy the home for $300,000, which means that the millionaire friend or the others would have made $200,000 just like that?

The investor that ended up with the deal used her IRA to buy it as well as fix it up. The rehab cost her another $100,000. But do you know how much she sold the property for? It was listed for $476,000 on a Saturday and sold for $465,000 all cash 2 days later to a Taiwanese buy-and-hold investor (i.e. landlord). Now do you see what I mean by making money in a sick economy buying and selling bank-owned properties?

Foreclosures are happening everywhere. Ever heard of Hillsborough? I had not heard about that town before I started selling bank-owned properties. In fact, being an REO broker has taken me to places in the Bay Area that I d not have been to otherwise, from Watsonville to Santa Rosa and from Pacifica to Moraga, I have been everywhere.

I sold over 30 properties for one lender alone in 2009 and one such properties was in Hillsborough. If you are even remotely familiar with Hillsborough then you know that it is one of the ritziest places in the Bay Area, with huge lots and humongous prices. The bank assigned me to list a home on Merner Road. As usual, the protocol is to first check the occupancy status. I drove to the home and noticed that to get to it you must pass through an easement. It was the weirdest home I had ever been to yet one of the most expensive. The house itself was dump. Everything was falling apart. A rat would die if it was thrown into the lap pool. The location of the house was terrible and everything about it was awful except for the fact that it was located in Hillsborough.

Eventually, I met with the former owner, a Filipino. Apparently, he used to be in the real estate business either as a realtor or a loan guy. Don t quite remember which. He told me that he d acquired permits from the town of Hillsborough allowing him to build a 5000 square foot home on the site. When completed, the value of the home would be around $4,500,000. Unfortunately, that was not to be, at least not for him. He was willing to give me the blueprint at a price. However, since I would not be buying it I was not interested but I told him that I would let would-be buyers know about the plans.

Before I met the former owners, there were tenants living in the property. After several attempts, I was able to meet up with one of them and exchanged cash for keys. Soon after, I instructed my cleaning crew to tidy up the place as much as they could. I had my handyman reinforce some planks to prevent people falling into the dilapidated lap pool.

I wasn t quite familiar with the Hillsborough market but there was no way I was going to give a value above $1,000,000 for that property. No way. However, the appraiser, who was at a loss as to what value to give to the property came up with a $1,300,000 for it, which meant that the asset manager had to give me a list price that was half way between my value and the appraiser s value.

I was right. Given the location and the state of the property, no one was interested in coming in at the list price above $1MM. Thirty days later, as it is customary, I compiled a monthly status report and recommended a price drop. The asset manager obliged. An offer came in but they buyer had problems closing. After over 30 days waiting for him to be approved, the asset manager became irate and asked me to drop the price one more time and solicit for cash buyers other. That was the magic thing to do. Remember Topeka? Looks like once you mention that keyword, money people come out of the woods and scramble for Africa, as it were.

I dropped the price down to $849,000, from $1,080,000. As soon as I did so, an offer came in at $750,000. The asset asked me if that would work. I said I doubted it, advising her to get it around $800,000. She did and the bank countered at $825,000. But before I got back to her another all-cash offer came in at the asking price. The bank accepted that one. I remember I was in Dallas attending the Fivestar Default Service Conference at the time. Calls just kept pouring in. A Vietnamese lady offered to buy the same property for $1000,000 with half a million down. An agent called offering me $950,000 cash. I also received a call from a direct buyer, who sounded like he had a ton of mazuma. Unfortunately, the contract had been ratified.

I recall being in Los Angeles attending an investor conference hosted by Jeff Adams, where I met new friends, one of whom I mentioned this property to. She introduced me to her mentor, a guru from Florida. I mentioned that I wished I had the money then I d but this property for $750,000 and sell it for $850,000 or more. He said he would not touch it unless he was getting it for $600,000. I looked back to what he said. It was just the same stuff as the millionaire friend of mine whom I had shown 30 Topeka to and he thought it wasn t worth much only to be wowed later at how much I was able to sell it for and how many offers I had received.

Want to hear more? Here s another quickie.

The same bank gave me a property to sell in San Leandro. I had never been to that part of San Leandro, and given that I was so busy running the office, I requested for one of the agents to do the BPO for me. He came with a value a little below $200,000. I do not know what the appraiser s value came in at. But what I do know is that as soon as I listed the property, I received a call almost immediately from an agent. She said her client had been watching for properties to come up in that part of the city and was just elated. That agent was the first agent to ever hand deliver me an offer. I was told to list the home for $289,900. The agent brought me an offer for $325,000 and told me that I should let her know if she had any competition. She did. My phone rang off the hook the entire Friday and throughout that weekend. I had agents coax me in all kinds of ways. One derided FHA buyers and prided in her ability to close sooner than anyone else. I informed the first agent that she, indeed, had a ton of competition. On Monday she came back to my office with a new offer, increased to $365,000 and prayed that the bank would accept her office. Because of her desperation and show that her client needed this property more than anyone else, I persuaded the asset manager to accept hers. While we were in escrow, someone called and offered to buy the same property all cash for $400,000.

Get the point? Yes, you can make money buying and selling bank-owned properties. If you had come to me before the property was listed and had been the first for me to enter your all-cash offer price into the system you could have made $100,000 in no time. And guess what, if you had millions, you could have bought this property as part of a bulk package at 70 cents on the dollar, or about $230,000 and would have sold it later and pocketed at least $150,000 in no time. I will cover bulk purchase later on but you get my drift, don t you? The rich indeed get richer, especially when the times are tough for the average Joe.

A friend of mine had expressed his desire to live by Lake Merrit in Oakland. He and I started looking or properties in that area going back in 2007. After several tries, we were finally able to get him a home on MacArthur Blvd. He acquired this 2800 sq. ft. bank-owned property for only $382,000. The listing stated they were looking for a cash buyer or someone with 20% or more down. Yet, we were able to get it for my friend with only 3.5% down, and we even had the closing costs paid by the bank. The home appraised As Is for $630,000. A few weeks after he bought this home that needed work a home next to his was listed for over $700,000. With less than $20,000 down my friend instantly increased his net worth by over $300,000. I am sure that if someone with cash had offered the bank $350,000 or less for that property, the bank would have accepted the offer.

I had never been to Moraga. In fact, I had never heard of the town or the famous Saint Mary s College until the bank assigned me an REO there. Across the narrow alley from the subject property was a regular listing. This couple had lived in the area for quite some time. They were selling to retire to Arizona. Soon after I arrived and had gained access to the property I made friends with the husband. His townhouse was listed for $739,000. He wondered how much I was going to list mine. I am sorry, I said to him. Why was I feeling sorry for them? Well, there was no way I was going to list that property anywhere near the $700,000. Two weeks later, I listed it for less than $600,000 and received an all-cash offer for it from a Filipino mailman. Eventually, we even dropped the offer price by another $18,000 to accommodate the request mandated by the Home Owners Association to repair the foundation.  Here was this guy getting a property for about $150,000 less than what Zillow said it was.

The real estate market has been hit everywhere but there are certain parts of the country where bank-owned properties are not as many as they are elsewhere. The San Francisco Peninsula is one such area. I remember listing a 3 bedroom, 1 bathroom home in South San Francisco in 2009. I remember taking my millionaire friend to the property and suggesting he make a tentative offer of $356,000 and see if the bank would take it. I had listed it for $376,000. I received an email from the Asset Manager asking if I had a cash buyer for her and that s one of the reasons why I had brought my friend to take a look at it. He didn t like the house and he said he d not pay more than $250,000 for it. Well, maybe that s why he has money because he buys things extremely cheap then makes a killing in profit. For someone who did not care making a quick $50,000 in less than a month, I felt this was a good deal.

I was right. As soon as I put the property on the market I received dozens of calls from real estate agents. I had set the deadline for offers at 8 p.m. on Sunday. One agent called me at 8:05 p.m. wondering if his offer was too late. He offered me $440,000 with no loan contingency. They were ready to close. I received 2 cash offers. One of the cash offerors called to beg for her to buy the property. She said she was born in the area and wanted that home more than anyone else. In multiple offer situations, the seller has maximum edge. A 1-minute conversation or an increase can boost the price by thousands of dollars.  My millionaire friend could have more than $80,000 in a month if he had only heeded my advice and been the first to make an all-cash offer on the property.

We witnessed another buying frenzy at another Peninsula REO, this time in San Bruno. As usual, as soon as I received the assignment from the bank, my first duty was to check the occupancy status. I dispatched one of my associates to the property. It was vacant. We took possession of the property immediately, did the broker price opinion, cleaned it up and less than a week later, we put up our For Sale sign. Prior to putting the property on the Multiple Listing Service (MLS), we farmed the area, announcing to the neighbors our upcoming Open House that weekend. It rained cats and dogs on Saturday and Sunday but that did not deter droves of buyers and their agents streaming into the house. The property had been listed for $520,000. We received multiple offers and sold the house that weekend for $580,000. We would have gotten above $600,000, I believe, had we countered. An all-cash buyer could have gotten this home from me for $520,000 or less and would have made at least $50,000 in less than two months.

That was the case for the property I listed on Wren Avenue in Concord. The subject property had been vandalized, so I advised the Asset Manager to authorize me to conduct the repairs necessary to bring the home to market. He preferred listing it As Is at $330,000. I was surprised when he instructed me to list it for $319,000 after $12,000 worth of work had been done on the property. On November 16, 2009, a friend of mine made an all-cash offer for $320,000 and the bank accepted the offer immediately. I then helped him to spruce up the exterior part of the house. In February 2010, we sold the home to a former serviceman for $408,000. My friend and his wife were pleased and wanted more of these kinds of opportunities. In fact, they even became my private money lenders. I will talk about them and the subject of private money lending in another chapter. Continue reading.

Agents in my office are privileged to know about my upcoming REO listings long before the outside world even begins to have a clue. Smart associates are the first to ask if they can hold an Open House and start to generate leads even before the bank gives a list price. Two listings were sold this way. The bank wanted just $375,000 for a property in South San Jose. One of my agents brought me a solid offer for $450,000. Not too bad. The bank accepted it right away even before many other people learned about the existence of this listing. The same scenario happened in Daly City. Long before the listing was posted on the MLS, I started receiving calls from agents in the area. Properties in that area were going for close to $500,000 or more, yet the bank asked me to list it for only $379,000. Sensing that this was a great deal, I immediately passed on the information to one of my acquaintances. He got greedy and did not make a move. The associate who brought me a buyer for the San Jose property brought me one for this property as well days before the rest of the world knew about the listing. As usual, he pushed the envelope $60,000 above the asking price. As usual, the Asset Manager was ecstatic and she accepted the offer without wasting a second. My cash friend could have made an easy $60,000 to $80,000 if he had simply made an offer to me.

For those buyers with deeper pockets, bulk REOs is the way to go. As stated above, some of the properties I sold in 2009 were featured on the bulk REO list my Client was sending to me. To qualify for bulk purchase, a buyer would have to choose at least 50 properties on the list. In the San Francisco Bay Area that would entail have anywhere between $15,000,000 and $30,000,000. For most of us, this is a lot of money, but peanuts to a select few. The rich, indeed, get richer, especially in troubled times. The guy with deep pockets would have gotten the property San Leandro for less than $250,000 and sell it for $400,000 cash to the one buyer who offered to buy it at that price. The bulk buyer would have made a whopping $150,000 in less than a month. The same would have been true for the property on Rengstorf Avenue, in Mountain View.

Two of the most prominent bulk sources are Fannie Mae and the FDIC. While Fannie Mae is a major investor in the secondary market, the FDIC ensures deposits in federally regulated financial institutions and oversees their performance. You may know that banks like Wells Fargo, Bank of America, Citi, PNC and others do not portfolio the loans they originate. Instead they package them and sell them to investors in the secondary market where Fannie Mae and Freddie Mac are key players. Lately, we have seen a flurry of foreclosures and this tsunami has threatened the very existence of these two national institutional investors. Their near collapse has produced enormous opportunities for individual investors and hedge fund managers who can now avail themselves to the bulk REOs these monoliths offer.