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
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
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
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
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.