Six Secrets to Buying REO Homes

Posted on May 15, 2012 by David Midgett

Six Secrets for Buying an REO

Are you interested in buying a foreclosure house owned by the bank?

Lots of investors know they can find a great deal by buying an REO (Real Estate Owned) house. REOs are the properties the bank didn’t discount enough to attract investors at the foreclosure sale, or which were taken without a foreclosure sale.

And while you might not get the same steal that you would at an auction, REOs have LOTS of advantages over buying at the foreclosure sale (most relating to reduced risk).

To find a great REO deal, you need to be savvy, and you need to understand exactly what the bank is looking for before you start submitting offers.

Here are the Six Secrets you need to know before making your offer on an REO.

1. Don’t lowball recent listings

Banks know newly listed properties haven’t been seen by enough potential buyers… so they will wait to see what offers come in over time. The asset manager handling negotiations for the bank has already priced the property based on what they think the property is worth. And each bank has its set of guidelines on how much of a price reduction they can stand at each stage of the process. So don’t expect a response if you are not close to the asking price on brand new listings.

If you want to low-ball (anything more than 10% off asking price), search for listings that have been on the market for 90 days or more. The asset manager has already had enough time to realize the property is not pulling in the expected offers… so the property must be overpriced. And the bank discount guidelines will be more in your favor the longer they have owned the house.

2. Avoid “highest and best”

If you see a fantastic property at a way-too-good-to-be-true price, you can be sure the agent listed the house low to grab lots of attention and create multiple offers. And you can be sure the agent will be sending an email saying “this is a multiple offer scenario and we need your highest and best offer by noon”. That’s Agent-Speak for “please bid against yourself and send an offer higher than your last offer… even if you might already be the highest offer”.

This selling tactic gets people emotionally invested and generates bidding wars… often resulting in a price way higher than the listing price… and often even higher than the asking price of other comparable listed properties.

Don’t fall for it. The key is to know what the property is worth and what you can afford. The house still may be worth more than the list price…and may be a good deal over the list price… just don’t overbid. Trust your numbers.

3. Jump on a Bargain.

Do your research, know your market, drive your neighborhoods… and be ready to pounce the moment a house goes on the market. You can be sure other investors will make offers within the first few days (if not hours) of a good deal hitting the market. But if your offer gets there first, you might have a slight edge. You might have your offer accepted while others are still trying to make up their mind. Don’t be the one trying to make up your mind.

4. Have Cash

Cash is king. Transactions funded with cash close quicker and more reliably, so banks prefer the cash offer over the financed offer. Loans take time and lenders require surveys, appraisals, inspections and title insurance… which cash investors can short circuit. So banks will discount deeper for a cash offer. If you don’t have cash savings to buy an REO, find it. Relatives or friends are your best source. Retirement accounts, credit cards, equity line… whatever. But if you don’t have cash, it is much harder to lock up a steal.

5. Submit Clean Offers

When we submit REO offers, we ask to close in 10 days, all cash, no contingencies, no contributions, no loans, no excuses.

The asset manager knows exactly what they will net, and that nothing stands in the way of closing, once they sign the contract accepting our offer.

Clean offers are critical if you get caught in a “highest and best” situation, because you will beat out the financed, messy offer every time.

6. Submit EVERYTHING up front

Every bank is going to want a written offer, proof of funds (for a cash offer) or loan approval (for a financed offer), and proof of the earnest money deposit.

Some banks need your agent to submit the offer through a proprietary online service. Others will need certain forms filled out.

But EVERY bank has a comprehensive addendum… which is one long form that basically says “we don’t have to sell if we don’t want to… and you can’t do anything about it…. and oh by the way, we really know absolutely nothing about this house.” You might as well sign this as early in the process as possible.

Make sure your real estate agent submits ALL the documents up front. If YOU were the asset manager and you had to choose between an offer with all the documentation neatly attached or one without, which choice would you make?

Buying an REO is a great way to pick up an investment property or a new home. Follow these Six Secrets, and you are well on your way to picking up your deal of the year.

So what other tips or techniques for buying REO homes can YOU share in the Comments below?

Proud to be a Vulture?

Posted on May 14, 2012 by David Midgett

Have you ever wondered why people look down on flippers?

Foreclosure Flippers are called “scavengers” or “vultures” by others in real estate.

Flipping certainly isn’t the glamorous side of real estate.

But every ecosystem needs scavengers….Otherwise dead stuff starts to pile up.

With foreclosures, the alternative to a flipper buying the house is the bank taking it back:

Banks don’t spend time and money, so the house turns into an ugly, empty eyesore.
Banks unload houses at rock bottom prices, preventing the market from recovering.
Banks limit properties to occupants, preventing landlords or investors from buying.

The dead stuff needs to be cleaned up quickly.

Flippers fix a home fast, then sell or rent the house right away. That cleans up neighborhoods, removes eyesores, and helps a market recover.

A world without scavengers would get ugly real quick.

So if someone calls you a vulture, does that offend you or make you proud?

How to pick the perfect foreclosure flip house

Posted on May 12, 2012 by David Midgett

What kind of property should you focus on buying?

If you are flipping, it’s simple– buy whatever you can sell quickly and profitably.

But first, you first need to know:

Who is my ideal buyer?
Where does my buyer want to live?
What is my buyer looking for?

In our market, these are very simple answers.

We know our buyers are looking for entry-level homes (most are first time buyers). There are also a large number of “consolidated families”, so they need a fair amount of room. Our buyers are very cost conscious and are looking for a great deal. They want an affordable mortgage, and they want the most bang for their buck.

We’ve developed the following standards for evaluating homes and neighborhoods. 90% of the homes we buy fall under these guidelines.

Avoid Small Houses and Two Bedrooms

Anything under 1,200 square feet of living space (air-conditioned area of the home) is difficult to sell. A house that small is usually a two bedroom, and only about 15% of buyers are interested in these smaller homes. So if you want the broadest appeal, make sure you stay away from the small houses. Our exception to this rule is in one of several large retirement communities, where a 2 bedroom is common and desirable.

NOTE: I love the “tiny house” movement– people turning sheds, trailers and other tiny structures into actual living space… but good luck flipping those!

Avoid huge houses

The sweet spot in our market is 1,600-2,000 square feet of living space. That’s generally a 3 or 4 bedroom house (sometimes with a bonus room). That’s big enough for families (even with an unexpected long-term guest or two), but still very affordable. Anything bigger than that, and the price is usually too high to attract a large number of interested buyers.

Stay under $150k… or even $100k

Our market data shows 87% of all single family homes sold in the past year were under $150,000, while 65% were sold for less than $100,000. That doesn’t mean you can’t make money on more expensive homes, but be aware of just how many buyers you are excluding when you get to those higher price points. If you want multiple offers on a house within a week of listing it…. stay under $75k.

Look for Nice Neighborhoods

This is all relative. We sell plenty of houses in neighborhoods I wouldn’t want to live in personally. But everybody wants a quiet street. Nobody wants to live in a war zone. Everybody wants nice neighbors who take pride in their home’s appearance. So don’t buy houses on busy streets or in unsafe neighborhoods or in ugly neighborhoods.

Look for a Garage or Carport with Storage

Most of our buyers are younger couples with children. They have cars, toys, mowers, hobbies, and lots of stuff. They need a place to store all this stuff. As a result, a house without a garage takes considerably longer to sell, especially if it is in a neighborhood where the other homes have a garage.

Buy the Ugliest House on the Block

With a house, you can always fix ugly. Pressure washing, mowing the yard, hauling off trash, a fresh coat of paint, newly planted flowers, a new roof…. knocks the ugly off pretty quick. But make sure your pretty new house is just a little nicer than all the other houses. If it is obviously that much better than its neighbors once you are done, you’ve “outbuilt” the area and won’t get the best return on your investment.

Buy Newer Houses

We had a building boom from 2004 to 2007, right before the crash. A lot of these were “spec houses” that were never occupied by the original owner, and they still make up most of our foreclosure market. With all these “new” homes (less than 10 years old) flooding the market at very competitive prices, it is much more difficult to flip an older home. The older homes, in well established neighborhoods, make fantastic rentals or owner-finance properties, but are very hard to flip to people who have seen all the “new” homes out there.

http://youtu.be/KACgsn3h7oE

4closureflipping.com

Foreclosure Flipping Secrets…. Revealed