Downside of REOs Part 2
October 10, 2007 by Anne Mayhugh
Filed under Buying Bank Owned Properties
I am currently working with clients buying an REO home to live in. They are not real estate investors, so I have had to be very sure they understand the process. The particular asset management group for this transaction used the addendums to change the inspection period from 12 days to 10, required use of the seller’s title company and closing of the seller’s choice, reduced the number of days to closing by half, put a high per diem charge for every day after their close by date, and required $2000 in certified funds as a deposit. The buyers had already given a good faith check made out to the listing realty company as per the original contract.
This addendum put me in the precarious position of trying to best protect my clients, without causing them to not be able to buy the home they wanted. We did this by writing up an addendum agreeing to their addendum after the inspection period, and agreeing to exchange the original good faith check for certified funds once the inspection contingency was released. The asset management company never signed our addendum, but they did wait for the inspections to be done before demanding the certified funds.
Because this particular home had some pretty obvious defects, we negotiated a lower price up front to cover the expected repairs. Where we got into a bind, was that we discovered the house had a very high radon level and no sump pump. Radon abatement was going to be costly, so we asked the asset manager for a credit at closing. About 50% of the time they will agree to this if it is reasonable. This particular company would not agree, so my buyer clients had to make a decision to continue with the purchase or release. Fortunately, they felt like it was still a good buy for them and they moved on to closing.
The Downside to Buying REOs
October 8, 2007 by Anne Mayhugh
Filed under Buying Bank Owned Properties
REO stands for real estate owned, with the implication that it is owned by a bank or finance company. With the big up swing in foreclosures, there are more and more bank owned properties listed with the various MLS providers.
What we are seeing here, in
Unfortunately, just because you have an “acceptance”, doesn’t mean you have a real contract, because all of the REO companies stipulate that acceptance is contingent upon the signing of additional addendums. These addendums vary greatly by company and oftentimes negate major portions of the original offer.
It is really important for buyers to understand that with a bank owned property, the original offer to purchase agreement is only the starting point, and the owner or management company is essentially calling the shots on the transaction. For REALTORS working with clients, it is imperative to understand and convey to the client, that almost all the banks have certain guidelines and procedures that may not be in the best interest of the buyer. Sometimes the listing agent will be able to provide the addendums prior to writing the offer. In other cases, the listing agent doesn’t know to which company the contract will be assigned so they will not get the addendums until after the contract is written.
Most companies require the good faith deposit to be non refundable after the inspection period, and I even had one company send notice of required fees for the buyer well after the inspection period. The buyer was justifiably angry, since he was told he could pay the $650 fee to the asset management company or release the contract and lose his $1000 good faith deposit.
REOs are usually listed “as is” and it is unheard of for a management company to agree to repairs, so offers need to really reflect the condition of the property. That being said, I have sometimes seen them agree to a credit for the repairs at closing. This gets really tricky if the lender requires repairs prior to closing, and the bank owner will not allow any repairs until after closing. Asset management groups never agree to escrow for items after the closing.
Buying REOs is complicated, and not for everyone. I’m really trying to educate first time and low down payment home buyers about these properties. Unless they are in stellar shape, the loans usually won’t go through based on repairs. I hate to have a buyer client spend money on inspections then have to release the contract over the repair request.
Running Numbers
October 2, 2007 by Anne Mayhugh
Filed under Buying and Sellling
It is not hard for even seasoned investors to make a mistake in their property analysis that can be the difference between a positive or negative cash flow. We all seem to be pretty good at the big items, it’s the details that can kill us. It is important to “run the numbers” each and evry time you evaluate a property. Use some type of a checklist to make sure you don’t leave out any expenses.
Sometimes savvy sellers will give buyers a net sheet showing income and expenses for a property. It is imperative to go over it item by item. If they have owned the property for a long time, they may have a low mortgage balance, or a lower rate than you will have. Mortgage interest is usually your biggest cost, so make sure you know your loan options before you commit to a property. Also, be aware that any building more that 4 units automatically becomes a commercial loan. Commercial loans generally have much higher closing costs and rarely have long term fixed rates. They often have pre payment penalties as well, so do your research early in your due diligence period.
Taxes are another item to take into account, most tax assessors will make the new sales price the new assessment, so be sure to calculate your tax expense based on the sales price, not the previous assessment. This also applies to insurance, the previous owner may not have felt compelled to fully insure the property, so get that quote early on as well.
Maintenance costs need to be evaluated carefully. Make every effort to actually look at the appropriate page of the current owner’s tax return to see true expenses. Once you see the expenses, you still need to evaluate based on age of the property. Has there been adequate maintenance done, or has it been “deferred” waiting for a new buyer. If all the furnaces are 20 years old, you better be budgeting to replace furnaces fairly soon. And be sure to get CO detectors in if they are gas! Same thing with the roof, if it’s 15 years old then budget for a new roof in the next 3- 5 years. Look at everything involved with the property, from the driveway and exterior, to the interior paint and appliances, all the way up to the roof. Set up a 5 year plan for maintenance, then budget accordingly.
Utility costs are important even when the units have separate meters. Here, many of the apartments have separate electric meters for personal electric, but the owner pays for water and gas heat, plus trash and common electric for the hall and porch lights. Also, when a unit is vacant, the owner may have those costs as well. Call all of the utilities and arrange for transfer prior to closing, make sure that there are no costs to transfer. Our electric company now requires a certificate from a licensed electrician if the power has been off for a certain length of time. These certificates can run from $125- 400 so, again, make sure you are aware of all the associated costs.
If you decide to hire a property manager, make sure you have a detailed agreement spelling out the fees. These can vary widely from one company to the next. Pay attention to all the fees, some companies seem very competitive on the percentage of rent, then add on other charges such as, putting out a sign, surcharges for arranging maintenance, tenant screening. Others may seem higher for percentage of rent, but don’t charge for every other little item.
Finally, do some serious research on the rents. Properties can be seriously over or under rented. It is important to know waht the current market rents are, if you are too high your tenants will move. In fact, they may not even wait for the renewal period, or give you notice! If you are too low, then look at small increments for raising the rents of current tenants- don’t “shock” them into moving. Bring new tenants in a fair market rent, but let your long term tenants think they are valued. A vacant unit almost always costs more than delaying a rent increase.
