Monday, April 7, 2008

Foreclosures are Abundant! And YOU CAN BUY THEM CHEAP!

 Yea, right! I work a good bit with investors and most seem to think that foreclosures are a steal and you can rob the bank when you purchase them. Well I would like to act as the Texas Mythbuster when it comes to foreclosure properties in the Austin area. There are several reasons why foreclosures in this area are not as attractive as the general public believes and I would like to use this article and possibly a few more to dispel this myth. Here are a few important points:

  1. Once a bank has foreclosed on a property, the real property becomes what is known in the banking world as an REO (real estate owned by a bank). Banks have complete departments that work maintaining their inventory of properties and often these properties are purchased at the same cost as what the bank had loaned against the asset with other costs added on top when they calculate the value of that property.
  2. I suspect that in many areas of the country the market is moving down so fast that banks are much more flexible on what they will sell these REO properties for, since they could be loosing value every day as the market values deflate. This is NOT the case in Central Texas and the bankers know it. They also know that we have many active RE investors here that are in the market buying properties now.
  3. The bank REO departments have very little maintenance costs associated with an REO property. They turn off all the utilities, and really only have taxes and HOA dues to maintain each property, so costs to let them sit are almost nill. Since the market here is fairly stable, holding a property for longer term is not a problem for a bank. When my job depends on how much money I make for the b, I am much less motivated to wheel and deal here than in other areas. Further, there are usually several signature authorities that approve deals for the bank, making it harder to get all the parties within the bank to come to agreement when the deal is a money loser.
  4. Some of the toughest deals I have been involved in recently are bank deals because of these reasons. Even when the banks are involved in negotiating a short sale, the motivations are just not there to reduce price to the point where it is attractive to most investors. We see many properties here that end up in foreclosure because of bank inflexibility. And before the properties go to auction, the banks buy them up at the mortgage amount and take them into REO inventory to wait out the process to get their whole investment sums back.
  5. I talk to brokers all over the country and they all tell me things are more loose where they are. Banks are flexible; often willing to take a loss than to go into foreclosure and my team and I have just not seen that in this area.

For these reasons and more, I encourage my investors to get the properties from an individual BEFORE they go to a bank or even to a short sale. The deals are better and more flexible. Closing go smoother. Everyone walks away happier.

If however you choose to shop for REO/Foreclosed properties in Central Texas, remember the following:

  1. Make sure you have the patience of Job - the wheels of bankdom grind VERY slowly!
  2. Expect that you will not get a steal of a deal! There just are not many out there. Invest for the long term to get appreciation which in this market is steady and solid.
  3. Remeber that many of the short sale and foreclosed properties here were taken with 100% finance situations in place, so the "deals" are even less in this sort of world, especially when the banks are looking for 100% recovery of their losses.
I would love to hear from others around the country with your experiences in working with the banks, HUD's, VA's etc. Is this just a Central Texas issue or are things tough all over when dealing with financial organizations?

Thanks for reading!
Steve Homer
Broker-Associate, The HBH Group/Keller Williams Realty
Round Rock, TX

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