Real estate tends to attract people who believe there is a pot of gold at the end of the rainbow waiting for them; and a big majority of those people think the rest of the world doesn't know about it. The latest myths center around buying foreclosed properties and "flipping" them. Both very dangerous uses of your credit.
You see, it has been said so many times that everyone apparently believes it. Here it is: "Banks don't want to get stuck with foreclosed property so they'll sell it at a big discount."
In my experience the standard comment that banks don't want to take back collateral is true, but it infers the wrong conclusion.
Early in my career, I worked for a bank in St. Louis. One morning we came to work and the bank's huge parking lot was packed with repossessed school buses. Maybe 75 of them. The school district had missed one too many payments.
Another time it was row after row of brand new mobile homes. And let's don't even mention a dealer's new car inventory.
I'm here to tell you that if you don't pay, the bank has no compunction about foreclosing its lien. I don't care what the guy on TV says, or the new book at Barnes & Noble pontificates.
Now here's what happens next.
The property is then transferred into a Balance Sheet account called "Real Estate Owned (REO)", and if it is not rented, it becomes a non-earning asset. After a short period of time, the bank is required by the regulations to set up a Reserve for Loss General Ledger account for the property. That formula is also specified by the regulations.
The only thing banks don't like about this is that it restricts their ability to accrue earnings on the repossessed/foreclosed asset, and it totally stops their accrual of earnings on the funds transferred to reserve for loss account. Further those reserves cannot be included in the formula that determines how much the bank can borrow from the Federal Reserve.
But then worse than either of those to the bank is selling the property at a loss because that affects profits.
So the bottom line is, the prudent management of a bank is not in any hurry to redeem foreclosed property, especially if it is going to challenge their bottom line. And for a similar reason, they see no benefit in reworking existing loans in an effort to head-off foreclosures.
That's why phone calls to them aren't returned, lots of time transpires before they respond to the problem, and you aren't the bearer of good news, whether you're an investor or a Realtor.
Nevertheless, real estate people chase the idea of foreclosed real estate being their pot of gold at the end of the rainbow...they think all they need to do is figure out how to work within the bank's "system." The only system they practice with bravura is the one they use to get these callers out of their hair.
Jay Beckingham, one of our colleagues in Florida, wrote a teriffic blog on foreclosed property. I commend it to you.
Miss Konnie and Miss Nancy,
Thanks for your comments on my explanation.
On top of that, if you are able to work out a deal to buy a piece, it comes without any warranties whatsoever ... even the deed you get is a "special warranty deed," which most title companies will guaranty, nevertheless, the bank has refused to be responsible for any title problems that may come up in the future. They warrant only the title they got as a result of the foreclosure and its transfer to you.
Bill
Ah, yes, the pot of gold at the end of the rainbow.
I am not in a hurry to call back some of these investors..... you wouldn't believe what all they ask for.
Tom, I'm glad I don't have to field those calls because they are primarily nothing more than an interrpution to the poor loan man, and they are going to be disappointed with what he has to tell them.
Bill
Tom, I'm glad I don't have to field those calls because they are primarily nothing more than an interrpution to the poor loan man, and they are going to be disappointed with what he has to tell them.
Bill
Bill, you are absolutely right to not want to work with these bottom feeders. All they bring is a lot of grief and very little reward.
We may differ on our take on whether banks want to get REOs off their balance sheets as fast as possible, but the "investors" in these properties aren't "real" investors and aren't worth my time or yours.
Bill Roberts