A foreclosures list can be an excellent tool for the investor. There are many places that an investor can find motivated sellers. Most investors are aware of the more traditional methods of finding these people. There are foreclosures, divorces, job transfers, job losses, estate sales and the list goes on. Each of these areas will provide an investor with an excellent opportunity to purchase real estate at good to excellent prices.
A foreclosures list has some advantages and some disadvantages for the investor. This list is not meant to be all inclusive but to give you a general idea of the pluses and minuses in dealing with a bank foreclosure list.
These lists can be very difficult to get. When banks take a property back it goes to their REO (real estate owned) department. Banks have various names for this department but industry wide if you refer to an REO, people will understand that to mean real estate that a bank owns after a foreclosure sale. It is extremely important to the bank to liquidate these properties as quickly as possible. Why? Simply because it inhibits the banks ability to lend. Keep these facts in mind when thinking about how damaging a foreclosure is to a bank:
- For each dollar in bad debt that a bank has they are required to keep 50 cents on hand.
- For every dollar of bad debt that a bank has they cannot borrow up to 5 to 8 times that amount.
Those are just a couple of the important reasons for a bank to quickly sell its REOs but it does give you an idea of how damaging it is to a bank to hold this real estate. For this reason the bank is a highly motivated seller. Banks rid themselves of these properties by either selling them individually through a realtor or "packaging" a group of the properties and selling them to an investor.
These packaged groups of properties are sold in very large quantities. They are typically in the thousands of properties and millions of dollars in cost. Although the properties can be sold at as low as 30 cents on the dollar, it is next to impossible for an average investor to acquire. So due to the size of these "packages" it is difficult for an investor to get involved in a bank foreclosure list at this level.
Another disadvantage is that these properties are normally bought sight unseen. At this level, the investor is deciding to purchase the bad properties with the good. Many of the properties in the portfolio will have issues that will make them less than good investments. However, because of the enormity of the package the investor will do well with the overall package.
Due to the number of properties in the Bank Foreclosure List, individual attention cannot be given to each property and the properties are typically resold in smaller packages to other investors. All in all, the big institutional investor that purchases the bank foreclosure list does so with the intent of making a relatively small profit on each of the properties.
The very large packages are broken down into smaller packages to resell to other investors. Typically they are grouped into regional or state packages. The foreclosures list at this level is more manageable for the local investor buying it. A foreclosures list of this size is at a level at which more local investors get involved. Depending on the size of the package, it may be possible for the investor to actually do a good amount of due diligence on the properties. The investor buying the property at this level may resell the entire package or once again break the package into smaller packages. In this case, the investor may keep a property or properties that he or she feels fit well into their portfolio.
You can see that the larger the package the less due diligence can be done on the property. Therefore, the smaller the profit. As the packages get smaller and more geographically concentrated it becomes easier to do the due diligence on the properties. At the smaller package level and when able to buy only one or a small number of properties from a foreclosures list, the higher cost of the property is offset by the ability to know exactly what you are buying when you buy a foreclosure home listing.
A small local package can afford the smaller investor an opportunity to purchase a foreclosure home listing or several from the foreclosures list after having done due diligence. In this case, the investor will pay more per property but be much more aware of exactly what he or she is buying from a foreclosure home list.
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