Cash Offers for Bank Owned Property Soar

Earlier in the decade, when we sold our house in Southern California and began our odyssey as renters, my oft-stated comment about someday becoming homeowners again would usually involve some sort of talk about buying property again at a much lower price when interest rates are at historically low levels.

So far, that continues to be a good bet.

Rates on 30-year mortgages are still in the five percent range, a level that is freakishly low by historical standards, but seems almost normal these days. While rates are sure to go much higher someday, that day probably won't come anytime soon in fear that the entire global economy will begin circling the toilet bowl even faster.

But, with time comes reflection.

After watching what has developed over the last few years and then seeing all the government responses to bail out the banking system and "save" the economy, not long ago we started thinking along the lines of just paying cash when we go to buy a home sometime in the next year or two.

The prospect of not having any mortgage lender involved in our next real estate transaction has taken on a surprising new appeal over the last year or so and, come to think of it, the whole idea of having a mortgage just rubs me the wrong way these days.

The notion of paying interest to some zombie bank that will probably just sell our loan to an even bigger zombie bank (Fannie or Freddie) just doesn't seem like an enlightened thing to do.

Apparently we are not alone in thinking this way as anecdotal evidence continues to mount that those with cash-in-hand are getting some pretty sweet deals on bank owned property, which is all the more reason for us to involve only one bank in transaction - the one we'll be buying the house from.

This report in yesterday's Wall Street Journal has an update on the bank repo market:

Bargain-Hunters Descend, Cash in Hand
Falling home prices are spurring an increase in all-cash home sales in markets that have been hardest hit by the foreclosure crisis, an indication that bargain hunters have descended on the markets looking for deals.

Homes financed with cash comprised one-third of sales in Phoenix last month, up from 19% one year ago, according to a report by Raymond James & Associates Inc. In Sacramento, Calif., all-cash sales accounted for 24% of total home sales last month, up from 8% in January 2008 and 3% in January 2007, according to the Sacramento Association of Realtors. Sacramento and Phoenix have each seen home prices fall by one-third in the past year.

Cash sales are up even more in many Florida markets. In Miami, cash offers accounted for 30% of sales last month, according to a report by Thomas Lawler, a housing economist based in Leesburg, Va.
...
In some cases, cash buyers are finding that they can get a deeper discount by making an all-cash offer. In markets with a glut of foreclosed homes, lenders are becoming more aggressive to sell "simply because there aren't enough first-time home buyers around to sop up the excess supply," Mr. Lawler says.

Brett Barry, a Phoenix Realtor, is selling a bank-owned home in Cave Creek, Ariz., to an Indianapolis couple that is retiring and buying a second home. The property will sell for about $190,000, down from an earlier listing price of $209,000.

"That price was a good deal, and the bank didn't even counter it," says Mr. Barry.

A separate bank-owned home in the same development sold for $133,000 to a cash investor, beating out a $179,000 offer from a first-time home buyer with financing from the Federal Housing Administration. "The bank just didn't want to take the chance with financing," Mr. Barry says. "The lenders I work with will take a substantially lower cash offer as long as they see proof of liquid funds."

That's a perfectly reasonable response by banks and it sounds like a good plan for us - I can't imagine they'll have any less inventory a year or two from now or that there will be substantially more first-time home buyers.

Comments

[Lotalolly:]

Cash is King! These are times of great purchase opportunities. Based on the examples in this articles it's best to have a credit line with any other bank and the buy at the low price.

Feb 26 05:20 AM

[Harry Tuttle:]

The comment is disingenuous, isn't it?

The preference for cash is due to the lack or certainty in getting quick financing. For instance, some potential buyers may not qualify and the seller would waste precious time waiting to find out.

Assuming that the price is right for your, the correct approach is to offer all-cash to get the discount and then get financing a the current low rates afterward.

Whether the lender is a zombie or Ponzi schemer is financially irrelevant.

Feb 26 08:11 AM

[Mad Hedge F...:]

Here is a novel plan put forth by a hedge fund in Florida, Derivatives Bridge, LLC. Securities backing performing mortgages worth 100% are being sold for 20% because there is no market for these securities. Have the government buy these securities for 60%, rescuing the banks, and then sell them back to the original homeowner. The homeowner then is able to refinance his home, see his mortgage principal drop by 40%, restoring his net worth, and purchasing power. The cost to the taxpayer is zero. This is already possible in some countries like Denmark. If someone offered me a deal like this I’d take it in a heartbeat, even if I had to clean out the sofa cushions and raid my kids’ piggy banks. They say necessity is the mother of invention.

Feb 26 08:14 AM

[t-bird:]

I will not disagree that we are entering a good time to buy bank owned homes. You may be better served by waiting for the county to auction the property.
Just be cognizant of the fact that these properties may have more downside in value as we go forward. Full Disclosure: Realtor and R.E. investor...

Feb 26 09:19 AM

[Deb:]

As a REALTOR for 30+ years I am finding in our market that the bank's selling their OREO properties are pretty much nightmares to work through. If federally chartered/national banks, they ignore most state real estate laws.The state admits they don't have the tank power to force them to comply. Fannie Mae-owned are among the worst. They don't accept FHA, which due to the 3.5% cash investment required by the Buyer works best for many first-time homebuyers who don't have the 20% many conventional loan products now require. Fannie Mae, if I understand correctly, says the FHA process now that they are looking at it from a Seller's point of view/wearing Seller's shoes, is to much work for them as a Seller. Cash or conventional rules. One offer made on behalf of a first-time Buyer was $96,000 FHA on a Fannie Mae-owned property (as in why not try when they have no other offers) which would require no worked from the Seller's part was rejected only to be made available at $75,000 suggested price by Auction (!!!) even while we are actively trying to get our offer through. No luck on our part. They wouldn't even look at it when they heard FHA. These are our tax dollars going down the drain. Buyer's use cash (from parents or by inverstors) because that is what works best for OREO. The first-time and other Buyer's who need to use FHA to qualify would love to be able to make it through the hoops and particiate in the opportunities of the OREO. Every OREO transaction I have done so far has been cash for this reason only.

Feb 26 09:26 AM

[bobbobwhite:]

If these securities are selling on the open market for 20% of face value, why should the gov't pay any more than that for them, as in your suggestion of buying them at 60%, which is a 40% premium over street value? You must work for the gov't or a bank with that kind of thinking. You should be thinking of the homeowner first, not the bank.


On Feb 26 08:14 AM The Mad Hedge Fund Trader wrote:

> Here is a novel plan put forth by a hedge fund in Florida, Derivatives
> Bridge, LLC. Securities backing performing mortgages worth 100% are
> being sold for 20% because there is no market for these securities.
> Have the government buy these securities for 60%, rescuing the banks,
> and then sell them back to the original homeowner. The homeowner
> then is able to refinance his home, see his mortgage principal drop
> by 40%, restoring his net worth, and purchasing power. The cost to
> the taxpayer is zero. This is already possible in some countries
> like Denmark. If someone offered me a deal like this I’d take it
> in a heartbeat, even if I had to clean out the sofa cushions and
> raid my kids’ piggy banks. They say necessity is the mother of invention.

Feb 26 10:03 AM

[mediapro:]

I agree with your thinking.

Except in the case of the retired or near-retirement example in the article, the advantages of retaining as much cash as possible, financing at historically low rates, and benefitting from tax policy outweigh the "your cash" approach of the author.

Here's a real example, and one that I am considering:

My principal home equity/debt ratio is ~70/30 so even when I sell the primary home, I expect a pretty good tax-free profit on the proceeds. Last summer I took advantage of a $200,000 Schwab HELOC offer of prime minus 1.25% (at that time an effective interest rate of 3.99%). This not only lowered the interst payments on my existing HELOC, but has subsequently followed the downward trend of the prime rate. Now, my effective annual rate on the HELOC is ~3.25%. I have drawn very little on that line and am seriously considering that all cash approach financed through the HELOC. This strategy gives me a lower mortgage rate on the purchase, deductibility and business deductibility when I use the property as a rental. Yes, I know the risks of rising rates tied to the prime, but if the prime rates began going up, this would either be a sign of inflation or an improving economy with more demand for credit. In either case, I have the saefty of a strong rental market, potentially increased demand if I chose to sell either the primary or investment property, and continued tax benefits while I shelter my personal free cash flow for other purposes.

Is there anything wrong with this strategy?


On Feb 26 08:11 AM Harry Tuttle wrote:

> The comment is disingenuous, isn't it?
>
> The preference for cash is due to the lack or certainty in getting
> quick financing. For instance, some potential buyers may not qualify
> and the seller would waste precious time waiting to find out.
>
> Assuming that the price is right for your, the correct approach is
> to offer all-cash to get the discount and then get financing a the
> current low rates afterward.
>
> Whether the lender is a zombie or Ponzi schemer is financially irrelevant.

Feb 26 06:01 PM

[TinyTim:]

This is the perfect storm for real estate investors. Homes at deep discounts and headed lower. Mtg rates hovering at decade long lows.

Things are so bad in housing, REO's are being bundled to wholesalers.

It's even possible now to positive cash flow with a conventional 30 yr mtg in many mkts.

First time buyers are being forced out by cash buyers. Sadly, many people can't refi to a lower rate because of the more stringent loan requirements and / or the house is upside down.

Feb 27 01:14 PM

[TinyTim:]

One thing I haven't heard a lot about in this mess is mortgage insurance. Everybody had to have PMI with <20% LTV.
Wasn't this supposed to protect the banks?
Did all these PMI companies evaporate?
Or was PMI optional on liar loans?

Feb 27 01:17 PM