Posted by CarolFL on May 11, 1999 at 07:09:41:
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For John Behle - Posted by Ben
Posted by Ben on May 07, 1999 at 06:04:12:
John:
I have targeted a distressed commercial property in my area in bank foreclosure. The bank (large institution) that holds the mortgage has agreed to sell it to me. Now I just have to make my offer. Obviously I want a discount but I do not want to come in so low that I blow the deal. On the one hand I know that they want nothing more to do with this company (the borrower) because they are defaulting all over the place. Everything they own is in foreclosure so the bank is definitely motivated to be rid of them. On the other hand, there is a substantial amount of equity in this
property so that even if I paid face value it would be a phenomenal deal. Should I just suck it up and pay full value
or is there a rule of thumb that says any note in default
should automaticaly be discounted, and if so by how much?
Thanks for your input. Ben
It’s hard to offend an institution - but try anyway! - Posted by John Behle
Posted by John Behle on May 07, 1999 at 11:30:05:
I doubt you would offend them. They are business people and have probably written the loan off anyway. At a certain point with a bank, a loan has to be written off. All of a sudden the asset becomes a liability and they can be nearly ready to give it away to get it off their books.
We commonly pay 25-50% for defaulted loans. Of course, the more secure and confident the lender feels, the more they will want. What you want to try to avoid is the lender that tells you years later that he would have taken less.
We had one note we negotiated to buy at 50% of value. Why? It was the “GUTS” factor. $850,000 was the lowest price we had the guts to offer the lender for his $1,700,000 loan on a commercial property. They told us years later they would have taken $100,000 less.
Your particular lender should be very worried about bankruptcy and a long drawn out process. You need to weigh the bankruptcy risk also.
The lender’s personal circumstances can make a big difference. If they have a lot of REO on their books, they can hit a point where they nearly give it away. We had our largest bank a few years bank drop a bond rating over their REO (Real Estate Owned - property they have foreclosed on and not liquidated). Dropping a bond rating is un-believably expensive for the bank. It means ALL the money they borrow costs more and the price of their stock goes down. They started nearly giving away REO to get their rating back up.
Another potential penalty for a bank is to actually get shut down. Excess REO is usually the cause. You need to realize that it makes little difference for them to take a discount on a “Non-performing” note or asset. They one I referenced earlier? Dropping nearly a million dollars through their discount didn’t even cause them to blink. I doubt it even caused a drop in their dividend that quarter. Just no big deal for them.
Once you see it through the banker’s eyes, you can realize you may be saving their tail ends. I had one banker scrambling to get me to buy one of their REO’s. They had lent nearly a million dollars on a church that was converted to a mexican restaurant.
How many Burritos do you need to sell to amortize a million dollars?
The bank took back the church and the President would have done almost anything for me if I had taken it out of his hands. I didn’t see the potential at the time (now it is a nice office building). I had the blinders on and was more focused on the type of deals I wanted to do than on potential profit - an error I’ve corrected now.
Guess what? The bank died shortly after that. They were shut down over their REO property. Even a small bank might have been better off giving it away - than losing their charter.
So, make them an offer. How much? You can always come up in price, but it is near impossible to go down. It’s rare someone would be so offended that they would not entertain further offers.
Re: It’s hard to offend an institution - but try anyway! - Posted by CarolFL
Posted by CarolFL on May 09, 1999 at 10:25:04:
John, How does one monitor the state of a bank and their REO’s? I really LIKE dealing with institutional properties - as opposed to individual sellers. They approach transactions with little or no emotion. Having the inside track would make it just that much more fun!
Thanks…
Carol
Is it worth it? - Posted by John Behle
Posted by John Behle on May 10, 1999 at 13:49:29:
You can monitor banks and some have been successful at it. You can study the ratios and look for banks with lots of REO property. It can give you an idea of their motivation.
I think the time is better used just networking with them and getting to know them. Even if a bank were to be in a vulnerable position, they might not be motivated and vice versa.
The most challenging part of working with institutions is getting the time of day. REO departments get hit by everybody that takes a seminar or watches an informercial. Usually they will try to brush you off. They may say they have no REO properties - when they do. I guess they know the persistent ones will be back.
Sometimes they toss you a bone. They may say they only have one or two and throw a couple dogs at you that they would love to get rid of. My experience is it is just a networking deal. We had one REO employee in the process of telling us they didn’t have any when the President came out and ushered us into his office, presented us with a large list and then started pushing the ones that were really hurting him.
So, I suggest just doing the networking. Get to know them, build relationships, show creativity and tenacity. We had one do a very large deal with us one time and he later said those were the two things that impressed him and got him to deal with us - “Creativity and Tenacity”.
Sometimes it is easiest to come in the door through an existing property. Find an REO they have, inquire about it or write an offer and then build the relationship and move on to other deals.