Here are 3 secrets you NEVER knew about large apartment REOs:
Secret #1: Banks can hold apartment REO assets on their books for a period up to five years.
Secret #2: Not all apartment REO assets are sold for pennies on the dollar just because they are REOs.
Secret #3: Asset managers will not take your call.
You probably have a little familiarity with single family REOs and how they work. Commercial REOs have very little in common with residential REOs. An asset manager for an REO division is typically in charge of hundreds of properties at a time. A commercial division REO asset manager is in charge of a specific region, an asset type, a loan type or a combination of all. Since the assets they are managing are more operationally intense, they manage a much smaller pool of properties. This means they typically will know their assets intimately. Remember, they are not a production line (like a residential asset manager), but instead are handling specialty products that are unique. Thus, you’ll need to approach them differently as well.
Here’s what you should know about banks. Since banks are very heavily regulated, given the current economic environment, and being bank regulators are looking at all transactions with a fine-toothed comb, means that you probably won’t be getting many deals from them or asset managers. It is the job of the bank to show they are making every attempt to get the highest payback on every REO they sell. (I know sometime it doesn’t seem like it, huh?) The best way for them to do this is to take the property to market (using a r/e broker) and see how much the marketplace (you and I) is willing to pay for that property. By doing this, if there is ever a regulator auditing a discounted sale price of an REO property, they can answer by saying they did everything they could to sell the property. The price was merely what the market said the property was worth.
There a couple of exceptions, however. One could be if the banks is a small local bank, it may sell some of their REOs to local investors they have strong relationships with. There’s that word “relationship” again folks!
Banks may also be willing to sell their “bad loans”, loans that they call “non-performing” loans to investors that can perform. This would relieve the bank of going through the entire process of foreclosure on a property they want nothing to do with. Basically, the buyer of the loan would become the new note holder of the property, giving him rights to foreclose and taking physical possession of the property.
If you live in an area or know of an area where a bank is holding a portfolio of commercial REOs, to become an “insider”, doing a little detective could pay off big. Find out what brokers they are using to liquidate their properties and build a relationship with those brokers. Also, study the sales prices and the properties that they have sold and determine their hot buttons. What made the lender sell one property for less than another property? Different banks are afraid of different issues you’ll discover. By determining what those circumstances are, it will help you negotiate better deals.
Till next time,
Peter Harris, TheApartmentConsultant.com