Unless you have a billion dollars, a twenty year relationship with the bank, and a plan to rule the world <insert evil laugh here>, banks don’t want to talk to you. Seriously, why would a bank want to trade with a buyer it knows nothing about and has absolutely no relationship with? Why does everyone think buying bulk directly from the bank is the answer? If you are successful enough to be able to trade with the bank, then you have gone where most buyers never will. There is an alternative – buying on the secondary market from private sellers. Here are the pros and cons of both.
BANK (Pros)
1. You will get the best discounts from the bank.
2. Banks process is seamless and as long as the buyer follows procedures, they will be successful.
3. You proof funds directly to the bank. Your POF is secured.
4. You can obtain a compiled package from the bank specific to your requirements.
5. Closings run smoothly and are handled by experienced title companies associated with the bank.
6. If there are properties that are not in the condition it was represented, the bank will replace them (make sure this is written into your contract).
7. As you buy more, the bank will come to you. You may have some leverage to negotiate better terms.
8. Properties almost always come with Warrantee Deeds (WDs) and are free and clear of all encumburances.
BANK (Cons)
1. Banks will want to know who they are dealing with. They will often ask for corporate docs, corporate tax returns, personal tax returns of the principal officers, W2’s, bank statements, trading history, company profile and a DNA sample (kidding about the DNA sample). If it is a large enough buy, they will also to a complete background check on you as well as send you through U.S. Homeland Security. Many buyers do not want to be this exposed.
2. Unless you are dealing directly with the bank asset manager/trader, you can expect bank discounts are 70% – 80% of current FMV. These are not deals. This pricing occurs if you are going through a seller’s mandate for the bank.
3. Bank Broker’s Price Opinions (BPOs) are three to six (or more) months old.
4. Banks packages are usually a bid, highest and best offer. Most buyers I know stay away from bid packages.
Banks can take up to a week to accept an offer and even when the do, it make take another week for them to issue the purchase agreement.
5. Bank sets the terms, you follow them.
6. Banks have what is called a “clawback” which gives them the right to continue selling your properties in your package up until a day before your actual closing. You can expect up to 15% to drop off from your original package and those drop offs may be the best properties in your package. Banks will replace those properties but don’t expect them to be of the same quality as the drop offs. If they are, take them. If not, tell the bank you will purchase the remainder of your package only.
7. Banks have the right to modify pricing or even cancel their contract right up to the day of the closing. This happened to me back in October, 2008. I had a $15 million package ready to close and three hours before the closing, the bank canceled it because the US Congress was getting ready to vote on the first government backed bailout of US banks. Bank said that we would be able to close the following week. I am still waiting.
8. If there are problems with the deeds, it could take up to six months or longer to resolve it. Usually the cause of this is when a bank buys from another bank and the chain of title and recording is done incorrectly. With so many properties being recorded by multiple title companies, there are bound to be properties that were recorded improperly.
9. If you fail to perform, the bank will not give you another opportunity to buy from them. You may lose your escrow deposit but banks also reserve the right to take legal action against you. This will cause you to spend money on legal fees.
PRIVATE SELLER (Pros)
1. Buyers that trade with the banks for their large bulk packages, are extremely well funded Real Estate Investment Trusts (REITs) and Hedge Funds. These folks are the ones who have the money and the relationships to successfully trade with the banks. They have a track record of performing and actually buying from the banks. These are the groups banks trade with.
2. Usually direct access to decision makers with quick turnaround on your offers.
3. Private sellers won’t ask for full financial disclosure. They usually want a purchase agreement and proof of funds.
4. BPOs are usually more realistic than a banks.
5. Upon acceptance of your offer, purchase agreement in 24-48 hrs.
6. More flexibility in negotiating price and terms.
7. Quick closings can occur in less than 7-10 days from the time offer is accepted. Most private sellers have already closed with the bank so title review and issuing title insurance is easier on a resell.
8. No clawbacks. No price changes and no modifications of the purchase agreement after it is fully executed.
9. Closings run smoothly.
10. If you fail to perform, you lose your escrow deposit but usually the private seller won’t take further action.
PRIVATE SELLER (Cons)
1. Your discounts, while decent, will be a higher than buying directly from the bank. Private sellers need to make a spread.
2. No guarantee of replacement properties. Once you close, you own them.
3. Some packages come with warrantee deeds while others come with quit claim deeds. With quit claim deeds you get much better pricing but no guarantees. So if taxes are owed, you are responsible for them (this can be solved during the title work).
4. No compiled packaging. What they have available is what you can buy.
Now that you know a few pros and cons of each will help you better understand how to work with them should the opportunity with either of them presents itself. If you have suggestions on improving this list, I would welcome your comments.
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