When buying properties from owners who have taken them back, you'll have to overcome several obstacles. First of all, they'll always think of the properties as being worth the last price they sold at. They'll conveniently overlook the fact that they'd have never gotten them back if they'd been worth the debt that was on them. Let's face it. If they'd been worth more, wouldn't someone have bought them at foreclosure? Wouldn't the former owner have been able to sell them to the public. The fact that they have the properties back is a clear sign that they weren't worth what was owed on them.
So you've got to wait until the lender begins to realize that he's the OWNER now, not the LENDER! Once he begins to think like an owner – you know, when insurance and tax bills come in or when he's cited by the city for allowing trash to be dumped on his vacant property or when some kid is injured playing in an abandoned building and he sued or when his property is vandalized and stripped of its windows and copper pipes – he'll be ready to listen to your proposal. Until that time, you'll pay too much.
Back during the deep depression in the Texas housing market, several like minded distress buyers packed their carpet bags and headed for Houston, where the distress seemed most severe. When we went to Houston, we were certain the timing was right because we'd been tracking the market through a newspaper clipping service for several years. We had a subscriber base in the city that kept us informed. We'd also visited the city many times. A friend had already made a major investment in an apartment complex and he fed us occupancy and profitability reports from time to time. In short, we did a thorough research job on the market to make the best possible choice of when to buy in.
We were equally convinced that Houston was a better place than any other Texas city cr any other city in the Energy Belt because of its size, location, lack of zoning controls, economic resources OUTSIDE the energy field – NASA and the HOUSTON MEDICAL CENTER – lack of UNION ACTIVITY, port facilities, airports and PRO BUSINESS ATTITUDE of the local government agencies as well as State taxing authorities. It offered a very positive environment for long term investment. And we were prepared to wait 10 years in order to reap our profit.
Next, we took a hard look at the money we'd need to buy properties. It's not realistic to go into an area full of distressed lenders and expect them to lend you the money to buy property they've just bought back unless you bring along with you impressive financial credentials. Or CASH!
During the first business depression in the early 1980s, many lenders would finance major acquisitions of THEIR properties at 1 % – 3% for up to 10 years with a 10% down payment. More significantly, they'd cut their price drastically for cash. But, by and large, today, they no longer do this. Absent of government subsidies, lender foreclosures take money out of their pockets and replaces it with non-performing real estate. That devastates their “bottom line” profit and yield on invested capital. Lenders have a financial incentive to cure defaults if they can.
Put yourself into the lenders' shoes. First, you borrow money from your depositors ii long term CDs at 5% or so, depending upon the financial markets. Next, you lend as much as 8 times that amount out (thanks to the Federal Reserve and the fractional reserve banking system lenders enjoy which gives them the power to multiply credit) to land developers, builders and home buyers at 7%. You're in tall cotton reaping millions of dollars in profit off other people's money.
Suddenly you have to foreclose. Instead of getting 7% positive for your 5% cost, your getting a negative return because you're paying out money for security fences, guards, managers maintenance, taxes, insurance. And you have to reduce your lending power 8 times for every dollar in bad loans you have. Is it any wonder youre ready to offer reasonable prices and terms? When you take back property in lieu of loans, you've bought it FREE AND CLEAR! Is that any way to invest in reel estate?
When negotiation with lenders to take over or buy defaulted loans, you'd be remiss if you didn't point out to any executive of an institutional lender holding a portfolio of defaulted loans that a failed financial institution which he helped operate would be a poor source of references in the event he were to find himself once again in the job market.
It would purely be instructive if you explored with him the qualificiations he might possess for employment at commensurate salary and perquisite levels in non-financial institutions when taken within the framework of his current success. These motivational talks are aimed at bringing him brutally up against reality. It's amazing to me that lenders still act as if they were detached from their loan portfolio performance, when it is what could make or break them professionally – and ultimately personally as.well. This should make him receptive to offers.
At this point, enter the distress buyer holding cash. You can expect a warm welcome. Flow warm? Here's an example. One S&L President wanted $5,000,000. for a 758 unit apartment house in Houston located on 25 acres of prime ground. That amounted to a price of about $6600 per apartment which averaged about 1100 square feet. $5 per foot for 25 acres of land more or less.
He wanted all cash. We offered him $2,000,000 with our paying the property taxes which were $44,000 in arrears as a down payment. Zero interest and no payments for 5 years, after which we'd pay the loan down over 10 more years direct reduction.
He countered at $2,000,000 CASH. THAT WAS 40% OF HIS ORIGINAL ASKING PRICE! We countered with an all cash price of $1000 per apartment where is, as is with our paying all overdue taxes. He was just about to cave in and agree when the government bailed him out via the RTC. Like I said, distortion in the market place. From this example there's one saying you should memorize: THERE'S NO SUBSTITUTE FOR CASH.
