Finding Money in the Liquidity Crisis: Are Banks Running Scared?

 
Thanks Mrs. Reed for this photo.

I just closed a home for a spectacular deal. The home was as we say in the industry, “real estate owned.” A better name might be bank owned, because the property was owned by a large bank which had acquired the property in a foreclosure.

What really made me think about this transaction was a call from a local appraiser who was looking for comparable properties in the neighborhood and said, “Why did this sell for so cheep!” This call coupled with my knowledge of the current liquidity crisis made me think. Are banks so worried that they are giving properties away for bargain basement prices or was the property just marketed poorly at a bad time in the market?

The property in question is located on Skyline Boulevard in the Oakland hills. It was sold just a year ago for $1,900,000. The lore behind the property is that both of the owners who bought the home in March of 2006 passed away shortly after acquiring the home and the property was soon foreclosed by the bank. At the time of the foreclosure there was $1,700,000 left on the mortgage. Soon after the foreclosure the bank who now owned the home sold it to another larger bank for $1,600,000. My best guess is that they took this $100,000 loss to get the home off of their books quickly. The property was then placed on the market July 17, 2007 priced at $1,574,900. We saw the property 4 days after it hit the market and wrote an offer. My client just closed on the home for $1,520,900. That is a $399,100 difference from the properties sales price of $1,920,000 on March 1, 2006. The banks took an accumulative loss of $179,100 on the deal.
So, why would the banks take such a large loss on a 2 acre 4,000 square foot premier property with Bay to Bay views that was in great condition? Why would they agree to this loss so quickly, just 4 days after placing the home on the market? The most interesting thing is the bank received a full price offer on the property, just days after we got it into contract. So, what made the bank so restless?

I think there is an accumulative effect of 2 different things going on that are making some real estate owned properties a good bargain. One answer is that the mortgage liquidity crunch has scared banks into making rash spur of the moment decisions. Banks do not want homes on their books, especially in a market where they are being highly scrutinized by Wall Street investors. Second, banks are not good at selling property. It is not their business and often banks structure their foreclosure departments in a way that negatively affects the sale of their homes. Basically, they are not good sellers, because they are susceptible to market changes, regulation and their lack of proximity and neighborhood knowledge makes them poor assessors of property values.

In other words banks are structured to deal with money not real property. Thus their selling philosophy has not been refined and is often not powerful. Each bank will handle their foreclosures differently and not all real estate owned homes are good deals… But, I now have proof that some lenders will let homes go for true bargains.