Real Estate Bargains: Ask Banks

Individuals or companies that want to buy real estate at distressed prices should search for banks with portfolios of foreclosures and repossessions. They’re difficult to find, but the search can really pay off.

When comercial or savings banks foreclose on commercial property, they’re often in a hurry to sell the property to remove non-income-producing assets from their books. If the real estate market is weak or the property is not prime, you have substantial leverage in negotiating with the bank.

Insiders, however, know that: Banks don’t generally advertise real estate they want to sell. They usually find buyers through private contacts.

Three ways to overcome this problem:

• Ask loan officers at your bank to put you in touch with colleagues in their real estate or asset management department. A real estate officer is usually in charge of selling foreclosed property.
• Use business contacts to get introductions to real estate officers of banks.
• Make cold calls to bank asset departments. Lenders who are anxious to sell property sometimes will provide information about available real estate to total strangers. Once you located a property for sale there are certain things to bargain for:

Price and favorable financing.

One bargain hunter had been able to buy high-quality property for up to 50% of the original cost. Of course the discount is biggest when the property is in a distressed area.

Banks are often willing to offer enticing mortgages to the purchasers of foreclosed property. But it’s usually possible to go even further.

For example: A bank foreclosed on an apartment building whose owner couldn’t meet the debt service on an 8M property. Because of the soft real estate market, the bank could sell it for only 6M. But instead of selling, the bank found a buyer who agreed to take over the building for 8M, paying 10% down, with a 7.2M mortgage at a low interest rate and extended payment schedule.

Because the rental market was weak, the bank agreed to accept all cash flow from the property for eight years if scheduled debt service couldn’t be met, and also waived its right to foreclose for eight years. Any shortfall in debt service was to be added to the mortgage balance and come due as a balloon payment at maturity. After eight years, the mortgage reverted to normal terms.

The advantage to the buyer: The property market rebounded after five years and the rental income was then more than enough to cover mortgage payments. Meanwhile, the bank couldn’t foreclose while the property became healthy. From the bank’s point of view, it was worth postponing part of the mortgage payments in order to find a buyer willing to pay the price quickly in a soft market.