I notice a lot of people interested in foreclosed properties tend to have this belief that they are really cheap and priced at below market values.
While it would be a big mistake to assume that ALL foreclosed properties are good deals, there are obviously real and valid reasons why foreclosed properties MIGHT BE real bargains.
But why are foreclosed properties so cheap (at least some of them)?
Here are just 4 reasons why I personally believe that bank foreclosed properties can be priced at below market values:
1. Foreclosed properties are owned by motivated sellers
Banks are not in the business of selling real estate, they are primarily in the business of making money through interest earned through loans. A foreclosed property is a non-performing asset because the loan is non-performing (obviously), hence they need to get their cash back as soon as possible by selling their properties. The longer their cash gets tied up in non-performing assets (NPA’s), the longer they are unable to earn money on the same
In a nutshell, the banks that own foreclosed properties can be considered as motivated sellers for the following reasons which I’ve heard from a lot of people I know who work for banks out there (and I believe them!):
- “Bangko Sentral ng Pilipinas (BSP) regulations require banks to sell their Real Properties Acquired (ROPA) within five (5) years; and
- a significant amount of ROPA has a negative impact on the financial ratios and financial statements of banks”.
2. Banks only need to recover the outstanding loan amount plus foreclosure costs, etc.
Another reason why it is possible for banks to sell their foreclosed properties at a price below market value is they only need to recover whatever amount was owed to them at the time the property was foreclosed, along with some incidental expenses like foreclosure costs, legal fees, costs for the caretaker(s), if any, and other miscellaneous expenses.
To begin with, the maximum loanable amount is usually only up to 70% to 80% of the appraised value of the property used as collateral, and it is very likely that the former owner already made a lot of payments which would further reduce the loan principal before he or she defaulted, thus the amount the bank would need to recover is usually less than the market value of the property. Some would refer to this as the book value of the property, although I am not a hundred percent sure this is the correct term to use.
Tip: Get a traceback of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT) of the foreclosed property at the local Register of Deeds to determine the mortgage amount annotated on the TCT/CCT. The mortgage amount plus incidental expenses the bank may have incurred should give you a good idea how much the bank needs to recover/how much you can offer.
Thus, some banks may either indicate a low indicative price on its foreclosed properties for auction, or they may be more willing to accept offers below the indicative price for properties that are for negotiated sale, .
3. Foreclosed properties need a lot of repairs
You can expect that a lot of foreclosed properties need repairs, and this is another reason why one may be able to acquire a foreclosed property at a discount. They can be in pretty bad shape because they have been neglected for a long time and/or they might have been cannibalized, they are very old, etc. Because of the need for repairs, banks would naturally have to sell them at a lower price compared to similar properties that require little or no repairs. Otherwise, no one would buy any of their foreclosed properties.
I believe a lot of real estate investors out there (including me), are afraid of foreclosed properties that need a lot of repairs. However, having much needed repairs can be a big advantage for investors because it can give plenty of room for profit, assuming its After Repair Value (ARV) is significantly high.
Of course, even with a discount, a prudent real estate investor should check and verify if a property is still a worthy investment inspite of the renovation costs. Get a quote from reputable contractors and check if the discount can offset the cost to renovate the property, and will result in a good enough ARV.
4. The foreclosed property has been left unsold for a long time
Think about it, if a foreclosed property is left unsold for several years, and it is located in a nice neighborhood that has experienced a steady increase in property values, then it follows that its market value has already increased. Of course, the property could have also deteriorated and it would need renovation for it to have the same market value of comparable properties around it. Again, one needs to check if the numbers make sense when the renovation costs, and other expenses, are considered.
By the way, some banks also give discounts for properties that are left unsold after an auction and you will notice a price reduction at the next auction. Imagine if a property is left unsold after several auctions, the cumulative discounts can turn a previously bad deal into a good one.
But why are foreclosed properties not as cheap as before?
Before, I used to ask myself “Why are foreclosed properties so cheap?”. But now it’s different. If you’ve been into foreclosed real estate investing for a long time, you should have also noticed that foreclosed properties are not as cheap as before, even with the reasons I have stated above.
I can only assume that this is because some banks have started to base their selling price on actual appraised values of comparable properties, instead of book values.
Understandably, seeing foreclosed properties priced very near or at actual market values of comparable properties is generally a turn-off for would be investors.
Nevertheless, I still believe foreclosed properties that can be considered as “good buys” are still out there, and it’s just a matter of finding those that are really priced below market value.
What do you think?
In your opinion, do you think banks are still selling their foreclosed properties at below market values? Why or why not?
Happy investing!
~~~
To our success and financial freedom!
Jay Castillo
Real Estate Investor
PRC Real Estate Broker License No. 3194
Blog: https://www.foreclosurephilippines.com
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Text by Jay Castillo and Cherry Castillo. Copyright © 2008 – 2012 All rights reserved.
Full disclosure: Nothing to disclose.
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i find this article so true.. most unfortunately for those who are just beginning to invest thru foreclosures.. i feel like it has jeopardize my dream of [sigh] financial freedom thru it .. [sigh] ..im almost certain i got the news so late.. i can use a helping hand right now..
How or where to compare the price of the foreclosed property given by banks vs the current market value?
Hi Danny, here’s how I do it: How I estimate market values of foreclosed properties
me too, i also want to learn the process in foreclosed properties. 🙂
Hi Jay,
I’m interested to find updated listings of foreclosed props available at the 2012 Pabahay Fair last week at SM megaMall which you used to publish in your previous columns (last year).
I hope this will be available in your succeeding feeds as this have been a great help to us working overseas (as reference)who are unable to be available at the trade fair site.
I am specially interested in the properties of our government institutions – SSS, GSIS, HGC, NHMFC as these are generally affordable for us.
Keep your informative columns coming. God bless you and your family and more power!
Thank you very much …
Hi Marth, I didn’t know they held the Pabahay Fair at SM MegaMall, did that replace the Housing fair? Anyway, thanks for the heads-up. I’ll come up with a compilation asap.
sir Jay tanong ko lang po.. dapat po ba tumataas ang price ng Lupa kada taon o dapat pababa ng pababa?
Thanks po sir jay
Hi Krimani,
It would depend on the location of the lot if the market value will go up or down. If it is in a good location (in the path of progress, a place where people want to live and properties are in demand, a location near jobs, schools, hospitals, churches, etc.), then you can expect property values to go up consistently. For areas in not so desirable locations (example: affected by ondoy, habagat, etc.), property values can stagnate, or go down. But as the saying goes, time heals, and even with those areas affected by floods, they can still go up, given a long enough time to recover.
I hope this helps. Cheers!
Great to have you back writing, Jay! Did you remove Discus?
I agree most banks, especially the big ones, already sell at market value. But an investor should always be looking for deals, you never know when a bank turns around and suddenly drops the price on a property.
I remember what a bank did a few years ago. They listed an apartment building for 15M. Some investors figured it would be a good buy at 11M and made an offer. The offer was rejected and the property was forgotten.
A few months later, the bank dropped the auction price to 5M. Another investor found it and presented it to the first set of investors who negotiated for 11M. Of course, they went in without hesitation. 🙂
To paraphrase Aga Muhlach, “Tumingin-tingin ka lang, marami kang matutuklasan. Maging isang Pinoy Investor!” 🙂
Hi Ronald,
Yup, still in catch-up mode though. Yes, i removed disqus for now, approving and then replying to comments was a pain, it was so slow, even if done at the back-end at their site. Actually, I believe disqus also made load times very slow. When I deativated disqus, I also discovered a bug where some comments are not synced to the wordpress database, very bad!
Yes, I’ve seen and heard of very similar deals to the one you described above! Very exciting! This is the reason why one really needs to pay attention and be on the lookout. 😉
By the way, we really should finish our database project soon, I plan to use it internally at first. Talk to you soon…
Yeah, that project is long overdue. Call me!
Thank you Brother Jay. Ang galing mo talaga. Gawa ka ng book about real estate ako ang publisher. Matagal na tayong hindi nagkita.May maganda akong listing ngayon.God bless.
Hi Von!,
You’re welcome at salamat! Pwede kitang kunin na publisher? Maganda yan… pag usapan natin soon, pati yung maganda mong mga listing… text text tayo! 🙂
Thanks and God Bless you too bro!
I’m a mortgage counselor in the US for 4 years, and indeed, you are correct on citing the reasons why foreclosed properties are cheaper.
In regards with that, here in our country, indeed price of foreclosure properties are getting high, unlike 5 years ago. I believe this is also due to the fact that information dissemination is easier nowadays, wherein if you are interested in a property, you can just google it and see if a bank owns that or not. That’s just my thought.
Anyway, happy hunting guys!
Hi Chuckkk,
Yes, I would have to agree that with information ready at buyers’ fingertips at the click of their mouse, this should result in a higher demand, which should naturally drive up the prices…
Thanks for sharing your thoughts, cheers!
Hello kuya Jay. Sana matutuhan ko din ang process sa foreclosed properties.
Hi Joliber, I’m sure kayang kaya mo yan!
thanks sir jay 🙂 i really enjoyed reading ur blogs 🙂 btw which bank has the most forclosed properties?
Hi Michael,
Thanks a lot for the kind words!
As to the biggest bank which has the most foreclosed properties, I have yet to research on that… but I just might soon…. thanks for the idea! 😉
Hi jay good day 🙂 does bank offer a 10% downpayment for forclosed properties?thanks
Hi Michael, yes, Unionbank is one of them. Good day! 🙂
Its very obvious that most banks are selling at market price not at book value. It can be easily seen in their bed price. Some are even greedy in terms of pricing . Banks are profit oriented institution so they want always high profit. adn the 5 years , it s only in papers ..I never heard or read any papers that the the bank was punish because not following the 5 years rule.
Hi Alexc, thanks for the inputs. I guess the keywords here to consider are “Most banks”. Which means there are still other banks that still sell at book value, or at least for some properties which are hard to sell…
The five-year period within which a back can hold on to real property is correct because, as pointed out earlier, the business of a bank is to earn money through loans, and not to own real property. However, banks have found a way to dispose of its foreclosed real assets but not really dispose them. Banks have created corporations independent of its bank operations to which they “sell” their foreclosed real assets before the expiration of the five-year period. But banks fully control these corporations, called special purpose asset vehicles. This is regulated by the Special Purpose Vehicle Act of 2002 (R.A. 9182). So in a ways, banks can comply with the five-year period rule, but they still can actually hold on to their foreclosed real assets through another corporation. I think this is contributory as to why prices of foreclosed properties are not as cheap as they used to be because banks are not as presssured to dispose of their foreclosed real assets within five years.
Good point Garm. But hasn’t the SPAV Law lapsed already?
The main reason why foreclosed properties are not as cheap as before is because there is a bubble in Philippines and the prices are going up, people are looking for cheaper options, in my opinion.
Hi Dalamar, you have a point. Property prices are getting inflated hence a bubble is forming (pardon the pun) with some real estate projects out there, and I guess the increase in prices are influencing the banks to do the same.
The question now is… how far are we into the bubble process?
– There is over construction
– I think credit is not yet cheap, and not highly available, right?
– Most of the people buying are not speculative yet, even if there are too many OFW buyin to rent… there will be enough people to rent them? Economy is booming, may be…
– Foreigners are putting a lot of money into the economy but not into the real state yet
Wondering whether we have a bubble or not is not productive. Rather than watching for a bubble, buy a property for cashflow then you can hold it whether the markets crashes or goes up.
“Wondering whether we have a bubble or not is not productive”
If you have properties it is productive if you sell at the right time, it is also productive if you are looking to buy to avoid making a mistake, for me is very important to identify if there is a bubble or not.
“buy a property for cashflow”, ohhh yeah of course but cash flow is not guaranteed, if you have excess of supply it will go down or even will be difficult to rent, they property I’m renting now it used to rent for double the price only a few years ago.
You can hold the property only if you can rent it, cash flow is not always stable.
Well, there are no guarantees in investing. That’s all part of the risk.
The reason most investors worry about supply is because they bought pre-selling condos. So when every major and minor developer built condos, the market was flooded with new units, rental rates went down and resale opportunities went away. Let me guess, you bought a condo in Bonifacio Global City a few years ago?
And cashflow can be unstable if you only have 1 unit. So diversifying your cashflow may work better for you. Own more property in different markets.
Hi Dalamar,
In my opinion, credit may not be cheap, but it can work in our favor and prevent a real estate bubble, because people who really cannot afford loans will not get any loans in the first place. This is very different from the US where loans were given to people with no income, no jobs, and no assets, and the bubble burst when they started defaulting. This scenario is very unlikely to take place here as banks are very conservative, in my opinion, although there are still a lot of people are availing loans (yes, the economy is booming…).
Yes, credit is not cheap, and that is a good thing for the real state market, it can go up a lot when the credit becomes more available.
The economy is booming and hopefully it will continue like that for a long time, Philippines is doing very well in this adverse environment, but we need to be careful I high Peso will hurt exports and also OFWs will have less purchasing power to buy properties.
You sure got that right Dalamar. Aside from traditional OFW’s, even “Online Filipino Workers”, those who earn dollars online are affected by the strong peso. Cheers!
Do you know any real estate investing forums? Thanks
Checkout the ones at pinoymoneytalk.com and skyscrapercity.com. 😉
Thanks! 🙂
Hi S’Jay,
Good day!
I just want to inquire what universities/ colleges offer units on how to be a licensed real estate broker.
Im interested to study again.
thanks!
Hi Joann, I heard of some but I am not 100% sure. As of now, I am sure that CRESR’s are still one of the requirements to take the real estate broker’s exam. I will come up with another compilation of CRESR providers for the 2013 Real Estate brokers exam soon.