Friday, January 24, 2014

Institutional Sellers are not all alike

Institutional sellers, such as banks and government agencies have been a large part of out real estate market. During the "crash" five years ago, many homes were foreclosed upon by the lenders. These homes have been sitting in various stages of either foreclosure or short sale attempts, etc. Now they continue to trickle onto the market sold by the institution that ultimately ended up with the property. As the title above says; not all institutional sellers are alike.

To understand the difference we first should look at the process. The following description of the process is intentionally simplistic just to keep it a light read. The actual processes are very sophisticated. I have a fair amount of experience in this arena but am by no means aware of every articulate detail in the foreclosure proceedings. This basic outline however can be helpful to understand why institutional sellers do what they do and how it can benefit buyers.

Conventional loans are typically "sold" to either Fannie Mae or Freddie Mac. These are the two large quasi-government companies that purchase mortgage paper from banks and package them as securities to be traded on the market. The system dates back to FDR which is a brilliant legacy piece of legislation. basically, a bank makes a loan for say $200,000. If that loan meets the criteria of Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corporation) the bank can sell that note at a small profit to them and then they have another $200,000 to lend out again. It is this system of selling mortgage paper that allowed the American dream to become reality for two thirds of the population. Other loans that do not meet the criteria may be sold to other mortgage investor groups as well.

The other common type of loan is a government insured or government guaranteed loan. These are usually FHA, VA or USDA loans. These loans are similar in that a bank makes the loan and then sells the paper to investors not too different from conventional. These loans however end up differently if a foreclosure happens.

With a conventional loan the bank that issued the loan is initially responsible for servicing that loan. They collect payments and if necessary foreclose. In a foreclosure the bank must follow federal and state proceedings. the home is usually sent to auction by the local courthouse. If it does not sell at the court auction the servicing bank takes possession. That bank may buy the house back from the courthouse and sell it or it may end up going back to the investor that bought it (usually Fannie or Freddie).

When a government backed loan goes south, the government usually takes the house back. FHA foreclosed homes are sold by HUD (U.S. Department of Housing and Urban Development), VA foreclosed homes are sold by the U.S. Department of Veterans Affairs and the USDA foreclosed homes are sold by the U.S. Department of Agriculture.

To simplify there are broadly three types of institutional sellers that are commonly found in the market. They are Banks, Fannie/Freddie, Government.

Banks are the closest to traditional sellers. They often have a few legal addendums they ask to be a part of the sale agreement. The terms vary from bank to bank as to whether they are strictly selling the property "as is" or whether they will negotiate for repairs. For a bank it is always about their bottom line. They are cold and calculating. Once in contract bank owned properties typically close on normal time frame. Banks can be slow to respond to offers or inspection repair requests but generally the transactions are easy to manage. Sometimes banks will negotiate strongly on price so if the home is priced a little high buyers can come in soft and might make headway. Banks may act stupid, but they are not. In this market super low-ball offers generally will be ignored by banks or countered at full price..

Fannie and Freddie have been in a bit of a transition over the last few years. They used to sell "as is" with the homes often in sorry condition. Lately they seem to be taking the approach of fixing the house up and making it a "turn key" move in ready property. They still sell "as is" but all fixed up it is almost moot. These two institutions require the buyer to use their official sales package with terms that are very specific and non-negotiable. Fannie requires the buyer's agent to load the offer into their computer and await a response. Fannie also requires buyers to either use their appointed title and escrow service or choose a local company and pay all costs including the seller's costs. Freddie has the buyer's agent submit and offer traditionally to the listing agent but that agent then loads the offer into a computer similar to Fannie. Upon approval the Freddie required sales package is sent to the buyer for signatures. Fannie and Freddie can be frustrating in that they often will stand firm on a price only to lower the price a month later below that which they denied the previous month. They are very sluggish to respond during the transaction but generally speaking provide an opportunity for buyers to get a quality home at a good price. I have noticed that some properties listed by Fannie Mae lately have been priced high. They have a practice of lowering the price every thirty days and I find that about 20 days into a price reduction they are most negotiable on price. Like the banks, they will not entertain ridiculous low-ball offers.

Government is a whole different 'shebang'. Personally I have not yet sold a house that was owned by the USDA. I have sold houses owned by the VA and HUD. If owned by the VA and the buyer is a Veteran the transaction can be quite smooth. The VA is committed to getting Veterans into the homes they own. If they are unable to find a suitable Veteran the homes are available to non-veterans. HUD is probably the most common government seller. HUD has a bidding process. Most HUD homes are required to be offered for an initial period only to owner occupants, not investors. After that initial period of 15-30 days the property is open to all bidders. The process begins with a sealed bid auction. Usually the first ten days. The buyer's agent loads the offer into the HUD computer and at the end of that sealed bid period HUD will either accept the strongest offer or reject them all and continue on a daily bid process until they get an acceptable offer. I have not seen HUD take up the practice of fixing up the homes like Fannie and Freddie seem to be doing. HUD homes are often pretty rough. HUD sells "as is" and is difficult to negotiate with. Up until very recently all HUD transactions required using HUD's official closing agent. That process was slow and frustrating. Here in the great state of Washington, HUD has instituted a local closing program. This allows the buyer to choose a local title firm to handle closing procedures. This is awesome. Other than some anal retentiveness on the part of HUD to approve the final closing statements, this local process has been a wonderful improvement to the buyer's experience.

So there it is in a nutshell, albeit a large coconut-shell. Do not be afraid of institutional sellers; just be aware. The process will not always make sense and they will do things that seem, well... stupid. But in the end if the buyer gets the house of their dreams for the price they want; it is well worth the aggravation.


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