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REO and Flipping

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Wayne Henry

Thread Starter
Junior Member
Joined
Nov 17, 2003
Professional Status
Certified Residential Appraiser
State
Maryland
If I appraise an REO property and it seems like a good deal can I then place an offer for the property? Is this considered insider trading? Is there a conflict of interest here? Does anyone own an investment company and also appraiser on this forum that can tell me a legal way of going about this. The increasing demands and lesser fees on our profession is forcing me to go back to my investment roots which is fine by me (less work). Any suggestions on going about this legally are greatly appreciated.
 
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Richard Carlsen

Elite Member
Joined
Jan 15, 2002
Professional Status
Licensed Appraiser
State
Michigan
Once you even begin to contemplate a way to acquire the property while you are in the appraisal process, you have automatically (IMNSHO) defiled your independent status and must immediately disqualify yourself from signing the Certs that says you have no interest or contemplated interest in the property. In other words, you cannot plan on buying the property for any reason and appraise it at the same time.

If you want to appraise; then appraise. If you want to invest; then invest.

Just don't try to mix the two.
 

hastalavista

Elite Member
Joined
May 16, 2005
Professional Status
Certified General Appraiser
State
California
Wayne-

This was discussed in detail recently (last 2-months?) and there is some controversy on it.

My opinion is this:
The issue in regards to the appraisal is if you had an interest or potential interest in purchasing the property while doing the appraisal? If so, that needed to be disclosed (I think most would say to decline the assignment- I would decline the assignment).

More likely is the scenario where the appraiser appraises the property and then considers purchasing it after-the-fact. Appraisal is finished, it seems like a good deal, maybe I'll buy it!

What is important in my opinion is:
A. Make sure there is no conflict of interest. If so, decline the assignment or pass on the deal.

B. If there is a potential appearance of conflict then take steps to make sure this appearance is disclosed and explained away. This would be the case if I were purchasing from a client a house I appraised for a pre-foreclosure 2-months ago. I'd want to make a statement in writing and get acknowledgment from my client (who I presume is the seller) that I did the appraisal at point X with no interest in the subject at that time, and have made a purchase decision after point X; my appraisal and my purchase decision are independent and not related decisions/actions.

It may be a good idea to contact your regulatory board and get an opinion from them. My guess is that their advice won't be much different, but your action in contacting them may provide evidence of the steps you have taken to insure that no conflict (real or imagined) exists if you decide to purchase a property that you've previously appraised.

(Others will have a significantly different opinion) Good luck!
 

Mr Rex

Elite Member
Joined
Jan 12, 2004
Professional Status
Certified Residential Appraiser
State
North Carolina
Wayne, rather than cross that grey line, I follow the courthouse auction sales in the local papers. In NC they are required to give public notice 2 times within 2 weeks of the courthouse foreclosure sale. If I see a property that I might be interested in after looking up the tax card etc. I will drive by, if I'm still interested, I do an appraisal for myself with an As-Repaired market value. From there I deduct having to pay a realtor to sell it after I fix up, anticipated costs to repair with a big fat cushion for the unexpected, since I haven't been inside, account for expected profits, and come up with a maximum amount I can bid at the courthouse sale. Sometimes they do sell for pennies on the dollar and you can get a deal this way, but it is risky because usually you are gambling on the interior condition etc.

If the bank buys the house back at what is owed, typically this is way above what I would pay, and it goes to a local broker. It usually takes 30-45 days before it hits the MLS, but I look daily. Once it does, I will go look at the house, and eve crawl under and through the attic with my Home Inspector hat on, to further tighten my expected costs to repair etc. and make them an offer based on my anticipated costs and desired profits.

A perfect example, the house across the street from me is REO. The guy that lived there had a contract on it for $145k last year, but some termite damage was found during a HI. The guy stupidly refused to negotiate, and lost the house (he had changed jobs, and took a cut in pay etc). Came on the market at $116,900, recently dropped to $106,900, total DOM now 120+/-. I am going to make a cash offer of $65k next week, with closing immediately. I would be willing to go up to $85k, but I am bringing cash to the table, and at this point hope they are ready to let this one go. Needs about $2500 in termite repairs, and probably $15k worth of cosmetic updating to be worth $175k or so, but even if I pay $85k, I would make decent money at anything over $120k if it turns fast. Over $85k and I will haver my money tied up too long to get what I need to maek out of it etc.

A friend of mine that has been fixing and flipping for a while has recently started doing an auction, 30 days after he closes. He lists them in the MLS as soon as it closes at the as repaired value. If he doesn't have it under contract within 2 weeks, he starts advertising the auction, minimum bids start at his total cost + a reasonable amount of profit (he doesn't have to pay a realtor when it sells at auction). He is doing 1 a month, and will likely make $150-200k doing this over the next 12 months.
 

murray stroupe

Senior Member
Joined
Apr 27, 2005
Professional Status
General Public
State
Tennessee
Re ; No place like home

That REO home close by sounds desirable for several reasons,Mr Rex;
including a bank or credit union would likely look on you buying & your profession favorably.

One local REALTOR did not permit the appraiser to be related to the listing REALTOR.Assuming legality, disclosure, some may differ, on that.

1] Easy as a seller, to get emotions entangled, when selling ''the old home place''.

2]Time & gas saver , close to home.

3] Difficult sellers have to cut prices, that trend favors the buyer.

4]Maybe they can use treated wood for replacement;
rot proof & termites cant stand the stuff.Some changed the chemical formulae, so i had to take some decking back this year,exchange it, so it matched reasonably well.
 
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Couch Potato

Elite Member
Joined
Mar 15, 2004
Professional Status
Certified Residential Appraiser
State
North Carolina
Déjà vu all over again. :rof:
 

Ion Caza

Sophomore Member
Joined
Oct 21, 2005
Professional Status
Certified Residential Appraiser
State
Michigan
Wayne,

I am sure that you can find a lot of good deals, which you do not appraise. Why to have trouble if you have appraised it? By the way if you appraise all the "good deals" means that you have so much work that you do not need anything else, keep appraisaing.
 

ketchumid

Freshman Member
Joined
Oct 5, 2007
Professional Status
Appraiser Trainee
State
Idaho
If appraisers can't figure out how to make money on these REO properties then nobody can. Before I decided to get into appraising (still learning as trainee) I begin my RE exploits looking at distressed properties for my friend who is an investor and broker. I would hit the pavement and he would visit only after I weeded out the ones that would not pencil.

It turned out that our biggest competition was an army of ill equipped single investors that watched way too much cable tv on how to make millions in RE.

I watched these "future millionaires" get in trouble fast and these are now the #1 type of default loans according to Countrywide mortgage (single buyers (not martial status) non owner occupied properties.

There's money to be made for sure but in todays market you really need to know where you stand, hence if an appraiser can't find firm footing on a deal then who can?

As far as appraising properties and having an interest in buying them, I say keep it separated, like it was said in the post above there's no shortage of properties for us if we want to invest, we don't need to do it with an assignment subject property.

Owning RE is still the cornerstone for wealth, anything less is working for a wage. Looking for properties to "flip" is great, but the great ones find the properties they can buy and hold.
 
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