Banks and their REO -What you Should Know !

We at Edge Consulting are learning the new methods needed to successfully approach Banks wishing to sell their unwanted non-performing assets (REO). Here is a summation of what we are seeing.

Banks today are all over the place when it comes to strength and health. The healthier the bank the less difficult it will be working with them towards a reasonable price. In classifying banks it is the HAVES and HAVE NOTS that determine how you need to approach a bank. In this case we are speaking about REO, so the HAVE NOTS are the ones with less and therefore easier to work with. NOTE: Sometimes the "HAVES" can be just as difficult because they are not desperate to sell; especially if it is a good asset with obvious potential that can wait for better times.

We need to understand the capital pressures banks are under when looking at an asset. Recently Edge was retained to assist another consultant and an interested builder in analysing a large partially built condominium project in a good location. As a potentially profitable asset it suffered the wrong asking prices at the wrong time...a very familiar scenario today. We wondered why the bank was carrying the asset on the books at such an aggressive price. As it turns out this was a HAVE bank; owning lots of REO. So why were they being so difficult? In many cases banks are working with a relatively small overworked staff making for long response times and little back-up data. The REO officer might have been the chief credit officer before or an account rep. As developers and builders we know more about the market, building costs, carry and problems aligned with this process than banks do. Our greatest fear is whether their is a market that will eventually be moving up in values and the market depth when it does. Here is where the clash of cultures begins; an informed party and an overworked banker. Our HAVE bank does not dare lower its prices unless told to do so by the auditors. If they have a recent (or even a year old) appraisal that supports the price on their books, it will stay at that number. Reducing Bank REO prices on their balance sheets can result in an unfavorable event for the bank. If the value of the asset is defensible then auditors will accept the bank's pricing. If on the other hand it cannot be supported the bank must realistically price the asset. By doing this, banks capital requirements and its Federal rating may be lowered. If lowered too much a bank will be taken over by the FDIC and sold to an investor group, a stronger bank or run by the Feds until the bad bank can be sold or merged. This fear of under pricing an asset portfolio can sometimes paralyze a bank's ability to deal with a sale of an asset to a builder. This is true for $2 million dollar assets or $50 million dollar assets and above.

You need a strategy that takes into account the bank's nervousness. Here are some scenarios we have encountered when trying to get back-up information from a bank to properly assess our future offer:

1. Banks will make you sign a confidentiality agreement, and they mean it.

2. Getting the much needed data may be difficult, especially if the bank is a HAVE bank with plenty of REO. They are paranoid about letting out potentially unfavorable numbers to someone just kicking the tires and wasting their time.

3. Be prepared to make an offer that may not have the amount of data you feel you need to peg a price. Have "subject too's" that protect your contract rights. Once the bank sees that you are serious, you will get the information you need.

4. Be patient, even if other people are looking at the same asset. They will be handled no differently.

5. Do not be offended by your offer. Show how you arrived at the numbers. Without the full data package you have plenty of unknowns to persuade a bank to consider your value system. If not you may withdraw the offer and stay in touch for a later attempt.

6. Be mindful that if you are interested in one of the better assets the bank may be willing to wait out the market. Again, in this case, stay in touch and offer your expertise and assistance; brownie points never hurt.

7. Be persistent, but not bothersome. Eventually banks do come around. When they do, you want to be the most memorable.

8. There is no deal until the board of directors approves the sale. Be sure you work with people that have the authority to take your offer to the final level.

9. Don't be afraid to ask for terms or financing. If you are buying an "A or B+" property that appraises well at the right price, and it is a good deal for some lender then why not the current one?

The only difference between a non-performing asset and a new properly planned project is the benchmark where a reasonable profit can occur in the existing market. We are currently at work in this very environment where our client and the bank are millions apart. The only thing that can change that now is a revelation in the withheld data that upon issuance to the developer may cause him to increase the price he is willing to offer. Or if the data does not support an increase, a persuasive developer can show the bank why their pricing process may be flawed. The developer has the knowledge and the money, but the bank has the asset. Somewhere in all of this a deal will be struck. Hopefully, it will be your offer and not the next developer to come along. Eventually, all bank REO will get redistributed into the private sector again.

THE EDGE TEAM.