Looking for the best value for money is one of the foremost considerations in acquiring property. There has not been a more opportune time in a very long while to make these acquisitions than at the present. Low interest rates, affordable payment schemes and a growing economy are some of the main contributing factors to this.
Several years back when the property sector and the economy were in the doldrums, the Special Purpose Vehicle (SPV) Act was passed to enable banks to sell their portfolio of nonperforming assets (i.e. foreclosed properties, et. al.) to stabilize their liquidity or money supply. Under the said law payments for the documentary stamp tax, capital gains tax and value-added tax were waived and registration/transfer fees usually collected in the sale or transfer of assets were reduced by 50%. On top of the incentives offered most of these properties were priced at a discount to further facilitate the sale. The underlying condition was that nonperforming assets were to be sold in bulk and consisted of both choice and not so choice assets.
A considerable number of these nonperforming assets were eventually disposed during the effectivity of the SPV Law until it completely lapsed in 2008. To date, even without the incentives provided by the SPV Law, there are still some potential good buys from the remaining assets.
The question we wish to address is “Why buy foreclosed properties?”. There are several good reasons to buying foreclosed properties. In our opinion, those presented below are some of the common and more obvious advantages.
First off, foreclosed properties are normally sold at a discount. The lower price would be the main motivation of potential buyers to acquire the property. Given this, banks and other asset management companies would ideally dispose of these properties at the soonest possible time to maximize profitability from its sale. The longer they hold on to these properties the more losses they incur through holding costs (i.e. security, maintenance, taxes,…) and possible depreciation .
Secondly, there are some great finds in these foreclosed properties. If properly scrutinized plus factors can be realized in terms of location, condition or state of the property and its potential for development among others. These factors may vary according to the buyer’s needs and perception. Some buyers may see these factors outright while some may need further convincing from the seller or additional advice from a third party such as a real estate services company.
In some instances, some of these properties may even be considered brand new especially if the construction of the foreclosed property was just recently completed. The fore-closed property may also look and feel like it is brand new if the previous owner was very meticulous in its care. This may be unfortunate for the previous owner but for the benefit of the current buyer. As the saying goes, “Another man’s loss is another man’s gain.”
Lastly, buying foreclosed properties reduces the nonperforming loans (NPL) portfolio of the bank thereby increasing its liquidity. This additional liquidity can be tapped to finance other projects such as property developments, businesses or the acquisition of a new house, a new car as well as other goods and services.
All told, buying foreclosed properties is beneficial to both buyers and sellers. It can provide the best value option for the buyer and at the same time contribute to the strengthening the banking system and the economy.
As a disclaimer, we would like to point out that we are not saying that foreclosed properties are better than non foreclosed properties or even the other way around. In the same way that we are not saying that previously owned properties are better than brand new properties. We are merely stating that there are advantages to buying fore-closed properties.
In the end, it is the buyer who will decide on what to buy from the different options presented him, whether it be a foreclosed or brand new property. What is important is that the buyer should be properly informed regarding these options. It is hoped that his decision will lead him to buy what he knows and feels would be most beneficial to him whether it be measured in terms of monetary or other preferential values.
Real Estate Professional, Mr. Ramon C.F. Cuervo III, shared his pointers on foreclosure assets.
“We are all interested in buying properties on bargain prices,” Mr. Cuervo said. “A basic rule in real estate investment is to buy below market value. One can post a profit not when you sell, but when you buy at substantial discount of say 20-30%. This is the opportunity that one gets in buying foreclosed real estate.”
However, Mr. Cuervo said that it is important to look at the property to be sold. “Have it appraised and make necessary due diligence study. Studies includes avoid buying properties that are under litigation, Make sure you check the title and taxes, interview occupants if there are any but if they are hostile, stay away.
He likened the real estate bargains to an “ukay-ukay” basis- select, inspect, analyze, appraise, and make a due diligence study.
Having known some Spanish words, Mr. Cuervo said that “In ukay-ukay real estate, that is buying foreclosed or distressed properties, I advise my grandmother’s formula: Bueno, Bonito, Barato which are Spanish word. Bueno means good, which applies to good location. Bonito means good quality. Barato means cheap or value for money.”
Source: Pinnacle Real Estate Consulting Services, Inc. (Formerly Capital Servicing Advisors Phils., Inc.)
Pinnacle Real Estate Consulting Services, Inc. (Formerly Capital Servicing Advisors Phils., Inc.) provides a full range of services to local and foreign investors, buyers, and real estate lenders. Pinnacle’s primary business lines are real estate asset management and brokerage, real estate closing and advisory services, and non-performing loan asset management.