I Don’t Get It? The Bank Forecloses on Their Home and then Pays Them to Move…or Why Cash For Keys
It should be more than obvious, by the time an REO property is assigned to a local Real Estate Agent, that the bank wants’ the property back so they can liquidate the real estate and minimize their losses.
Just figure it out…the previous homeowner went at least 3 months without making a mortgage payment prior to the foreclosure process and then another 4 months for the California foreclosure process to weave through the process. Many times there are even additional months that the bank did not receive payment.
So now we have 7 plus months of non-payment – go ahead and add that to the cost the bank has incurred in trying to collect the money. At the very bottom of the list is the cost of the direct mail sent to the homeowner followed by the cumulative hours of manpower, computer and telephone costs which is multiplied if the parties tried to work out an agreement.
Then if the property was listed for sale and a short sale was attempted, thousands more have been spent between managing and manning a negotiation team and the BPO’s and appraisals that had to be ordered and paid for. Many times this ‘negotiation’ only extended the inevitable auction date, when ownership of the property would be legally transferred to the lender.
Of course even a non-judicial foreclosure incurs thousands of dollars in legal fees and costs. In this industry, no one does anything for free. (Except an occasional free BPO by a REALTOR® - but that’s a whole ‘nother story!)
What Does It Cost The Bank?
If all of these out of pocket expenses aren’t tough enough on the banks bottom line the big kicker is the declining value in the Hemet Real Estate market. The local economy here may not be representative of other markets, but here we have lost an average of 2% to 3% per month in value for the last 3 or 4 months and 1% to 2% for the 6 plus months preceding that. It is not uncommon for a Hemet home to be worth 15% to 20% less today than it was just 6 months ago. For a $300,000 home, that could easily be a $60,000 loss in value. Add another $5,000 t $10,000 for the out of pocket expenses I discussed above and 7 months of missed payments can easily add an additional $15,000 or more onto the banks losses.
Add it all together and it should be pretty obvious that the bank wants to get the property back as quick as possible.
Cash For Keys
The REO industry figured out that if the home is still occupied that it would be much more cost effective to offer the occupant a cash incentive to move out by a certain date in the very near future as opposed to spending even more money on an eviction, which is the last straw for the former homeowner.
Before I go any further, I just need to remind anyone who reads this that I AM NOT an attorney and what I am sharing here is just my opinion of the process as I understand it, as a California Licensed Real Estate Salesperson and a member of the California Association of REALTORS®. If you are seeking legal advice – please find an attorney.
What Makes a Foreclosure Eviction Different?
The big difference is there really is no defense. My understanding is that if the property is occupied by the former owner of the property then there is not much more they can do except tuck their tale between their legs and move-on.
If there is a renter or other tenant in the property, it may take a bit longer.
Of course this is one more expense that needs to be added to the balance sheet that the lender will be absorbing (and passing on the costs to it’s other customers and stock holders).
So, What is Cash for Keys?
“Cash For Keys” is a program that each lender administers in their own way (some even have their own proprietary name for their version of the program). Some of the banks I work with have a simple 2 paragraph agreement that the recipient is required to sign and I have seen others as much as 8 pages long.
The long and the short of it is the bank agrees to pay for a smooth transition of the property from the occupant to the REALTOR®, so we can prepare the home for sale and ultimately sell it.
There are three elements that are universal to every agreement. 1) The bank will offer so much money for the home to be vacated; 2) the REO property is to be vacated by a very specific date and time – usually 3:00 p.m. on the following Friday; and 3) the REO property must be left ‘broom clean’. The 4th universal truth about every Cash For Keys Agreement is that the recipient must also sign a W-9 form so the bank can send the 1099 the following year, reporting this as the income it is.
Broom clean is described to the occupant as not leaving behind any personal belongings or trash of any kind – inside or out. I let them know I am not looking for washed windows or waxed floors. I am looking for a clean home without any additional damage – meaning no holes in the walls or torn up carpets. Everything attached to the REO property remains as real property and that this includes the appliances, plumbing fixtures, electrical fixtures, outlet covers and everything else. If it is not left this way, they cannot get their check, as those funds will have to be diverted to a crew to restore the property.
I am very firm on this issue. I have shown up and found ovens and other appliances removed, being told that they bought those. I have had ceiling fans taken down. The worst burn I got was after my contractor went in to change the locks out and discovered that both of the huge city trash cans were filled with paint cans and other toxic chemicals that are difficult and expensive to dispose of.
And What About the Money?
Typically, as soon as I receive a signed Cash for Keys agreement, our Admin staff will process the paperwork and forward it to the bank. Over 95% of the time I have a cashier check overnighted to me 2 to 3 days prior to the schedule transfer of possession. I just received a check yesterday that I though had been sent to the former homeowners at their new address, which I provided to the bank 3 weeks ago when they moved out! It is unfortunate, but sometimes it just does not show up on time – it is not my fault, it is just the way life happens sometimes.
The REO Team has recently changed our policy on the final inspection. In the past it has always been a REALTOR® responsibility. Even though we are firm, we have been sucked into the personal drama of the people moving and may have overlooked a detail or two and let a substandard conditions get by.
In an effort to ensure that our lender clients get exactly what they are paying for, we have now assigned that task to our Field Services division. This way, they can check the property to make sure there is not any work they need to do and can change the locks right there on the spot. It is an impact statement to the former occupant for them to see the lock change process take place right before their eyes – it is sending a message that this is no longer their home. It’s hard, but it’s reality and I would rather send that message then have them arrested for trespassing or breaking and entry. Trust me, that is not a pleasant experience and one that no one should have to experience, from any prospective.
Next Time I’ll share Scripts
In my next article I’ll share some of the dialogues I have with occupants and convince them that the Cash for Keys program really is in their best interest. It is really very simple and yet so few have figured it out on their own.
<<UPDATE>> Please do not post dollar amounts in the comments. The last thing I want to do is explain why someone else is getting more than we are offering. Thanks
Blessings to all who read,
John Occhi, REALTOR®
Century 21 Crest - CrestREO
CrestREO.Com
Hemet - San Jacinto Valley
951-927-9473
Servicing THE REO Needs of Asset Managers, Banks and Lending Institutions in the Hemet - San Jacinto Valley, Temecula, Murrieta, Winchester, Wildomar, Menifee, Sun Valley, Perris, Moreno Valley, Romoland, Homeland, Nuevo, Banning, Beaumont, Cherry Valley, Yucaipa, Redlands, Mentone, Loma Linda and throughout South West Riverside County and The Pass Areas of The Inland Empire in Southern California. If you are a buyer, investor, first time home buyer or are just interested in REO real estate, please contact us at the above website or phone number.
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