By JUDITH BALEA, abs-cbnNEWS.com | 12/05/2008 8:13 PM
Whether it's investors looking to buy cheap and sell for profit, or families who want to bring their renting days to an end, foreclosed homes have a sure market.
In the last couple of years, foreclosed properties being sold by banks have been gaining popularity on the idea that they fit more easily into the budget than brand new homes.
Banks regularly hold auctions to bid out these second- or, sometimes, third-hand homes to prospective buyers. But they also book effortless sales just from taking dozens of calls a day from clients.
The secret is to give people incentives to entice them to take a risk on a foreclosed house, Janette Abad Santos, assistant vice president of Philippine National Bank's (PNB) Asset Management Group, told abs-cbnNEWS.com in an interview.
Foreclosed homes could sell for a fraction of their worth in the market, and may seem like a steal. However, if one's not careful in choosing, these kinds of homes could also harbor unpleasant surprises and could run into a lot of money for those who don't have much of it to start with.
Banks' bad assets
Simply put, foreclosure happens when a buyer fails to make timely repayments for a bank loan it used to pay for a property. The lender, after filing a notice of default, will then initiate the legal process to reclaim ownership of the particular asset.
This is perhaps the last thing in the mind of home buyers. Yet, many times, they are confronted with the problem due to unexpected circumstances like when they lose their jobs or incur huge medical expenses.
Meanwhile, in as much as banks want to repossess a property from a delinquent borrower, they don't really like keeping it.
Once banks take a property back, this falls in the list of their real and other properties acquired (ROPOA), which they sell at market value or below, depending on the condition of the properties.
Banks are in the business of lending and investing money, so naturally, they want cold cash. To them, foreclosed properties are bad assets that if they don't dispose of, would pile up and get too costly.
Bad assets punish banks in three ways. Banks do not only get stuck with an asset they could not collect and earn from, they also have to spend resources--from lawyers to security guards in the property--to justify why the asset should beawarded to them.
And, as a lesson from the 1997 financial crisis when aggressive bank lending fueled a real estate boom, Philippine banks are also mandated to set aside buffer funds--usually resulting in the need for the owners to cough up more funds to increase their capital base. The buffer funds are required to cover the banks' risk of eventually not collecting what they lent out, most of which are actually their depositors' and investors' money.
Lastly, having too many bad assets in their books doesn't speak well of the banks' claim of business prudence. Bad assets show off their poor lending decisions.
At end-September, Philippine commercial and universal banks' ROPA stood at P142.39 billion, down by 1.97 percent from P145.25 billion in the previous month, data from the central bank showed.
Big discounts
The buildup in banks' bad assets can't be helped, especially when the time between foreclosing a property and selling it takes too long, said Abad Santos.
"Before a property is foreclosed, the owner is given a year or so to remedy the soured loan. If he fails to, then the foreclosure proceeding begins. Even when the property is already transferred to the bank, we cannot sell it until a year after to give the former owner a chance to redeem his property," she explained.
As banks get loaded with foreclosed assets, they become more willing to negotiate with interested buyers who often pull an offer off the table and haggle. Such is the case with PNB.
In the industry, according to Abad Santos, PNB holds the largest inventory of foreclosed properties, with roughly 15,000 real estate products, of which 11,000 are residential houses, lots or the combination of both priced at P1 million and less. The bank's properties in all are worth a hefty P30 billion in market value.
But it does not expect to recover the full amount anymore.
"The bank normally sells a property at market value. However, like a tiangge (flea market), if you want to sell fast you should be willing to bring down your prices," she noted.
Abad Santos said PNB offers discounts of between 10 to 30 percent on homes. Aside from this, the bank also provides in-house financing carrying a fixed interest of as low as 8 percent over a period of one to 10 years, for properties worth P1 million and below; and up to 12 percent over five to 10 years for those that are above P1 million. Industry rates are basically in the same range.
Behind the discount
These discounts have a story that wise homebuyers need to know to fully understand why foreclosed properties are priced as such.
Banks are wise. In this centuries-old business of lending, they are fully aware that it is inevitable to encounter borrowers who couldn't pay up, whether due to bad business bets or because of issues that are beyond their control, such as the tumbling of the entire local economy.
Thus, right at the start when borrowers apply for a loan, banks already asses the collateral offered--usually a real estate property--based on the most conservative of standards. The most prudent banks in the Philippines usually value the collateral property being offered a few notches below their current market price.
For example, a Fort Bonifacio condominium owner might have bought the unit at about P5 million, but the conservative banks would asses it at P4.8 million or lower, depending on the banks' perception of price risks, which could be influenced by oversupply or inflation in construction materials.
It is from this assessed value that the banks would now base how much they will lend to the borrower.
Currently, banks lend only the equivalent 60 percent of the assessed value of the property. In the Fort Bonifacio unit example, that means the bank will only lend P2.88 million to the borrower.
Banks say the property owner should shoulder the remaining 40 percent of the property's value (equivalent to P1.92 million in the Fort Bonifacio example) as a proof of the borrowers earnestness. By shouldering a portion of the property's value, the banks don't end up financing the entire deal.
But that's just one way to put it.
The other way is this: Banks know that when bad assets pile up, they will have to spend that 40 percent (that P1.92 million) in legal fees during numerous court proceedings, and litigation and documentary requirements, and in some instances, even hiring security guards to make sure illegal settlers don't inhabit the property, thus further reducing its resale value.
Obviously, banks would like to recover 100 percent of what they lent out, and hopefully the legal and other costs they incurred in trying to recover the property and cashing it in.
To the second—or third—hand homebuyers, discounts in foreclosed assets that go up to 40 percent mean the banks are already willing to absorb their legal and other costs.
In the Fort Bonifacio example, it means the bank is willing to swallow the P1.92 million (the 40 percent portion) as a foregone resource just so it could recover the P2.88 million (the 60 percent portion) that it lent out.
In other words, the discounts depend on how desperate the individual banks are to convert these foreclosed properties into cash. The more foreclosed properties they have, the more the probability that they are selling these foreclosed assets at firesale prices.
Buyer beware
Buyers also need to beware of deep discounts. More often than not, there is a catch.
Usually, foreclosed properties at rock-bottom prices have "defects"-- from an impending legal case to the perennial problem of squatters. Sometimes, it could be that the title of the property has not been transferred under the bank's name yet, the reason why an irked former owner won't leave the place.
"These are some of the encumbrances that a buyer will have to take on when purchasing cheap properties. They have to keep in mind that all banks sell properties on an 'as-is, where is' basis," said Abad Santos.
A buyer is therefore advised to thoroughly inspect a foreclosed home before purchasing it. Or else, he could be snatching up a deal that's not as good as he first thought.
Diverse market
Abad Santos described the market for foreclosed homes as "vast."
"We have buyers coming from the A, B and C segments. These include big businesses, individual investors, overseas Filipinos and start-up families," she said.
And behind every home purchase she witnessed was an interesting sub story.
There were those who have turned buying and selling properties into a business while some just wanted an affordable place they can call their own.
Abad Santos recalled that they had foreign clients who got homes for retirement purposes or simply to have a proof of investment in the Philippines.
Overseas Filipinos, in particular, would usually buy homes for their families in their hometowns.
Many times, however, a former owner of a foreclosed home and his family would share expenses to win the property back because of its sentimental value.
"Largely, purchases here are emotional. But you see, that's how we Filipinos value our families and the things we share with them like our homes," she added.
as of 12/05/2008 8:13 PM
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