However, this P9.7B inventory is still huge, and it is presents a lot of opportunities to investors who want to make money in disposing these bank-acquired assets. Banks, by nature of their business, in most cases are always motivated to sell these assets because they Non-Performing Loans (NPL) become a liability to them, and banks are usually required by the BSP to spare the same amount of liquidity (money) equal to the amount of their NPL as reserve money, meaning they can't loan that out to their borrowers, thereby decreasing their ability to make money out of their own money! That's why they want to dispose of these assets (liability is the more appropriate term because these properties are depreciating over time and the banks absorb the depreciation cost).
STARTING FROM THE BASICS
Just like in any honest-to-goodness business, you need to find your target customers and make them aware that you have a nice product that will better address their need. That's Marketing & Selling! I always believe that any business should deal first with the Customers in mind.
You also need to have a good grasp of pricing your goods in such a way that your target market will race against each other to get hold of your product while you make money in the process. That's Value Engineering! Designing a good cash flow pattern is also crucial in maximing the value that you can get out of the product (will expound on this later).
And once you have the interested buyer of your product, and now writes the check and signs the Sales Documents, then that's it.
Foreclosed Assets and bank-acquired assets are two different types of assets. Foreclosed assets are those house & lots that were recently foreclosed or repossessed by banks in either a year past or less. If you are going to invest on these assets you may have to wait until the mandatory 1-year redemption period is over. This will tie up your money because the title cannot be transferred from the borrower's name to the bank's name until that period has lapsed with no pending court cases.
You can however still make a lot of money from Foreclosed Assets but I will discuss it separately because it's totally a different route. I would suggest that you focus on Bank-Acquired Assets because you can make a fast turnaround with it.
HOW TO DO IT
Let me just share here the simple steps how to make good money from bank-acquired assets:
- Find your potential customers by dropping a visit to established brokers. Active selling brokers usually advertise their services all over town. Find out what their buyer exactly wants (floor and lot size, number of bedrooms, toilets, parking space, amenities, price range and location, among others); establish a good rapport with them by discussing the desired commission rate and schedule of release(s); and get their commitment to help you dispose of your potential inventory.
- See the Manager of the Asset Management Group of the target banks and ask for a complete list of their acquired assets. They will usually give it to you in printed form but it helps to have a handy, virus-free USB for easy downloading. The list usually includes the description of the property, the location, and bank's selling price.
- Find out from among the list which properties come close to what your prospect buyers want, and ask the Manager to schedule an ocular inspection. While on the trip, squeeze as much insider information from the bank representative as to how much discount does his boss approve in terms of price percentage.
- When on location, take as much pictures of the house, in and out, and zoom on those leaking roof, worn-out ceilings, peeled-off paint and wall papers, etc so that you can capitalize on these issues when you ask for a discount. And this will also help your memory is estimating the cost of the needed repairs.
- Always ask the neighbors their inputs on the peace and security of the area, flood history, availability of public transport, water supply, proximity to hospital, market, schools, malls, etc; selling price of the latest house sold in the area, etc.This info will definitely help your judgment.
- Assuming that you eyed some of these properties, start working with your numbers by answering the following questions: (a) How much is the fair market value of the property after the repairs? You can easily answer this question by taking the shoes of the buyer.; (b) How much is the estimated cost of repairs? You might need to seek assistance here if you are not familiar with this part; (c) How much money will I gain out of it?; net of the cost of the house, the repairs, commission and income tax?
- If you are comfortable with your estimated net gain, discuss the matter with your broker, show her the pictures (just the nicer ones!) and describe to her the repairs you will undertake to make the house like new, how much you are selling it, etc.
- Then make a formal offer to the Bank, usually discounted at 30-40%, pay a reservation fee of P10-50T, and the 10-20% down payment spread over 6-12 months, depending on how you designed your target cash flow.
You can actually do this with almost no cost to you if you happen to be lucky. Here's the scenario: Say the bank's list price for the house is P750T and the approved discount is only 30%, so that's P750T - 25% = P525T. Assuming that the cost of the repairs is P200T, so that's P525T + P200T = P 725T. And assuming that the prevailing selling price in the area for the same house & lot is at P1.7M, just be content by selling it lower than that, say at P1.5M; and your agreed sales commission rate is 8%, so that's 8% x P1.5M = P120T commission.
Based on the above, your net gain would be P1.5M - P525T acquisition cost - P200T repair cost - P120T comm = P655T or a profit rate of 43%.
But if you require the Buyer to pay P50T non-refundable reservation fee, this will already cover the reservation fee you paid to the bank; and if the Buyer agrees to pay you the required 20% down payment (10% cash down = P150T upfront, remaining 10% over 3 months = P50T/month cash inflow) so that means you will have P150T cash on hand which covers for your P200T worth of repairs. But why spend that money if you can get the needed materials on 30-60 days credit from the hardware store. So practically your repairs and monthly downpayment to the bank, which is 20% of P525T = P105T is actually funded by your Buyer and the hardware store.
Once the house is ready and your Buyer got a pre-approval for bank loan to cover the 80% balance (80% x P1.5M = P1.2M), then you can now execute a deed of assignment of the contract in favor of the bank and once the loan is released, the Bank will retain the P420T which is the 80% balance of the P525T after your full DP, and release to you the remaining P780T (that's P1.2M - P420T = P780T).
YOUR RETURN ON INVESTMENT
Going back to our numbers again: Your total expenses paid is P425T (that's P105T DP to the bank, P200T repairs, and P120T sales commission to your broker); while your total receipts is P1.08M (that's P300T as DP from Buyer, and P780T from Buyer's net housing loan proceeds).
You now have P1.08M total revenue - P425T total expenses = P655T. But because your cash outflow was financed by your Buyer and the hardware store, so practically you made P655T and spent practically nothing for it (or should I say your minimal expenses were immediately reimbursed by the Buyer's reservation fee and downpayment).
In finance parlance, your Return On Investment (ROI) is P655T divided by zero for investment = infinity.
So how is that for a start? You might as well decide to head home from your high paying and very demanding overseas employment and do this very rewarding business. Making P655T from nothing is equivalent to receiving a monthly salary of P55T overseas.
What if you were able to have this kind of transaction repeated every quarter, so that's like receiving a salary of P218,000 a month overseas, or an equivalent of US$5,070 monthly. You will be definitely better off than OFW ship captain who risks his life away from the family!
There are a lot of opportunities here in the Philippines. One just have to grab them.
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