Banks have figured out a way to shorten the amount of time REO’s (foreclosures) are on their books via what’s called CWCOT.  This is an interesting concept, as they look better to the Feds for the amount of inventory they carry, and savvy real estate investors have the first chance at getting newly foreclosed properties.

What is CWCOT?

“Claims Without Conveyance of Title”.  What this really means is the Banks can start marketing the property immediately after the foreclosure sale at the courthouse steps.  They don’t have evidence of title, they haven’t taken possession of the property, but they are allowed to start marketing while clearing title for their inventory.  If they happen to sell one of these, the bank will happily supply you with a quitclaim deed, or you have the option of purchasing title insurance.

How is this good for me?

Actually, it’s not really good for a typical investor.  There is no listing agent, you don’t really know if the property is occupied, you legally can’t disturb the occupant, you can’t get inside the property to see what work is needed, and it’s almost impossible to find a hard money lender that will lend on it – because they need an appraisal, and they need to get INSIDE to get the appraisal.

So what’s left?  Oh, the price.

Most of these properties are recently foreclosed.  NOBODY knows the kind of shape that it’s in, what the value is, or what kind of work is required, so naturally the banks are willing to give a significant discount on these properties that you won’t see from regular bank-owned homes.

How is this good for the bank?

First, the bank keeps its foreclosed inventory low.  I’m not an expert at securities and banking regulations, but I do remember that they are only allowed to have so much toxic debt on their books before the Feds shut them down.  The lower amount of toxic debt (either through inventory or non-performing notes) the bank carries, the better interest rates they can get from the Treasury, etc.

Marketing the CWCOT during that initial closing period gives the banks a speedy resolution to the amount of time that inventory is held in their books.

What does the purchase transaction look like?

You can purchase these properties almost immediately via quitclaim deed, which I never recommend.  Most of the outlets that sell these properties allow you the option of purchasing title insurance which I highly recommend, since you have no idea of what kind of liens are on the property.

Why Title Insurance?

I had one property under contract in Florida at a price of $28,000.  Of course I requested Title Insurance and the title search showed a lien that was just over one MILLION Dollars.  Needless to say I backed out of that deal.  Can you imagine if I purchased that property via quitclaim deed and had to carry that lien?

As it turned out it was some kind of lien that incurred daily fines.  Given Florida has a fairly slow foreclosure process those fees can add up pretty fast.

Other issues and complications?

Since most of my properties are not local to where I live, I rely heavily on my local agent to help me a long on my transactions.  There are no listing agents assigned to these properties and they do NOT offer a broker’s fee for the buyers agent.  There is little incentive for my listing agent to help me along on that property at all, especially if I want to fix it up and rent it out.

Hard Money Lenders, for the most part, insist on getting a full appraisal on the property.  While yes, most hard money lenders are asset based, they have their rules and aren’t as willing to lend on the property without a full appraisal.  Remember, you can’t get a full appraisal because they can’t get inside the property.  The best alternative I have found is a reduction in the amount they will put towards the purchase of the property.  The day after closing, you can get in and get a full appraisal and try to negotiate a new loan with the hard money lender, but all in all, it’s a pain in the you know what.

Oh, and you want to wholesale it or assign the contract to another?  Good luck with that one.  Nobody wants to buy a property from a wholesaler without the ability to go inside the property.  So there’s another issue from a wholesaler’s perspective.

In conclusion, more and more of these types of properties are becoming available in alternative markets.  The first nationwide Hard Money Lender that can get to some level of comfort to offer standard structures to advanced real estate investors, is the one I will recommend!

Any Questions?