Like everybody else in real estate, I am constantly talking to the banks about their properties. The general wisdom is that the banks have lots of properties they must dump on the market and this will cause the prices to plummet. So it is interesting to consider the actual actions of the banks and the positions they take regarding their bank owned property.

Two years ago, when banks we actually making loans to buy investment property the situation played out something like this:

You go to a bank to borrow money to buy investment real estate, and you must demonstrate to the bank how that property will generate sufficient cash to pay the debt service plus a healthy 25% safety margin (DCR = 1.25). They have no interest in pro forma profit and loss statements, don't care to hear your optimistic projections and are downright pessimists.

Generally, to borrow money to buy investment properties we have to show at least two years of financials for the property, showing appropriate reserves, good management, and plenty of cash to pay the note. They subtract 6% of your gross income to cover vacancies and apply a debt coverage ration (DCR) of 1.25% to the NOI further reducing the amount of money they will loan you against the property.

Some banks deviated from these general guidelines, and they are by and large the ones in trouble.

Fast forward to today - The banks have foreclosed on many properties, now own them, and are trying to sell them (or sell the notes if they haven't foreclosed yet).  However the deals they are offering, they themselves wouldn't finance. The general suggestions I get is that the buyer should use a forward looking (24 month) pro-forma P&L to justify the purchase.  Ludicrous at best.

The Fed is allowing banks to hold many of these properties on their books for 3 years (in the recent past they had to get rid of them immediately) and it appears that the banks are going to take a wait and see attitude.