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Tuesday, May 30, 2006

When Bankers Are Not Brilliant

This is lifted from a banking forum. An "ORE" or "Oreo" is Owned Real Estate (usually real estate that has been foreclosed upon):
We have an oreo that we want to sell. I will use hypothetical numbers.

It is on our books for $3000. The appraised value of the oreo is $5000. We have a customer that is willing to pay $7000 but needs us to lend him the money.

Can we lend more on a property (personal residence) to an individual than what the appraised value says it is worth?

The customer is actually going to be paying 31% more than the value of the property. Are there any regulations that would prohibit us from lending money on a residence that the loan is 31% greater than the appraised value?
Why is this person willing to pay more than appraised value? Were other potential buyers bidding, driving up the value?
There was no bidding. This person is already living in the house & had a contract with the individual that owed us (became an OREO). The person living in the home is willing to pay the remaining contract (which is greater than the OREO amount & appraised value) amount to own the home but they need to finance it.

In order to get the home out of OREO, we need to finance it. Problem is the remaining contract amount is greater than the appraised value.

We (bank) have two choices, actually three.
Proceed with auction, inwhich the person living there may not get it.
Be kind & lower the selling cost to the person living there which would cover the OREO price.
Be business-minded & sell it to the person living there for the remaining price of the contract to make a good profit.
There are multiple issues with what they are considering doing, but the rule for you should be "Caveat Emptor". I thought this one provided a little generally useful perspective.

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