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Buying Bank Owned Properties (REO)
Everyone wants to buy a home at 40% discount, hold it for a couple years or even fix it up and sell it for 110% of what you paid right? It's harder than you think and less than you imagine!
Get the facts and make an educated decision.
An REO (Real Estate Owned) is a property that goes back to the bank after an unsuccessful foreclosure auction. You see, most foreclosure auctions do not even result in bids. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank. That is why the property ends up at a foreclosure or trustee sale.
Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs association with the foreclosure process. In order to bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid. If you are the successful bidder, you receive the property in "as is" condition, which may include someone still living in the property. There may also be other liens against the property you will be held responsible for.
Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Then the property "reverts" to the bank. It becomes an REO, or "real estate owned" property.
The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property.
A bank owned property might not be a great bargain. Do your homework before making an offer. Make sure that the price you pay (if you’re successful) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a ‘bidding war’ and pay over market value. It’s an old myth that “foreclosures” are a bargain.
Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in "dumping" real estate cheaply. Generally, banks have an entire department set up to manage their REO inventory.
Once you make an offer to purchase, banks generally present a "counter-offer." It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible. More often than not the counter is just removing fee's they do not wish to pay or inspections they will not provide. You should plan to counter the counter-offer.
Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, the bank may insert wording like “..subject to corporate approval with 5 days."
Banks always want to sell a property in "as is" condition. Some will provide a Section 1 pest certification, but not unless you include it in your offer and negotiate the point or the buyers lender requires it and even then they will probably say "no". They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs.
Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct.
Even though you agreed to “as is," always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted.
Banks do not want to see a lot of proprietary disclosures; they are exempt from the California Seller’s Transfer Disclosure Statement (TDS-14). If there are real estate agents involved, either representing you or the bank, those agents are required to provide you their disclosure statements.
Most banks will not provide financing on their REOs but it doesn’t hurt to ask. Especially if the property has extensive damage and you are purchasing it "as is." Althought this policy is gradually changing and most banks are requiring buyers to at least be prequalified with their bank or a designated mortgage broker.
Before making an offer, have your agent contact the the listing agent and ask the following:
- Are there any inspection reports?
- What work has the bank agreed to?
- Is there a special "as is" form?
- How long does it take the bank to accept an offer?
- How does your agent deliver the offer?
Offers are usually FAXED or emailed to the bank. The listing agent needs your originals. There is no formal presentation. Keep in mind: nothing happens evenings and weekends (banks are closed)
Since there is no face-to-face presentation to the bank, provide the listing agent with a pre-qualification or better yet, a pre-approval letter and buyer biography, fico (credit score) is also very helpful. Make your offer easy to accept by allowing them to choose Title & Escrow companies they want to use. Usually they get a discount on services from these companies that handle all their business. The more money they can save the more likely they will look at your offer seriously.
Hopefully these tips will manage your expectations. Remember that REO's sell at pretty close to full market value and are not the deals presented on late night television infomercials. REO agents typically list REO's much less than they expect to sell for. This creates interest and multiple offers, the agent counters each offer with "highest & Best" so everyone has another chance to win. Even at this the bank may still come back and counter even higher than before. Until the bank makes their determination on which offer to take and has inserted their specifications to the transaction..and everyone has agreed...only then will escrow be opened.
It is recommended that all inspections be performed after the bank has agreed to accept your offer in writing and any previous agreement be contingent upon banks approval of that offer and that all time frames for inspection, disclosures & loan contingencies etc be counted from the date of mutual agreement with bank and buyer.
Please email me if you would like to be put on my REO list to purchase a home or investments.
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