Buying Bank Owned Homes
What you need to know about Bank Owned Properties (REO)
We have all heard the stories of how someone picked up a fantastic deal on a foreclosure home and figured if they can do it, so can I. Who doesn’t want an unbelievable deal on a house??? Well like everything else in life sometimes the offer sounds just too good to be true. You first need to know some facts and understand the difference between Foreclosure and REO (Real Estate Owned).
A foreclosure sale starts with a minimum bid of the property that will include the current loan balance, interest on the loan, any attorney fees and other cost accrued with the foreclosure. Potential bidders of foreclosure properties MUST have a cashier check with them for the full amount of their bid price. Those whom are successful and win the bidding will receive the property in an “AS-IS” condition. This may include but not limited to tenants still in the property, liens or judgments held against the property. It is highly suggested that you have a title company conduct a lien search before you bid on any property.
An REO property is one that fails to sell at a foreclosure auction and goes back to the lender / Mortgage Company. Most foreclosures do not result in a bid because what the bank is asking for in a bid price is often more than the property is worth. The property then reverts back to the bank where it becomes an REO or real estate owned property.
REO Properties For Sale
When the bank takes back ownership of the property a loan no longer exists. It is up to the bank to take care of any liens or HOA (homeowner Association) fees, handle any evictions and “may” make repairs. It is suggested that you have a qualified home inspector view the property before purchasing. The cost of repairs can be negotiated in the offer price.
Make sure you do your homework before you make an offer. Not every bank owned property is a steal so you want to make sure that the price offered compares to other homes in the neighborhood. You need to consider the condition of the home (repairs) when placing an offer. If you find yourself competing with multiple offers on the property you are bidding on, you may want to consider passing. Bidding the price higher may mean you are paying over market value.
How REO’s Are Sold
While all banks and lenders are very different the all have the same goal when it comes to an REO. This is basically getting the highest price and moving the property off their books as soon as possible. Most banks have a special department set up to handle their REO inventory. This department (Loss Mitigation) negotiates the sales of each property. Once an offer is made to the bank, this department will review the offer and typically present a counter-offer. At this point it is no different the negotiations with a regular seller. The bank is trying to protect their interest as well as the shareholders and investors of the bank. You should plan to counter the counter-offer.
One thing that you should be very prepared for is that banks take their time with all offers. Often each offer will need to be reviewed by several people and can take days and even weeks.
REO’s are almost always sold in “as-is” condition. For your protection, you should hire a licensed home inspector to do a complete inspection of the property. You should know of any problems in advance of your purchase. This inspection is typically at your expense and any repairs needed will most likely be at your expense. Most contracts for purchase allow you a “right to inspect” contingency which will allow you to cancel the contract if you deem the repairs to be too excessive or too costly.
Keep in mind that even though an offer is made “as-is”, you can always ask the bank for repair to be made or a credit for the repairs at the closing. By giving the bank a chance to make repairs or re-negotiate to offer, it gives them the opportunity to save the transaction instead of putting it back out on the market. This should not be taken for granted; banks will do what they want to do without making sense to you.
When it comes to disclosures about the bank property, it is often said that banks have all the rights and the buyer has none. While this may not be totally true you can expect the bank to have you sign addendums and disclosures that essentially release them of liabilities tied to the property. Properties that involve a Real Estate agent either on the Sellers side (bank) or the Buyers side are required to provide you with disclosures for the property.
Making an Offer
Before an offer is made, you will want the agent representing you to contact the listing agent and ask the following questions.
Are there any other offers on the property?
Is there an inspection report?
What is the time frame for the bank to accept the offer?
Are there any special addendums or terms that the bank requires?
What fees will the bank be paying?
Will the Bank pay any Buyers closing cost or Buyer concessions?
Once your offer is received by the Listing agent, they usually will fax or e-mail it to the Bank Negotiator for review. Keep in mind that banks are very busy with foreclosure and work on a first come first served. Banks do not work on weekends, nights or holidays so if you are given a 5 day time frame for a response, this means 5 business days.
When submitting your offer you will want to provide the listing agent with a strong offer. Sending a pre-qualification letter is good but a pre-approval letter is much stronger. Show the bank that you are flexible with their time table. Respond to their request quickly and even provide the bank with a little Buyer background. The better the Bank knows you, the better chance you might have. Remember the bank doesn’t know you because they have no face to face contact with you. By making your offer strong and explaining your financial position, you might just beat out an offer that is identical to yours.
The bottom line for REO’s is to be an informed buyer and prepare yourself for unexpected surprises. By working closely with your Real Estate Agent, you should be able to avoid the major problems that can arise in an REO property.