Buying “Bank” Owned Properties (REO)
Or more accurately known in the industry as a REO (Real Estate Owned)
“A REO (Real Estate Owned) is a property that has gone through foreclosure and is now owned by the Lender who owned the loan. This Lender is technically called the Lienholder, but is often referred to as the “Bank” or a Mortgage Company or Lender. For simplicity, in the remainder of this article, the property that has gone through foreclosure will be referred to as a REO and the person responsible for managing the property is called the Asset Manager. The steps before it becomes a REO are reviewed below but covered in depth in the Education section of this website.
Just a quick review of the steps toward becoming an REO are important for understanding what a property has gone through before it becomes a REO.
Steps to becoming an REO property
1. The owner stops paying the mortgage and the property goes into default.
2. The owner is usually given some options by the Lien Holder. Pay the past due amount, Loan Modification, Deed in Lieu, or do a Short Sale if they have a hardship that qualifies them for selling the property below the amount owed. All of these require the owner to cooperate with the Lien Holder by providing a lot of information.
3. If an owner and the Lien Holder do not come to an agreement, the Lien Holder will file a Notice of Default. After 120 days, they can then send the property to the foreclosure auction. For this auction, the Lien Holder decides what the specified bid will be to start the bidding. If they want it sold out of their inventory, the bid is usually below market value. If they decide they want it in their inventory, the bid will be higher and sometimes reflect the total amount owed on the loan plus all the penalties.
4. If no one buys the property at foreclosure auction, it becomes a REO.
The Lien holder now becomes the owner of the property, now called a REO and the rights of the previous owner are terminated. In the State of Washington, the owner has 20 days to vacate, a Tenant has additional rights too extensive to cover here.
Now that the property is an REO, the Asset Manager will decide what steps to take. Their decisions puts the property through some combination of the following status;
Buying a REO property
Just like an individual seller prepares their property for sale, so is an REO property prepared. For instance, the previous owner or the tenant will no longer be in the property, a limited range of repairs may have been completed, title will be reviewed, taxes and homeowner’s association dues will addressed, and they will have contracted with a local REO Listing Broker to list the property.
A Buyer and a Buyer’s Broker will then engage in most of the same steps as any purchase i.e. Walk thru and evaluate it for their needs, make a determination of any work it needs and the cost, write an offer etc.
Just note that an REO usually is not “remodeled” or “updated” for the sale. Although the previous owner may have done some of this work. Also, properties are not usually “dumped” for a “steal”. But they are often sold at a discount if there is a confirmed defect. Sweat Equity can usually be earned so it can be a good buy for the project minded individual.
Writing an Offer
A Buyer’s broker should review directions given by the REO Listing Broker and use forms provided. If a broker has additional questions it is best to ask prior to writing an offer.
An offer should always include;
Offers should be scanned and emailed to the Listing Broker. There is no formal presentation which is why the “Offer overview sheet” is requested.
Keep in mind: REO listings are typically not worked on evenings and weekends like other Real Estate because Asset Managers keep regular Monday-Friday business hours. This makes the “Offer Expiration Date” on the Purchase and Sale agreement something better left blank. An offer can be withdrawn at any time prior to approval. Though we do ask that any offer be given a minimum of 5 days.
If there are competing offers, each Asset Manager will have briefed the Real Estate Broker as to their procedures. Generally though, it is common to se a call for Highest and Best to allow all offers to put their best foort forward prior to a buyer being chosen.
The chosen offer is sent by the Listing Broker to the Asset Manager who will take it through the review process and return it with a counter offer, an acceptance, or a rejection. Even once an offer is accepted, there may be wording like “subject to corporate approval within 5 days."
Once approval is received, paperwork is signed and returned so Escrow can start the closing process. Escrow is usually chosen by the Asset Manager. Review to the listing for directions regarding Title.
Now that you have reviewed the steps, the process should be very comfortable and non-intimidating. But continue reading because there are some things that generally DO NOT happen with REO’s.
What generally does NOT happen when buying a REO
Work orders are generally not accepted and wording such as “as-is sale” is very standard. The offer should reflect this. Items found at inspection are typically for the information of the buyer only. Because of this, the inspection is often completed before the offer is presented or before it is sent to the asset manager.
An offer is usually NOT just MLS forms. Documents produced by the Asset Manager are usually supplied to the Buyer’s Broker to be included in the offer. Typically No changes are allowed to these documents.
The offer is signed by the buyer but is NOT signed by the seller until all the terms are agreed to by both parties.
Electronic signatures MAY or MAY NOT be accepted by the Asset Manager so a Buyer’s broker should check the listing comments or call before making an offer.
The Seller Disclosures (Form 17) is provided as required by State of WA law but usually will NOT provide useful information. There is no one in the transaction that has lived in the property therefore no information can be provided.
The process is NOT as fast but it IS very predictable so there is no need to be hesitant about buying a REO property. Just don’t be in a huge hurry, add about a week to 2 weeks to the negotiation process and the rest is standard.
Closing is NOT difficult it IS very similar to any other transaction.