Bank Owned Properties (REO)
So you'd like to Buy Bank Owned Property?
You’ve watched the late-night infomercials and you’re ready to do the bank “a favor” and take a problem off their hands. Plus, you expect to make "a killing" in the process. Sounds great and it might just happen, but first you should take a look at some facts and get prepared.
REO's are the result of Foreclosure
“An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure auctions do not even result in bids for a myriad of reasons. Often, there was not enough equity in the property to satisfy the loan and the owner could not or shoes not to try to get the bank to agree to a short sale (bank gets less than what they are owed) Other reasons could be there is something unique about the property that creates an issue buyers don’t want to deal with, or like it has been from 2007 to 2010, there aren’t enough buyers, or the owners milked the bank for as much free rent as possible and ran out of time to sell it, any or all of the above. But in all cases, a REO has gone through foreclosure, not been purchased at the auction. The property "reverts" to the bank. It becomes an REO, or "real estate owned" property.”
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.
If you know the words “Specified Bid” you know that banks in many cases need the cash they can raise at an auction. So they will specify a bid that makes it sure to sell. There are some of these at every auction, and many really are a screaming deal, but you must have done your homework on the property to know what price really makes sense based on your exit strategy.
Back to REO properties…
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 thw 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, but then again, the bank may need cash and it could end up being a good deal. 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. Do not make the mistake of ASSUMMING anything.
How Bank's Sell REO's
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. 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. Most will provide a Section 1 pest certification, but not unless you include it in your offer and negotiate the point. 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 Washington Seller Disclosure Statement (Form 17). So you should take one and go through the checklist with an inspector to make sure you really know details the bank can not provide about the house.
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."
Making an Offer
Before making an offer, we will contact the listing agent and ask the following:
Offers are usually faxed or scanned and emailed to the bank. There is no formal presentation so I usually add a summary of the offer and provide an insight as to why we are making different aspects of the offer. 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. Make your offer easy to accept.
Do not be in a hurry. The only time a bank moves fast is when they choose to be fast, and that is usually when they can charge you money for something. Your agent and the listing agent will need to keep pursuing the bank until they provide an answer.