Tuesday, January 18, 2011

Buying Bank Owned Properties (REO)

So you would like to buy a bank owned property?

You see the informercials... and you think you can fix up a distressed home, (and sell it), before you pay your first loan payment on the money you borrowed to fix it up! Or... your relatives friends just "flipped" a fixer upper, and you think you can do the same.  Well, it sounds great... but you should look up some facts and get prepared with a good, experienced Realtor.

REO vs. Foreclosure

An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. Most foreclosure auctions do not even result in bids at the court house.  After all, if there was enough equity in the property to satisfy the loan, the owner would have 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 that may not be satisfied and will go with the property you just purchased.

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.

REO Properties For Sale

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 should buy 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 are successful) is comparable to other homes in the neighborhood. Consider the cost 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.

How Banks Sell REO's

Each bank/lender works differently and requires different paperwork. 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-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.  The waiting time can vary from 5 to 20 days.  Short sales can go out months.

Property Condition

Banks always want to sell a property in "as is" condition. They may allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs, (and getting a 30 year mortgage is next to impossible on an AS-IS property).

Even though you agreed to AS-IS your might ask for an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages But... an REO will most likely not accept an contingency to inspections.  So, AS-IS means AS-IS.

If your lucky and did get the clause accepted for for inspections...sometimes they will re-negotiate to save the transaction instead of putting the property back on the market, but do not take it for granted.  It rarely happens.

Banks will send thier own addendums for buyer to sign for an AS-IS offer is just like you see the property. They want a nice clean AS-IS contract with no extra clauses.  A cash offer gets you the property, and a bank loan contingency will not.  There is only a few exceptions on 30 year mortgages on an REO. Talk to your realtor and heed their advice and experience.

Making an Offer

Offers are usually faxed 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 proof of cash funds letter, a commitment to loan from your local banker, or a pre-approval letter for an REO rehabilitation loan. Make your offer easy to accept.

Hopefully these tips will manage your expectations. Remember that REO's can sell at pretty close to full market value when newly on the market and are not the deals presented on late night television.

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