Buying an REO

REO vs. 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. 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.

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 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 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. If you do your due diligence… an REO can be a good buy. Work with a Realtor you trust through out the entire process.

How Banks 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 within 5 days.”

Property Condition

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. Utilites may have been turned off, make sure they are turned on prior to the home inspection.

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 will 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 with their disclosure statements. A form, Agent Visual Inspection disclosure should be completed by the real estate agent(s).

Most banks will not provide financing on their REO’s. Financing may be a challenge or unattainable… if the property has extensive damage be prepared to pay all cash.

Making an Offer

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?
• Will they offer a home warranty…if not consider buying your own!
• Will the bank use their own purchase contract?
• 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 to the bank. The listing agent needs your originals. There is no formal presentation. Keep in mind that it may take from 1- 5 days to get a response. Some banks have a policy that home must be on the market for a certain number of days prior to hearing offers. This helps to create a multiple offer situation for the bank, putting them in a better position to sell the home at list price or better.

Since there is no face-to-face presentation to the bank, provide the listing agent with a loan pre-approval letter, if paying cash you will need to provide evidence of cash funds to close the transaction with your offer. Have your agent include a Comparable Market Evaluation with your offer to justify your price. Make your offer easy to accept and you will improve your chance of an acceptance.

Gracie & Greg offer over 35 years experience, call us if you would like help finding a bank owned home. Gracie & Greg 760-285-1783 or 949-275-4008.