like to buy a bank owned property?
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 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.
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
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’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. It’s an old myth that “foreclosures” are a bargain.
How Banks Sell REO's
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
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."
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.
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.
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 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 their disclosure statements.
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
an offer, have your agent contact the the listing agent and ask
has the bank agreed to?
a special "as is" form?
does it take the bank to accept an offer?
your agent deliver the offer?
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).
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.
these tips will manage your expectations. Remember that REO's
sell at pretty close to full market value and are not the deals
presented on late night television.