We've all seen the late night infomercials boasting how easy it is to make big money from investing in bank owned real estate. Sadly, reality is never as simple as late night infomercials make it seem. While there are definitely opportunities to make money investing in bank owned properties, you must first understand how the whole process works.
REO vs. Foreclosure - What's the Difference?
Bank owned properties are called REO (Real Estate Owned) properties. REO's are homes that the banks have taken back from the owner through the foreclosure process but could not resell at auction. REO properties typically have a mortgage balance equal or greater than the current market value.
Most banks will go the extra mile to help delinquent homeowners fix their default, since they do not want to foreclose on the property as it costs them time and money. Banks are not in the real estate business and do not want to retain a large inventory of unsold homes on the books - they will typically try to quickly unload foreclosed homes through an open auction.
What to Expect When Buying Foreclosures at Auction
If you plan on attending a foreclosure auction, you have to come prepared. Expect to pay not just the balance of the mortgage, but also the any other fees incurred during foreclosure. These include accrued interest on the mortgage balance, attorney fees and any other uncollected fees the bank feels it is owed from the foreclosure process.
Say you place the winning bid on a foreclosed property and win the auction - the bank will expect you to pay for the property with cash-on-hand and will not give you additional time to arrange financing. This makes it extremely difficult for anyone who is not a real estate investor with deep pockets to actually get into one of these auctions and successfully purchase a home.
Another thing to be aware is that there is no guarantee that the property you are bidding on will not have any additional liens against it. Buyers bidding at an auction of foreclosed properties simply don't have the time or opportunity to research such things in detail.
Most properties offered at an auction typically have more owed against them than they are actually worth. In fact, very few foreclosures actually end up as a successful sale at an auction. The properties that do no sell go back to the bank and become a Bank Owned Property, also called REO (Real Estate Owned).
Everything you Need to Know About Buying a REO Property
Buying an REO is somewhat different from bidding on a foreclosed home at an auction. REO's are properties wholly owned by the bank, and as such are free of any additional liens. While the banks are still going to try to get the most they can for the property, many are content to take a small loss if it means a quick sale to a qualified buyer.
At this point in the process the bank has already gone through the steps of evicting any lingering tenants and doing the bare minimum repair work to get the property ready for sale. Additionally, the banks will also work to remove IRS tax liens and pay off outstanding HOA dues. The big advantage for buyers of bank owned properties is that they get title insurance. Title insurance ensures that the property you are buying will not have any additional liens against it.
Keep in mind that an REO property is not always your best choice. Make sure you are paying a fair market price for the property, one that is in line with similar houses in the area, before making any offers. Don't fall into the trap of competing with other buyers for a REO that caught your eye. People chasing REO's thinking they are a great deal often end up the full paying market value thanks to the ensuing bidding war. Bank owned properties sold at auction are not always the great bargain they appear to be.
How do Banks Sell REO Property?
Each bank has its own practices and procedures when it comes to selling REO property. They do all share one thing in common, however: they all want to sell at the highest price possible. Banks usually maintain a separate department to handle their REO properties.
Upon making the initial offer on a REO property, expect to receive a counter offer from the bank. Usually this counter offer is much higher than what you might expect, but this is a regular tactic used by banks to signal that they want top dollar for the property. At this point if you are genuinely serious to buy a house you must make a credible counter offer to the bank's counter offer.
If your offer is accepted, expect a 4 to 5 day delay in getting the final approval. This is because someone else higher up in the bank’s hierarchy has to look at the deal and grant final approval.
What is the Condition of the Property and Who Will Pay for Repairs?
The bank will always push to sell the property "as is" to avoid spending money on additional repairs. At the very least, most banks provide Section 1 termite clearance, but be prepared to fight to get any additional items covered. This is where having an experienced Realtor to negotiate with the bank on your behalf can help.
Make sure you arrange for a physical inspection of the property prior to purchasing it so you know exactly what you are getting. Most contracts allow for a certain length of time that lets the buyer back-out without jeopardizing their deposit should he or she find problems with the home.
Despite most banks’ insistence on selling REO’s "as is", there is some leeway to be had when it comes to repairs. In many cases if the buyer decides to back out of a deal because of insurmountable repair work, the bank might offer a credit at closing to complete the repairs to ensure the sale goes through. They do this because it is in their interest to work with the buyer and close the deal instead of going through the trouble of finding another buyer. How far the banks are willing to bend on repairs depends to a large extent on market conditions and how many potential buyers they have lined up for a given property. Once again, an experienced Realtor by your side can help a great deal.
Making the Offer
Before making an offer, it is important to contact the listing agent of the property with the following questions:
- Is the property being sold "As Is"? Is the bank willing to do any repairs?
- Has this property been recently inspected? If so, can you provide a copy of these inspections?
- Has the bank agreed to do any repairs to the home?
- How will the offer be delivered to the bank?
- How long should I expect to wait before the bank responds to my offer?
The listing agent will take your application and send it to the bank. At this point there is nothing more you can do other than be patient, since it can take a couple of days to hear back from the bank. While many Realtors are happy to work round the clock, banks don't operate on weekends and close up shop every day at 5pm, so don't expect a quick response.
One way to speed things along and ensure your application reaches the top of the pile is to include a pre-approval letter or copy of a loan approval along with your offer. Being pre-approved will make your offer more attractive to the bank. It also helps if the offer is clean and easy to read - your Realtor will help you with all the paperwork.
While investing in REO's is not as easy as the late night infomercials make it seem, it is entirely possible to pick up some great bargains if you know where to look and how to approach the banks. We at Team Aguilar have plenty of experience handling REO properties, and would be more than happy to help you put together a solid offer on any bank owned property.