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 Buying bank owned properties
There is a lot of interest in buying bank owned properties these days. A lot of information, some good and some bad, is floating around about the subject. Often the information offered is for sale, with the promise that you can make a lot of money with little effort once you know “the secret formula”. The fact is that there are no secrets, and to make money does require effort.
What’s an REO?
REO stands for “Real Estate Owned”. These are properties that have gone through foreclosure and are now owned by the bank or mortgage company. This is not the same as a property up for foreclosure auction. When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accumulated during the foreclosure process. You must also be prepared to pay with cash in hand. And on top of all that, you’ll receive the property 100% “as is”. That could include existing liens and even current occupants that need to be evicted. A REO, by contrast, is a much “cleaner” and attractive transaction. The REO property did not find a buyer during foreclosure auction. The bank now owns it. The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing. Do be aware that REO’s may be exempt from normal disclosure requirements. In California, for example, banks are exempt from giving a Transfer Disclosure Statement, a document that normally requires sellers to tell you about any defects they are aware of.
 Is it a bargain?
It’s commonly assumed that any REO must be a bargain and an opportunity for easy money. This simply isn’t true. You have to be very careful about buying a REO if your intent is to make money off of it. While it’s true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it. When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale. The bargains with money making potential exist, and many people do very well buying foreclosures. But there are also many REO’s that are not good buys and not likely to turn a profit.
Ready to make an offer?
Most banks have a REO department that you’ll work with in buying a REO property from them. Typically the REO department will use a listing agent to get their REO properties listed on the local MLS. Before making your offer, you’ll want to contact your real estate agent and have them find out as much as they can about the the condition of the property and what the bank's protocol is for receiving offers. Since banks almost always sell REO properties “as is”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it. As with making any offer on real estate, you’ll make your offer more attractive if you can include documentation of your ability to pay, such as a proapproval letter from a lender. After you’ve made your offer, you can expect the bank to make a counter offer. Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer. Realize, you’ll be dealing with a process that probably involves multiple people at the bank, and they don’t work evenings or weekends. It’s not unusual for the process of offers and counter offers to take days or even weeks.
Get a free REO search account!
It is very simple and fast. Go to the top of the page and click on the Free Account button. Go half way down on that page and click on create an instant account or the Listing Book logo. From the next page click on Buying a Home. At the bottom of the next page click on Get Account Now. Fill out the information and create your own password. From the home finder criteria page under Features, check the like to have box for Meets Investor Criteria. You will now be get updates when new pre-foreclosures or foreclosed properties come up on the market. You can also do multiple map searches by clicking on the Map Search Tab that is located under Areas. When on the map, click the Add Search Area button and select the area that you are interested in. Keep repeating this step for multiple search areas. Don't forget to click the Update Search Areas button that is located below the map. This will save the information for you. You will also have access to restricted MLS information. Don't hesitate to contact us if you need additional support.
What you can expect when buying a banked owned property:
All across America, Realtors are hearing a low, anguished drone -- like a really loud, really bad case of tinnitus. That sound is the wailing and gnashing of teeth of untold numbers of innocent home buyers in escrow, those brave (but smart) souls who have gotten past their "buyer's block" and decided to take advantage of this buyer's market. What is causing all this toil and trouble? The dramas and traumas of doing a deal with the bank: buying REO properties (foreclosed homes now owned by the bank).
Mindset Management
If you are buying anything but a luxury home, REO listings comprise a huge proportion of the homes available for sale in almost every geographical market. So are short sales, but many buyers and Realtors simply refuse to consider short-sale listings (whether this is right is an issue for another column) because they have a relatively low probability of closing and the elements that increase the likelihood of closing are largely out of the hands of the buyer and buyer's broker.
REOs, on the other hand, are quite likely to close but may involve some drama in the deal so your efforts and stress are much more likely to result in you actually getting a home. Plus, if you decided to avoid all short-sale listings and all bank-owned properties, in most areas you would have few or no homes left to choose from. So, your best bet is to get some clear expectations about buying an REO listing from the bank to minimize or eliminate unpleasant surprises during your escrow period.
If I had to give you a single, overarching tool to manage your expectations about buying an REO listing, I would simply say to expect the worst and be pleasantly surprised if the worst doesn't happen. Expect everything to take longer than you think it will -- each signature required from the bank has to go through a corporate hierarchy of reviews and approvals at the bank itself, and sometimes also at an asset management company and/or the bank's lawyer's office.
Expect that the bank will not negotiate on price or repairs after your offer is accepted. Expect that the bank's escrow company or closing attorneys will be inefficient and make mistakes, requiring total and complete vigilance on the part of you and your representatives.
Go in with these expectations. Then, if you end up doing a deal with the REO listing agents and asset managers who are at the top of their game and you have a silky smooth escrow, you're golden -- if you don't, at least you're not caught off guard. In my experience, it's a crapshoot -- about 50 percent of the REO transactions I've been involved in have been drama-free (more so, even, than transactions with individual sellers), and the other 50 percent have been like pulling teeth from the seller's side to get milestones achieved and the transaction closed.
Expecting a tumultuous transaction not only prevents surprises, it serves at least two other purposes. First, it will stop you from obsessing over whether your transaction is "normal" and incessantly wondering why your transaction is so rocky, trying to detect some cosmic or karmic significance of the delays and irritations that can be par for the course in REO home-buying. Secondly, it will force you to focus on the vision you are trying to manifest -- the vision of your life in the home after escrow closes.
My father-in-law used to say, "A fair exchange ain't a robbery, and an even swap ain't a swindle." When you buy an REO, you might have to exchange a little more stress than normal for what can be a better deal than you'd have otherwise gotten. Keep your eye on the prize!
Need-to-Knows and Dos and Don'ts
Understand this -- when you buy an REO, virtually every bank/seller will require you to sign a counteroffer or addendum form by which you will agree to do the transaction on their terms. These boilerplate, non-negotiable documents shift the power balance in favor of the bank on everything except price and concessions (such as closing cost credits, etc.). For example, REO sellers almost always impose a per diem late fee on a buyer who closes escrow late, but will almost never pay even fair compensation to a buyer whose escrow closes late due to the fault of the seller or the seller's representatives. Also, REO sellers will almost never do repairs and will rarely renegotiate price or credits after inspections -- so it behooves REO buyers to ask for anything they might need upfront.
Also, REO seller banks almost always convert a contingency period contract (one that requires that the buyer sign a form when they have completed their due diligence and are ready to make the deal final) into an option period contract so that if the buyer fails to proactively object within a certain number of days the buyer's deposit money is automatically rendered nonrefundable. Additionally, most states waive many disclosure requirements for banks selling REOs, as the banks have no firsthand knowledge of the history of the property.
As such, smart REO buyers obtain exhaustive inspections and really pay attention to their inspectors' reports. With that said, even the normally simple task of obtaining inspections can be a source of drama with REOs. It's common for the utilities to be shut off, and getting them back on can take time and coordination with an overwhelmed listing agent.
Unfair to you, the buyer? Yes. Want to buy an REO property? Then suck it up and live with it, just long enough to get through your escrow. And keep in mind that most REO sellers are amenable to working with first-time home buyers' programs, down-payment assistance programs, providing closing cost credits, taking 100 percent financed offers, and otherwise helping home buyers in ways that individual sellers may not, so the pros of buying an REO can be plentiful.
Bottom line -- there is bound to be some unpredictability when it comes to timelines on REO transactions. Some banks, asset managers and listing agents move super-quickly -- others, not so much. Most of the time, the bank selects the escrow company or holder, which is a switch from the standard practices in many states. As such, your broker may have much less control over the logistics, timing and smooth execution of the transaction than normal.
For example, in a regular deal the buyer and seller often sign simultaneously and move to closing within a couple of days, max. With REO deals, the seller usually won't sign documents until the buyer has signed, and usually needs five to 10 business days after the buyer signs to close. This is normal, but can cause problems with buyers who have given notice that they are moving out of their current residence and soon-to-expire interest-rate locks on their mortgages.
I am now telling my REO buyers upfront to hold off on giving notice until the last possible moment -- even if it means you have a couple of weeks of overlap in your old and new living situations, and warning them that they may have to pay for a rate-lock extension or two.
When REO transactions drag on and on because of the bank's representatives, I've heard buyers ask, "But I thought the banks want to get rid of these properties? I'm trying to take it off their hands -- why don't they want to make it happen faster?"
My reply? Yes, as an institution every bank "wants" to get REO properties off of their portfolio. That is, it is a formal goal of the institution to get them sold. However, any individual transaction relies not on the motivations of the corporate entity, but on the competence, urgency and day-to-day effectiveness of a bunch of individual humans who are not always hard-wired or being compensated in a way that aligns their motivations with the speedy completion of your particular escrow. Will it get done? Probably so. How fast? Depends on the individuals involved.
In the final analysis, if you make sure you're getting a good enough deal to be worth the possible extra stress, you can come out of an REO transaction like a mom coming out of labor -- feeling the effects, but knowing it was well worth it!
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