So you'd like to buy a bank owned home? You've seen the increase in foreclosures month after month and you're ready to do the banks a huge favor and take a REO home off their hands, while you turn a profit for yourself in the along the way. That's excellent and it happens all the time. But first you should study a few facts and get yourself prepared for the deal.
What's exactly is a REO bank owned home?
A REO, or real estate owned, is a property that is taken back by the mortgage lender after an unsuccessful foreclosure auction. In fact, most foreclosure auctions don't even produce a bid. And it makes sense. If there was sufficient equity in the property to satisfy the loan in the first place, the home owner would have probably already sold the property to pay the lender. So that is the reason the property results in a foreclosure or trustee sale.
Here's how it works.
The beginning minimum bid in a foreclosure sale is the total of the loan balance, any accrued interest, attorney fees as well as any costs incurred in the foreclosure process. To even be able to bid at a foreclosure auction, you are to have an official check in your hand for the full amount of your bid. Should you be the winning bidder, you receive the property in "as is" condition. This may include a person still residing within the property. Always keep in mind that there may also be other liens against the property you purchased.
Because the amount owed to the bank is typically more than what the property is worth, very few foreclosure auctions end up in a successful sale. In this case, the property reverts to the bank. Now, it becomes an REO. Hence the term "real estate owned" property. But know that banks don't like to have REO properties on their books. The reason for this is simple. To a bank, an REO property is a liability, not an asset. From a business standpoint, they are eager to get rid of these REO properties, but they're also reluctant to do it at a loss when possible.
Bank owned homes for sale.
Now that the bank owns the property, the original mortgage loan no longer exists. If necessary, the bank will proceed to handle the eviction. The bank may additionally do some repairs as needed. They will also negotiate with the IRS for removal of tax liens and pay any home owner's association dues off.
As a buyer of a REO, the buyer be given the opportunity to investigate the property and receive a title insurance policy. It is important that you do your research on the property before making an offer. Make sure that the price you're paying is comparable to other homes in the local area. Factor in the costs of renovating the property and the time you'll spend to complete them. Whatever you do, do not get emotionally attached and get caught up in a bidding war which will only result in you paying over the market value. Bank owned homes are not always a bargain. As long as you play your cards right, you most definitely turn a good profit.
How the banks sell their REO properties.
Each bank works slightly different, but they all have essentially the same goals. They aim to get the best price possible and but at the same time have no interest in dumping real estate properties with cheap prices. Most banks have an entire department managing their REO property inventory.
Upon you making an offer to purchase the REO, the bank usually will counter-offer it. It might be at a higher price than what you bargained for, but they have to show to their investors, auditors and shareholders that they tried to get the highest price possible for the property. Bottom line, you should be prepared to counter the counter-offer.
The bank will probably have to review and approve your offer or counter-offer by several individuals and parties. Even if accepted by the bank, they may plug in wording like "subject to corporate approval within five days."
Property condition.
Banks will always try to sell a property in "as is" condition. Require them to provide a Section 1 pest certification. If you include in your offer and negotiate the point most will provide it. The bank will allow you to get all the inspections you want done on the house. However, this will most likely be at your expense. Also, keep in mind that they may not agree to pay for any of the repairs. But it may still work out. Just make sure to do your numbers.
You should include an inspection contingency period in your offer which would allow you to terminate the sale should the inspections reveal previously unknown damages that the bank will not correct.
Although you agreed to "as is," always provide the bank one more opportunity to take care of the repairs or alternatively give you a credit following your completed inspections. At times, they will re-negotiate to save the transaction which for them is better than putting the property back on the market. So it's worth a shot.
Banks are exempt from the California Seller's Transfer Disclosure Statement (TDS-14), so they prefer not to see proprietary disclosures. When there are real estate agents involved, whether representing you or the bank, disclosure statements are required to be provided by the agents.
Although it never hurts to ask, most banks are not in the business of providing financing on their REO properties. This is specially the case if the property has extensive damage and you are buying it "as is."
Making an offer.
Before you even make an offer, have your real estate agent contact the listing agent to ask the following:
- Do they have any inspection reports?
- What repairs has the bank agreed to?
- Will there be a special "as is" form?
- How long will it take the bank to accept an offer?
- How should your agent deliver the offer on your behalf?
Typically, offers are sent by fax to the bank. To make an offer, there's really no formal presentation required. However, the listing agent will probably need your originals. It's a good idea to provide the listing agent with a pre-qualification letter. A pre-approval letter would be even better. You should also provide them with a buyer biography. The bottom is to make your offer an easy one for the bank to accept.
