Investing or Flipping

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Buying Bank Owned Properties (REO)

So you’d like to buy a bank owned property? Or become a “Flipper”

You’ve 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 sold the property and paid the bank off. 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 additional liens against the property, which would have to be paid in order to give clear title to buyer.

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 (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

Each bank/lender works a little different, 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 have made your 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 they attempted to get the highest price possible. You should plan to counter the counter-offer.

Your offer or counter-offer will 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.”

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 at the point of the offer. They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs.

Banks do not want to see a bunch of contingencies, they want it as clean as possible. Most banks encourage the buyer to do there inspections before writing the offer. If the bank were going to do the repairs, the price would not be price low, it would be fixed up and at current market value.

Making an Offer

Before making an offer, have your agent contact the listing agent and ask the following:

Are there any inspection reports?
What work has the bank agreed to do?
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 emailed to the bank. There is no formal presentation. Keep in mind: nothing happens evenings and weekends (banks are closed)

Since there is no face-to-face presentation to the bank, provide the listing agent with a pre-approval letter, copy of the earnest money check and the offer. Make your offer easy to accept.

Times are changing

There are many banks that have started fixing the home up before listing it, there are a few that open it to “Owner Occupants” for the first 1O to 14 days on the market. Usually the listing will say the terms.

Hopefully these tips will manage your expectations. Remember that REO’s sell at a price close to full market value and are not the deals presented on late night television.

Maverick Realty has excellent relationships with many of the major foreclosure & REO asset managers such as Fannie Mae, HUD, Citi Financial, Bank of America, Veteran Affairs and many more.

Maverick Realty is a registered and approved selling agent for HUDHomestore.com

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