REO

REO (Real Estate Owned)/ Bank Foreclosure Properties

So you’d like to buy a bank owned property? 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’re going to make a killing in the process. Sounds great and it might just happen, but let’s take a look at some facts and get prepared.

REO vs. Foreclosure Sale

An REO (real estate owned) property is different from a foreclosure sale (trustee sale.) A foreclosure sale take place on the courthouse steps and you start your bid at a pre-arranged price. You need cash or a cashier’s check for the full amount and you receive a trustee’s deed and the property “AS IS”. “AS IS” may mean subject to other liens including IRS liens and it may mean you may have to evict a current occupant. You may not be able to even view the interior to determine if the condition. These are hidden costs and must be anticipated in your acquisition costs.

An REO is a property that the bank receives at the foreclosure sale to satisfy the loan that is in default. The bank usually “opens the bid” at the trustee sale for the amount of the outstanding loan plus legal costs and trustee service fees. This opening bid is usually greater than the fair market value of the property (unless it’s a “hot market” and values are rising fast.) In most circumstances the bank is the only “bidder” and gets the property back.

By the way, if there were equity in the property, wouldn’t the owner try to sell it before the foreclosure sale? Wouldn’t most people want to save their credit and sell to break even? Most banks will work with an owner trying to sell to avoid foreclosure and will even delay the trustee sale if the seller is marketing the home. A trustee sale is a last resort for the bank, they have to foreclose to stop their loses.

The bank now owns the property and the bank’s 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 payoff 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 big difference is that you can negotiate the price and terms with the bank; you can’t do that at a foreclosure sale.

A word of caution: 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.

Let’s consider a strategy for buying an REO. You’ll have to be patient and remember the following:

Each bank/lender works a little differently..

But they all have similar goals.

Banks want to sell at the best price they can, even market value; they do not want to dump the properties. Many now have entire departments to manage their REO asset.

Bank must “counter” your purchase offer high or even at full price the 1st time to show auditors that they tried to get the most possible. Always plan to come back with a counter to their counter.

They are motivated, it’s just that this is a business decision; there is nothing personal involved.

Each asset manager has a level of responsibility; your offer may have to be approved at a higher level. Even in an accepted offer, the bank may insert wording like “..subject to corporate approval with 5 days.”

Banks always want to sell "AS IS"; many will provide a Section 1 pest certification but you may need to negotiate this point. They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs.

Your offer 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.

Even though 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.

Most banks will not provide financing on their REOs but it doesn’t hurt to ask. Especially if the property has extensive damage and it’s an “AS IS” sale.

The OFFER: Contact the listing agent prior to writing and ask the following:

Any inspection reports?

What work has the bank agreed to do?

Any special "AS IS" addenda?

What title company?

Time frame for acceptance?

How to deliver the offer? (Offers are 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).

Since there 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.

That’s it; hopefully these tips will manage your expectations. Always remember, in California, bank REOs usually sell at just under market value, not 30% below.

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