Buying Bank Owned Properties

So you’d like to buy a bank owned property?

As a person who has worked on the listing agent side, the buying agents side, and the investors side of Bank Owned Properties, I have had a lot of questions asked about REOs and Foreclosures.

People who had just watched the late-night infomercials and are ready to do the bank “a favor” and take a problem off their hands. Plus, they expect to make "a killing" in the process. Sounds great and it can happen, but first 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 bank after an unsuccessful foreclosure sale or auction. Many foreclosure sales do not generate any bids because there was not enough equity to pay off the loan and leave a profit for a buyer (if there had been the foreclosed owner would have sold it). That is why the property ends up at a foreclosure or trustee sale.

The sales usually 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 other liens against the property.

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 highest bidder is usually the bank, and the bank buys the property at the sale and 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. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property. Sometimes you do need to ask for the title insurance policy as it is not always automatically provided such as in the case of a HUD owned REO.

A bank owned property may or may 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 differently, but they all have similar goals. They want to get the best price possible for the property in the current condition. They may decide to sell as is and they may decide to do repairs. Generally, banks have an entire department set up to manage their REO inventory and these departments list the properties with area realtors. Some of the smaller banks will turn their inventory over to a 3rd party servicer to market and sell.

Once you make an offer to purchase to the listing agent, the 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 that they attempted to get the highest price possible. You should expect this counter offer and determine your initial offer accordingly. You may also receive a counter offer in an auction form where they have multiple offers and the banks request from all bidders a highest and best offer by a certain time. They make then select one of the highest and best offers or they may come back again with another blanket counter offer.
Your offer or counter-offer will probably have to be reviewed and approved by several individuals (like at the car dealership) or even several different companies. So be prepared for some time for negotiations. 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. They are going to state that they will not make any repairs. 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. Be sure to do all inspections and make the required notices because in most cases after the inspection period the earnest money deposit becomes non-refundable.

Even though you agreed to “as is," if you find any needed repairs, always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Many times they will decide that they will re-negotiate to save the transaction instead of putting the property back on the market and disclosing your inspection to the next buyer.

Banks also don’t want to get sued, so expect large amounts of addendums in addition to the local disclosure forms that the area realtors use. The local forms more often than not will be crossed out, and signed only because the agent requires it and all parts of the local realtors contract can be over ridden by what is written in the banks “seller’s addendums”.

Most banks will not provide financing on their REOs but it doesn’t hurt to ask. Especially if the property has extensive damage and you are purchasing it "as is." And some such as Country Wide may require you to be pre-approved with their company before they will even look at your offer.

Making an Offer

Before making an offer, be sure to contact the listing agent and ask the following:
· Are there inspection reports?
· What work has the bank agreed to?
· 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 FAXED to the bank. The listing agent often will need the originals. There is no formal presentation. In most cases the listing agent will summarize your offer through email or an online submission form. 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.

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

The are not usually a property that you would want to buy and turn right around and resell. Most bank addendums state that these contracts can not be assigned and many sellers are including deed restrictions on the new deeds provided with the buyers. For example on a Fannie Mae owned home they usually include a deed restriction to keep the buyer from selling or financing for 120% of the investor’s purchase price on the home.

But if you are looking for something to buy and fix up, then the better and cheaper you can do your rehab, the easier (lower costs) your financing, and the more exit strategies you employ, then an REO property can be a great deal. For the first few years of our Real Estate Investing here at Tucker One, 9 out of 10 properties we purchased were REO.

And as we saw in the front page article in this newsletter, the banks are inventorying a lot more properties these days in the past and they are not in the house business, they are experts at lending money and we are experts in houses.

So get those lists of REO properties from the listing agents and from web sites, go look at properties and make offers. Who knows you might catch the asset manager on a day that he or she just needs one more sale for the month to make bonus and they might take yours.

~~ Kim Tucker: Kim and her husband Don have bought and sold or rented over 100 houses in the 6 years. Their first 3 years were spent purchasing primarily bank owned properties to rehab and retail, and currently are managing an inventory of single family rental homes while wholesaling one or two houses a month. See their current inventory for sale at www.TuckerOneProperties.com and request to be put on their email list of houses by emailing kcmoHomes@Yahoo.com.