As a local REO expert, I’ve help many buyers successfully purchase a foreclosed home.I’ve learned a few things along the way and I’d like to share them with you. The process is somewhat different that purchasing a non-REO property so read on for first-hand information.
First of all let’s define the acronym REO. REO stands for “Real Estate Owned” by a bank. The property has gone through the foreclosure process and is now in the bank’s portfolio.
(For the sake of ease in the rest of this article we will refer to the ‘owner of the foreclosed property” as the ‘bank’. It could be a bank, a private investor, Fannie Mae, Freddie Mac, HUD, a hedge fund, an insurance company or one of many entities.)
1.How do I find an REO property?
Finding an REO is as easy as asking your Realtor to send you a list of local foreclosed homes. Most REO properties are listed on the local MLS. A good realtor will have a feel for the best REO properties available. Let your Realtor work for you to find these properties. It’s their job!
2.There is a lot of confusion regarding the word ‘auction’ when it applies to foreclosures. What’s the difference between the foreclosure auction and an online auction?
I’ve had many a buyer confused by the word auction. The foreclosure auction is the auction that takes place when the owner has defaulted on their loan and the lender is taking the property back. It usually takes place at a title company or on the courthouse steps. In our Teton Valley market we have had very few properties purchased at the foreclosure auction. The risks are high as most buyers would not have had the opportunity to inspect the property. There may also be liens attached to the property. The buyer may have to evict the former owner in some cases. If you want to purchase a property at a foreclosure auction you will have to have a cashier’s check in hand for your full bid.
An online auction (after the bank has acquired the property at the foreclosure auction) occurs when the bank decides to sell their REO at an online auction site. They usually do this if the property has been on the market for several months and has not yet sold. Many sites state that they are no reserve auctions, and start the bidding very low. Just be aware that if you win the auction, you have in essence, won the ability to make an offer. After the bidding process the, your bid/offer goes to the bank for final approval. If the bid is lower than the bank wants to take they will reject the bid/offer. The property will most likely be put back out on the market.
3.What can I expect to see when I view an REO?
Just about anything. Many REO properties are in very good condition and will be in move-in ready condition. Others may be in very rough condition. Many will have appliances missing, damage or any of many other issues. The most important thing to remember is that REO properties are being sold in “as is where is” condition.
4.Will the bank do to fix up and/or repair the property?
In some cases the bank will make repairs to the property prior to going to market. In other cases they will do nothing. If you are getting FHA financing on the property you will want to make sure it meets FHA safety standards. You will be allowed an inspection period to determine what issues you may have with the property. But, in most cases the bank will not fix or lower the price on the existing contract to compensate. Do your homework. Hire a good inspector. If you find that there are too many issues to proceed, you can back out of the contract within your inspection period and receive your earnest money back. If the purchase price justifies the amount of time, effort and money you will have to put in the property to make it the way you want it, proceed.
5.What about any existing liens against the property?
Banks will convey a clean title to you when you purchase the home. They have to – no lender will fund a loan on a property that has a clouded title. Existing mortgages, property taxes, outstanding HOA fees, IRS liens, mechanic’s liens – all will be cleared from the title before your purchase. You will start paying all the normal fees (taxes, HOA, etc.) from the actual day your transaction closes.
6.What do I need to provide to write an offer on an REO?
The following items will be needed to submit an offer – please have these ready BEFORE you start looking for a home:
- Pre-Approval Letter (If you are getting a loan): Itmust be on a lender’s letterhead (Not a Pre-Qualification Letter).
- Proof of Funds (If you are paying cash): The best proof of funds would be a letter from your banker on bank letterhead stating that you have the amount of money you offered available. A copy of a bank statement, IRA, etc. will also work, but please white out your account numbers.
- Earnest Money Check: A good rule of thumb is 1% of the purchase price, however, the higher the earnest money the stronger the offer looks to the seller. Some banks will require 10% earnest money if it is a cash offer. Your realtor should be able to determine if this is the case.
7.Are the banks looking for anything special in an offer?
Banks are looking for the cleanest offer they can get. Please don’t insist upon asking for repairs, septic pumping, well tests, surveys, etc. They will not do them. If you want those things done, consider it your expense. Don’t specify a title and escrow company. Let the bank use theirs. They will give you the option to use a company of your choosing, but you will then have to pay for title insurance and all escrow fees. It’s just easier and cheaper to use theirs.
8.Can I ask for help with closing costs?
Yes! Banks often provide help with closing costs. However, make sure that you understand that the bank is looking for net profit and if you are in a multiple offer and there are two offers with the same purchase price, the offer NOT asking for closing costs will most likely prevail.
9.I understand that the bank will issue an Addendum or Counter Proposal to my offer. What can I expect?
Once the bank receives your offer you can count on 1 – 7 days to receive an answer. I have had it take even longer. Their answer will come in the form of a counter offer and addendum to the contract. If you and the bank come to terms, you will need to sign a bank addendum to the contract, that in essence, reiterates all of the banks terms, including the ‘as is’ situation. You cannot make any changes to this addendum. If you do, the offer, counter offer and addendum will be withdrawn. It’s the bank’s way or the highway.
10.What kind of a price break can I expect to get because it’s an REO?
First of all, we rarely see lowball offers on REO’s accepted in the Teton Valley market . Secondly, REO listing agents have learned to price their listings VERY competitively and, if it’s a nice property in decent condition and in a good location, expect multiple offers. Have your realtor call the listing agent prior to making an offer to see if you are competing with multiple offers. The sold price to list price ratio in our market has hovered right around 92% for the past few years.
I hope this helps! Great deals are out there and most of our current transactions are REOs or short sales. We have many VERY happy buyers in newly acquired foreclosed homes who have finally, because of low prices, been able to get their slice of the American Dream. Whether you are a first time home buyer, moving up, looking for a second/vacation home or investing, there is a property waiting for you in Teton Valley. Call or email me today to get started!