Tips for Buying REOs
The foreclosure process is complete. The subject property has gone from the beginning stage of borrower default, to public auction, and finally back to the foreclosing lender if no one purchases it at the sale. At this point in time the property is repossessed by the lender and becomes Real Estate Owned (an REO property).
Once a property is repossessed by a bank or lender, the property will most likely be listed for sale through a real estate agent who represents the lender. Good buys are available, but they require research, preparation, patience and persistence. Buying a bank-owned home in foreclosure isn't easy, and it is highly competitive. Before you consider plunging into the foreclosure market, be sure to do some in-depth research.
Here is a list of things you can do to successfully purchase a bank-owned REO:
Inspect the Property.
Most foreclosure properties are referred to by investors as "distressed" properties. Bank-owned foreclosure homes are usually sold "as is," which means that the discount you just saved on the purchase price can easily be eaten up by unforeseen expenses such as repairs that were not immediately apparent. Many owners of homes that go into foreclosure have been struggling financially, which usually means that the house has not received needed repairs or general maintenance for a while. Some homeowners who lose their property to a lender actually vandalize the property, causing major structural damage. So the best way to avoid many of these problems is to hire a licensed home inspector to give you a written estimate of the cost to repair the property. Remember to figure that number into your budget so that repair costs can be used later in your negotiation with the bank to reduce the asking price.
Conduct a Title Search.
Once you have selected an REO home you are interested in submitting a bid for, conduct a preliminary title search of the public records for liens and outstanding taxes. You can perform a preliminary title search on BankHomesDirect.com and then hire a title company to run a full, insured title search before closing the deal. Liens on the property can drive up the purchase price. Common liens typically are placed on a property for unpaid loans borrowed against the property, taxes or unpaid contractors (mechanics liens). Normally, these liens remain intact until the money is paid, which means that you may have to pay off the liens on the foreclosed property you are buying — even though you're not the one who didn’t pay the property taxes. When the bank takes the property back it usually clears title before selling the property, but never assume that this is the case.
Investors should be prepared to negotiate a lower down payment, a lower interest rate, a reduction in closing costs and a lower asking price. Many lenders may be willing to waive some closing costs, maybe even offer a break on the interest rate or the down payment. Moreover, some lenders might offer to finance the property at a below-market rate or with a lower-than-usual down payment. Don’t be afraid to ask for a better price and favorable terms.
Submit an Offer.
Although most banks want to unload their foreclosed properties, they won't necessarily do so cheaply. So you aren’t guaranteed a fabulous price. But remember you’re dealing with an eager seller. Even though the bank’s REO manager or their listing agent might suggest that the list price is “firm,” never be afraid to negotiate price — especially if the foreclosed bank-owned home needs repairs. When submitting a low offer, you need to substantiate the reduced price in writing and document your case. You should furnish photographs and cost estimates for repairs to support your offer amount.
With good credit, many banks will loan the full price of the foreclosure or more. If the home is to be used as a rental, many banks will require only a 10 percent down payment. Foreclosure investors with a large amount of equity in another home may get a line of credit from their bank to purchase a foreclosure. When they convert the line of credit to a mortgage, no down payment may be required.
Purchasing bank-owned properties offer tremendous potential opportunities for both home buyers and real estate investors. There are many advantages including:
- Bank-owned properties are usually sold at below-market prices with great terms like low down payments and low interest rates.
- Buying bank-owned properties involves less risk.
- Foreclosures that are owned by banks are usually clear of any liens that may have been recorded against the property.
- Since the seller of REO homes is also the lender, you can negotiate with the bank to have them pay for all or some of the closing costs.
- Bank-owned properties are usually vacant because the banks have evicted the previous owner, saving the investor or homebuyer time, money and emotional toll involved in the eviction process.
But the bottom line is, nothing replaces doing the proper research up front before attempting to purchase an REO. Working with a real estate agent who is familiar with locating and submitting bids on bank-owned properties can also be a great help.