Foreclosures & REOs

So you would like to buy a bank owned property?

There’s no doubt is has been one of the best buyer’s markets in history. With historically low interest rates, declining prices and strong levels of inventory make this a great time to take advantage of the market and purchase a foreclosure. There are still deals to be had out there with some more aggressive than others. I am seeing about a mix of situations going multiple offers on listings and major price reductions on the other half. I am also seeing the inventory decline just a bit here this year.

If you are in the market to buy read on. And, take a peek at what’s coming soon!

REO vs. Foreclosure

A REO(Real Estate Owned) property, or bank owned property as it is more commonly known, is a property that has gone back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure auctions do not result in bids. Had there been enough equity in the property to satisfy the loan, the owner would probably have sold the property and paid off the bank. Indeed many REOs were on the market at one time as Short Sales Most of the time this 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, and HOA dues if the property is subject to them, plus attorney’s fees and any costs associated 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 the 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 liens against the property. Typically you do not have the ability to inspect the property in advance of the auction. 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 or inspect the property. 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. Frequently I see REOs come on below market value to encourage multiple offers. This may result in multiple offers, and often it does result in bidding wars with the bank requesting highest and best offers from all the buyers that made offers.

How Banks Sell REOs

Each bank/lender works a little differently, 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. They may also work with an asset management company who will then manage the entire process for them.

Once you make an 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 that they attempted to get the highest price possible. Your offer or counter-offer will probably have to 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.”

If you reach agreement on price and terms the final contract you are obligated to will, in all likelihood, not be the Colorado Residential Purchase Agreement on which you made the offer.  It will be the bank’s own addendum and the terms will be favorable to the bank.  It is critical that you and your agent are aware of all the terms you are agreeing to.  Typically the bank’s addendum will supersede all the terms and condition of the RPA (Residential Purchase Addendum).  It will include shorter contingency removal time frames, the passive removal of contingencies and a per diem penalty to the buyer if they do not closing on time.  The bank’s contract protects the bank as seller more than you as buyer.  If you buy a bank owned property be sure you and your agent understand everything you are committing yourself.  This is where representation by an agent experienced in selling these properties is critical.

Property Condition

Banks always want to sell a property in “as-is” condition. 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 renegotiate 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 not necessarily exempt from all the typical disclosures such as Seller’s Property Disclosure, Square Footage Disclosure and Source of Water. However, I have found that most will not fill those forms out. They will provide a Lead Based Paint Disclosure if the home was built prior to 1978. If there are real estate agents involved, either representing you or the bank, those agents are still required to provide you with their disclosure statements such as Buyer Agency Agreements.

Making an Offer

Before making an offer, you should consider the following questions.

  • How long does the bank take to accept an offer?
  • Are there multiple offers on the property? If so, has the bank gone to Multiple Offer Notification or Highest and Best?
  • If you need financing, are you required to use the approved lender of the sellers for a prequalification letter?

Offers are usually input into an online “portal” which the listing agent and asset manager have access to. There isn’t a formal presentation and no opportunity for the listing agent to give the bank a lot of input. Asset managers are simply looking at the numbers and will want the best price with the fewest obligations on the part of the bank. They may choose a lower offer which does not require they do any repairs. There will not be responses from banks on weekends, they’re closed.

Make your offer easy to accept. Remember that REO’s sell at pretty close to full market value.

My finger is always on the pulse with REOs. I have listed, sold and worked with just about every asset company and bank out there. If you are interested in knowing more about this type of property, please call or email me.

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