What is a REO Property? It is a property that is Bank Owned after a foreclosure sale.
So you’d like to buy a bank owned property?
OK you’re ready to do the bank “a favor” and take a problem off their hands. Plus, you expect to make "a killing" in the process. Sounds great and it might just happen, but first you should take a look at some facts and get prepared.
An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful per-foreclosure "short Sale". You see, most "short sales" do not even result in a closing. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank. That is why the property ends up at a pre-foreclosure/short sale or trustee sale.
Foreclosure sales 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 property "reverts" to the bank. It becomes an REO, or "real estate owned" property.
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 the property.
A bank owned property may or may not 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.
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.
Once you make an offer to purchase, banks generally present a "counter-offer" and or give you an opportunity to give your "Highest & Best 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 plan to counter the counter-offer.
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, etc."
Banks always sell a property in "as is" condition. They will allow you to get all the inspections you want (at your expense), but will 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.
* You will agree to purchase the property “as is".
* Banks will not provide any disclosures.
Before making an offer, have your agent contact the the listing agent and ask the following:
- Are there any 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?
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 that should make your offer easer to accept.
Hopefully these tips will help you with your decision to purchase a REO property.
PLEASE CALL US FOR ADDITIONAL INFORMATION 602-765-8700
*Broker is not qualified to provide financial, legal, or tax advice regarding purchaseing real estate. Therefore, any Seller and/or Buyer is strongly advised to obtain tax advice and consult independent legal counsel immediately regarding the tax implications and advisability of entering into a Purchase Contract.