Buying bank owned properties
There is a lot of interest in buying bank owned properties these days. A lot of information, some good and some bad, is floating around about the subject. Often the information offered is for sale, with the promise that you can make a lot of money with little effort once you know “the secret formula”. The fact is that there are no secrets, and to make money does require effort.
What’s an REO?
REO stands for “Real Estate Owned”. These are properties that have gone through foreclosure and are now owned by the bank or mortgage company. This is not the same as a property up for foreclosure auction.
When buying a property during a foreclosure sale, you must pay at least the loan balance
plus any interest and other fees accumulated during the foreclosure process. You must
also be prepared to pay with cash in hand. And on top of all that, you’ll receive the
property 100% “as is”. That could include existing liens and even current occupants that
need to be evicted. A REO, by contrast, is a much “cleaner” and attractive
transaction. The REO property did not find a buyer during foreclosure auction. The
bank now owns it. The bank will see to the removal of tax liens, evict occupants if needed
and generally prepare for the issuance of a title insurance policy to the buyer at
closing. Do be aware that REO’s may be exempt from normal disclosure
requirements. In Florida and many other states banks are exempt from giving a
Transfer Disclosure Statement, a document that normally requires sellers to tell you about any
defects they are aware of.
Is it a bargain?
It’s commonly assumed that any REO must be a bargain and an opportunity for easy
money. This simply isn’t true. You have to be very careful about buying a REO if
your intent is to make money off of it. While it’s true that the bank is typically
anxious to sell it quickly, they are also strongly motivated to get as much as they can
for it. When considering the value of a REO, you need to look closely at comparable
sales in the neighborhood and be sure to take into account the time and cost of any repairs or
remodeling needed to prepare the house for resale. The bargains with money making
potential exist, and many people do very well buying foreclosures. But there are also
many REO’s that are not good buys and not likely to turn a profit.
Ready to make an offer?
Most banks have a REO department that you’ll work with in buying a REO property from
them. Typically the REO department will use a listing agent to get their REO properties
listed on the local MLS. Before making your offer, you’ll want to contact either the
listing agent or REO department at the bank and find out as much as you can about what they know
about the condition of the property and what their process is for receiving offers.
Since banks almost always sell REO properties “as is”, you’ll want to be sure and include an
inspection contingency in your offer that gives you time to check for hidden damage and
terminate the offer if you find it. As with making any offer on real estate, you’ll
make your offer more attractive if you can include documentation of your ability to pay,
such as a pre-approval letter from a lender. After you’ve made your offer, you
can expect the bank to make a counter offer. Then it will be up to you to decide
whether to accept their counter, or offer a counter to the counter offer. Realize,
you’ll be dealing with a process that probably involves multiple people at the bank, and they
don’t work evenings or weekends. It’s not unusual for the process of offers and counter
offers to take days or even weeks.