Buying Bank 0wned Properties

There is a lot of interest in foreclosures, which are  bank owned properties these days. 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.  For example, the bank may be 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 isn’t always true.  You have to be very careful about buying a REO if your intent is to make money.  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. 

Fixer-upper?

If you're looking at foreclosures and short sales, it's highly likely that you will see properties in poor condition.  And while you may want to buy a property in great condition at an even greater price,  those properties are rare even in today's market.  So, consider an FHA 203K loan, which not only finances your purchase but also lends the money to do repairs and upgrades. 

Ready to Make an Offer?

Most banks have a REO department.  Typically the REO department will use a listing agent to get their REO properties listed on the local MLS.   You can view the property,  but be aware that banks sell REO properties “as is”.  So you’ll want to include an inspection contingency in your offer, which gives you time to check for hidden damage and terminate the offer based on the results of the inspection.  The lenser will require documentation showing your ability to pay, such as a pre-approval letter from your lender.  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, weeks, or months!

California and Florida curretnly lead the country in foreclosures.  There are some great opportunities available here.  You can search foreclosures here or around the country, just arrow down to the bottom of my home page.