Buying REO Properties
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What IS REO property and how do you buy REO Property ? It is Real Estate Owned. It is property which is in the possession of a lender as a result of foreclosure or forfeiture. In today’s economy there is to put it mildy a surplus of REO property on the market. This may present opportunity for the real estate investor, speculator or home buyer, but be cautious.
Always be sure to conduct home inspection for the bank owned property. The previous property owner might have done something to the property that the bank is not aware of.
Usually, VA or FHA financing is not allowed on REO properties.
The benefit of purchasing a REO owned property would be the discounted prices these properties are priced down to. Lenders are in the business of lending money and will work hard to release properties that have been repossessed and or foreclosed on.
REO – Bank owned properties, can most often be purchased at a discount to current market valuations. Sometimes in really strong real estate Markets, this is not the case.
REO properties are generally sold “as is”, so make you look the property over with a fine tooth comb if you are planning on doing any repairs yourself.
Bank owned properties are often purchased by real estate investors. Many REO houses require a lot of work by investors to be marketable. A handy first time home buyer can buy a REO requiring cosmetic repair and after some repair have instant equity in their home.
Buying Bank Owned Properties
In the world of real estate there are many, many types of properties that you can buy. The majority of the time people hire a real estate agent to help them buy a property that is listed on the MLS (multiple listing service) of the area that they are looking for. Whilst most people go through this route, other, perhaps more astute, or bargain hunting people, look at houses that are either in foreclosure of REO (Real estate owned) by a bank or Loan Company.
A common misconception that people outside of the real estate industry make believes that foreclosure and an REO purchase is the same thing. Although they are similar, they are in fact different; more precisely they are corollaries of each other, with an REO being a direct result of a failed foreclosure sale. To understand the difference between the two and how they vary from each other it is best to define what each is, and their respective merits.
The term Real Estate Owned propriety is sometimes used ambiguously, but has a specific meaning in the real estate industry; a property that has been fore-closured on by a bank or Loan company and has reverted back to the ownership of the lender. So as already explained above an REO is the result of property that has been foreclosed on, and is produced only as a result of a failed foreclosure sale.
Knowing that an REO is the result of a foreclosure leads us to wonder what is foreclosure, what are the benefits of buying a house that has been foreclosed on and what are the reasons why they fail to find a buyer.
Under the terms of foreclosure a bank or Loan Company reposes the property due to the tenants inability to continue with payments on their loan; that they used to purchase the property the first instance.
Once the foreclosure notice has been issued and foreclosure has started the bank or Loan Company legally has the right to sell the property; regardless of whether the tenants haven’t moved out yet.
In order to purchase a property in a foreclosure sale there are a number of items that the bidder needs to successfully complete. Firstly the buyer has to submit a minimum bid that includes the following:
The loan balance on the property. All accrued interest on the property Attorneys fees All costs associated with the foreclosure process.
Regardless of the above, in order to bid at foreclosure the buyer must also have a cashier’s check in hand for the full amount of the bid. If the buyers is successful then they will be offered the house in its ‘as is’ condition; complete with tenants who need evicting and liens secured on the property.
Because of all the difficulties and lack of concrete benefits in buying at foreclosure, most people who want to buy a foreclosed property will go through the REO route.
The REO method of purchase offers much more benefits, incentives and less stress than the foreclosure method.
When a bank or Loan company takes back a property they then have the property listed as a sellable asset on their books. The role of the bank is to maximize the wealth of its shareholders. If the foreclosed property can be sold to release cash to invest, then this is the main motive for the bank or Loan Company; sell the property and invest the cash.
In most situations a bank will be looking for a quick sale, and as such will offer many incentives and benefits to prospective buyers:
Savings of up to 20% off the market value of the property Market an REO purchase as the most simple way for first time homebuyers and experienced investors to buy properties Give prospective buyers have immediate access to the property for home inspections Remove all back taxes and liens Allow negation on rehab costs, interest, closing points, loan amount, etc. Describe the purchase as nearly 100% risk-free Accept a less than normal down payment
Although the benefits of an REO seem to out weigh those of a foreclosure purchase you should not take them at just face value; you should always look into exactly what you are getting and what you are liable for, should you choose to purchaser a property.
In a REO sale the bank will evict the tenants (or you could leave them there and let them pay rent), remove any liens etc and do the basics. Most of the time however the bank will not make any repairs to the house and want to sell it to you in what is called ‘as-is’ condition: the condition the house was in when it reposed it. IF this is the case you should seek the services of a home inspector, to find out the sate of the property and to help you decide whether you wish to continue the transaction.
Although a bank owned property might look like a good deal on the outside, it is necessary that you do your background research on the property before you commit to any contracts. Your first priority should be to find out what the house is worth in today’s current market; having a comparative market analysis carried out will help you with this aspect of the purchase.
The reality that a bank or loan company is trying to sell its REO property does not necessarily mean that they are going to sell the property at a bargain price; such would be going against their role: to maximize shareholder worth.
If after you have had the property checked you still wish to continue with the purchase you will most likely make the bank or Loan Company an initial offer. Generally the bank’s response will be to counter the offer and ask for a higher price; a standard trick for the industry.
The emphasis will now be on you to decide on what you want to do. If you decide that the price that the bank or Loan Company is asking for does not reflect the market value of the property then you can stop and walk away. If you are happy you can counter their offer and submit a new bid.
It is most likely that the bank or Loan Company will have a whole department to handle their REO transaction, and as such it may take a while to get back to you, as around 3 or 4 people may have to review your offer.
If the bank approves your offer, then great for you! If they reject the offer however you should look at whether you are happy paying more or whether you feel that the price they are asking is either above market value or unacceptable to you.
If you continue with the transaction the bank or loan company will draw up a contract. It is necessary for you to take a good look at the contract and maybe have your attorney go over it with you, as once you sign it you are liable for what it states.
If you have not done so by the time you accept the banks offer you should have the house inspected by a professional. If you are waiting for an inspection, and already have the contract drawn up you should have an inspection contingency written into the agreement, so that you can pull out of any deal if the result of an inspection produce surprises or faults you are not comfortable with. You should always remember that the bank or Loan Company will always want to sell the property ‘as-is’.
You should if possible always consult a Realtor or real estate agent before committing to a contract, or indeed making your offer to the bank or Loan Company. If you do have a Realtor working for you, you should as him or her to find out from the listing agent the following details about the property, before you come to you conclusion on the offer you will make:
Are there any inspection reports? What repair work has the bank agreed to? Is there a special “as is” form? How long will it take the bank to accept your offer? How do you, or your agent, deliver the offer?
Investing In Foreclosures
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Not all foreclosed properties are available at discount.
Do your research and do your home work when looking at foreclosures. Know the are you are buying in, find out what is a reasonable price for a similar home. Look at the property and bring some one else with you to be an objective observer. Write out lists of possible repairs, if you see anything suspicious have a specialist do an inspection.
The laws that dictate how foreclosed homes are seized and sold on the market again vary from State to State. Make sure to check your State’s laws to get a full understanding of the process before you assume its the right move for you to make.
Because timing is often of the essence in pre-foreclosure sales, you may feel pressured to enter into contract or put cash on the barrel while waiving inspection. Try not to waive inspection on a property which is being foreclosed, no matter how good the deal, or if you do insist on the maintenance of an escrow account funded by the seller to cover any major zoning, environmental or building code infractions that you may uncover upon detailed examination, and a contract indemnifying you and holding you harmless from any liabilities that may arise. Thee types of problems dramatically limit the marketability of the home when you attempt to resell, and depending on your local jurisdiction, may even force you into demolishing the property or engaging in expensive cleanup. In a worst case scenario, in the event of ground water contamination etc, you may be subject to fine or even expensive litigation from municipalities and individuals, and a fresh homeowners policy would not cover it.
The best time to buy foreclosure properties is before they get to foreclosure. If you subscribe to a notification service get involved at the default level. Offer the owners in default an equity sharing deal, you bail them out for a share of equity. This is usually a win-win situation and you can make a lot of money just bailing out people in default, its usually and easier deal to make and you still win regardless what happens because you will be imposition to foreclose yourself if the owner finally can’t make the deal work.
Another good way to handle foreclosures is to look for notices of default and see if the owner is interested in an equity sharing arrangement. In equity sharing you bail them out for the equity of the property at a certain point. I like to do a 5 year equity sharing agreement with homeowners where you agree to bail them out in exchange for a portion of their equity and the return of your investment plus interest in 5 years while they continue to reside in the home and make the payments. Sometimes you do 50% of the equity at sale depends on what works for everyone. One of the risks is that during that same period the homeowner will default again and you would have to foreclose and wind up owning the property, of course you may not see that as a risk depending on your situation.
Even though there has been a high amount of foreclosures in the nation, they have been touted as “easy money” by real estate investors trying to sell seminars more than real estate. Regardless of where the hype came from the demand is still perhaps more than the supply. For this reason banks have been able to sell their homes more and more at “market value.” For instance, Freddie Mac through HomeSteps will actually renovate the homes themselves in order to make them available for full market value. Their goal is to sell them to “end users,” or people who plan on buying them as primary residences. In fact, HUD will only sell their homes to end users first, and then open the auction up to investors. Because of this, HUD auctions are flooded with investors, getting a bid in only after end users get a shot at them.
In most of the country’s “hot” real estate markets, competition for foreclosures and stagnation of pricing has made the spreads on foreclosure rehabs and flips significantly lower than before, thereby increasing the risks associated with buying foreclosures. Consider targeting a market which may be slightly off the beaten path where demand is increasing as part of your strategy, to help you diversify the risks of buying foreclosures in hot markets.
Sometimes, you can negotiate a “short sale” with the lender. This is where the lender agrees to take a lower amount to pay off the loan, in lieu of going through the foreclosure process.
Doing your “due diligence” is key. It’s important to have a prelim title report done on the subject property(either by you or a 3rd party) to make sure there are no clouds on title.
The key to investing in foreclosures is to start early. Contact you local title company and have lists of NOD’s emailed to you. This will give you a starter list of homes that are facing foreclosure. If you have issues getting the list then contact a Real Estate professional you trust. They can get one for you.
Typically, competition for foreclosures is very high. Be sure to act quickly if you see a good opportunity.
As mentioned previously its often best to identify future foreclosures and work with the homeowners prior to the actual foreclosure. If your going to be working in the foreclosure market its best to get your financing in place so you can move quickly.
Also check the banks for REO or Real estate owned properties some like to sell their portfolio at a discount towards the end of the year. Especially smaller banks.
Very often, when a property is sold at a foreclosure sale, it is not in the best condition. Make sure you see the house before placing a binding bid on the property.
Also important to note, is that when you are bidding on a foreclosure sale at the county or municipal court, you need to have certified funds or cash, usually in the amount of 5-10% of the final bid price, to be given to the court as an “earnest money deposit” upon acceptance of your bid.
You then sign a contract and have generally 30-60 days to close. This time allows you to arrange for the financing, if any, on the property.
Make sure to check with the court for their specific requirements before showing up and bidding on a foreclosure sale.
There are high risks and hard work involved with buying foreclosure homes. A foreclosure property buyer needs to spend a great deal of time to find homes that are in foreclosure and to go through public records to make sure that the foreclosed properties do not have unexpected liens, such as tax liens, which could drive up the purchase price. Beginners should consider buying bank owned properties, which are often free from the usual risks associated with foreclosure homes.
When looking at foreclosure properties, failure to do the proper research can easily lead to as great a chance of disappointment as of the excitement that comes with a great find. A. If you don’t want your purchase to be an unpleasant experience there are some due diligence checks that you should make before you bid or make an offer on a foreclosed property.
While foreclosure listings may sound like increasable deals at first, one must be sure to do plenty of research before snapping up a foreclosed property. All too often, individuals purchase foreclosed property with one idea in mind only to find out that the property really isn’t what they thought it would be. That cute one bedroom condo in a trendy area coudl actually turn out to be a basement studio in a not so close to re-development zone. To avoid this kind of mistaken identity, be sure to take the necessary steps to properly research foreclosure properties.
Without a doubt to be successful in investing in foreclosures the investor must get to the homeowner early. Many serious foreclosure investors drive through otherwise well kept neighborhoods looking for homes in an unkept condition. This can often (but of course not always) be a clue that the property is close to going into foreclosure.
You can use a simple formula to make sure that you have some cash flow or make money if buying a rehab project. You can take your after repaired value times 70% less repairs. (ARV x .70)-R = maximum offer. Obviously you can sway a bit from this depending on the area but this rule of thumb is used by professional real estate investors across the nation. You may want to contact remodeling contractors in your area to gain an understanding of what repairs costs. This formula takes into consideration your holding cost until you find a renter or buyer.
