This book is a gift from Tim Barrans. You registered on one of our websites, or

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1 THE BARRANS REPORT Simple Steps to SMART Foreclosure Buying Table of Contents 1. SO YOU D LIKE TO BUY A BANK OWNED PROPERTY? 2. REO (Real Estate Owned) VS. FORECLOSURE 3. BANK OWNED (REO) HOMES FOR SALE 4. HOW BANKS SELL REO'S 5. HOW MUCH TO BID FOR THE FORECLOSURE 6. MAKING AN OFFER 7. CHECKLIST: FOR BUYING A BANK-OWNED REO PROPERTY 8. BANK ADDENDUMS BUYER BEWARE 9. HOW TO FINANCE A FORECLOSURE 10. WHY YOU NEED A HOME INSPECTION 11. HOW TITLE INSURANCE PROTECTS THE CONSUMER WHEN PURCHASING A FORECLOSED PROPERTY 12. FORECLOSURE COACHING 13. BANK-OWNED PROPERTIES AND REO (FAQ) This book is a gift from Tim Barrans. You registered on one of our websites, or When you registered on our websites your free subscription to the weekly Barrans Report, the hottest foreclosures and homes on the market will be sent to you from my website You can expect this every Sunday. Be ready for some outstanding deals! This e-book will help you understand how to not miss out on them. Enjoy! You can reach me by calling or at tbarrans@servingpugetsound.com 1

2 Chapter 1 SO YOU D LIKE TO BUY A BANK OWNED PROPERTY? The bursting of the real estate bubble and general downturn of the economy has brought financial hardship upon many home owners. Foreclosures are at record high levels. But this spells opportunity for real estate investors and home buyers who buy bank-owned foreclosure properties, also known as "Real Estate Owned" or REO listings. This e-book explains the process for buying foreclosure houses, condos, and multiple-unit residential properties at deep discounts. Banks are not in the business to hold an inventory of homes. They want to get rid of these homes yesterday. This is an extremely favorable time for first time home buyers and investors because most of these homes are often listed for 50 to 85 percent below market value. Chapter 2 REO VS. FORECLOSURE The term Real Estate Owned (REO) property is sometimes used ambiguously, but has a specific meaning in the real estate industry; a property that has been foreclosed on by a bank or Loan company and has reverted back to the ownership of the lender. An REO (Real Estate Owned) is a property that goes back to the bank after an unsuccessful foreclosure auction. A large percentage of foreclosure auctions do not even result in bids. Foreclosure sales at auction 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. There may also be other liens against the property. This is a risk most of us should not ever take. 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 auction. In 2

3 order to purchase a property in a foreclosure auction 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. Attorney s 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. Generally what is owed to the bank is almost always more than what the property is worth, and then the property "reverts" to the bank. It becomes an REO, or "real estate owned" property. Chapter 3 BANK OWNED (REO) HOMES FOR SALE The bank now owns the property. 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 sometimes 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. 3

4 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. Bank Owned properties create the following benefits to prospective buyers: Savings of 15 to 50 percent off the market value of the property. The most simple way for first time homebuyers and experienced investors to buy properties. Prospective buyers have immediate access to the property for home inspections. Remove back taxes and liens in most cases. Although the benefits of an REO seem to out weigh those of a foreclosure auction 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 purchase a property. Most of the time the bank will not make any repairs to the house and will want to sell it to you in what is called as-is condition. The condition the house was in when repossessed. If this is the case you should seek the services of a home inspector, to find out the state 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. This is done by having your Real Estate Agent work up a comparative market analysis. Your professional Real Estate Agent has access to records of sold properties in the area through the multiple listing service. They will compare these sales to the home you are looking at and create a comprehensive report for you. 4

5 Chapter 4 HOW BANKS SELL REO'S Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible, however they have no interest in "dumping" real estate cheaply. Generally, banks have an entire department set up to manage their REO inventory. Most homes will have several agents not associated with the sale create a BPO (Brokers Price Opinion) that will help the bank determine the price. Banks are selling a lot of homes right now and work hard to find a balance between protecting their assets and determining a price that will sell the property quickly. Once you make an offer to purchase you may get a quick answer or it may takes days. Sometimes you will be notified to submit your best offer as multiple offers have been submitted. Banks may 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. 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 with 5 days." First priority for you as the buyer is to 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. This allows you to withdraw from your offer should your 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. 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 re-negotiate to save the transaction instead of putting the property back on the market, but don t take it for granted. 5

6 Chapter 5 HOW MUCH TO BID FOR THE FORECLOSURE Obviously, one of the main considerations when thinking about placing a bid on a bank owned foreclosure home is how much to bid and, moreover, how to bid just enough to win the bid for the foreclosure property without overpaying. This is where the trouble potentially begins. Unlike HUD or the Veterans Administration (VA), which are both government agencies, banks determine the price they are willing to accept for a REO (Bank Owned) home on a per property basis. Ask your real estate agent to pull the tax records in order to determine the amount mortgaged prior to the foreclosure, then ask for comps in the area what would a home in good condition sell for. When an REO (Bank Owned) home comes on the market we have observed through selling records and the Multiple Listing Service that these homes sell for very close to the asking price. The low ball offer being accepted is a rarity and not the norm. After the home has been on the market several months the bank may be more willing to move on the price, often they lower it themselves. This is when the bargains really kick in. A discount of 10-15% off list price is probably the most you can expect, and the bank may still not be able to be this flexible regarding sales price. If you do not offer full price for the REO (Bank Owned) home, be prepared to lose the property to another homebuyer. Multiple offers can be expected on homes under $250,000 that are priced right by banks. You will also see homes selling for more than list price. Be ready to move as the home may not last long. HUD/FHA Government Owned Homes When an FHA insured home is foreclosed on often it will become a HUD (Housing and Urban Development) owned home. Purchasing these homes are a little different than regular bank owned homes. First they are bid online and only by a HUD registered Real Estate Company. The process is tedious and must be followed to the letter or it will be rejected by HUD. Ask your Real Estate Agent if they are familiar with this process. Per the HUD/FHA government foreclosure bidding formula, you can bid five percent below the asking price at a maximum. If you bid less than five percent, the bid will not be accepted and your bid for the foreclosure home will be thrown out. If you require closing cost assistance, you 6

7 must ask for it during the bidding process and this figure must be allotted in your final tabulation. HUD allows for a maximum of three percent for closing cost help. VA Foreclosure Bidding Formula A similar formula exists for VA foreclosure homes. The Veterans Association has the ability to be a little more flexible regarding sales price as the amount owed on the foreclosure home can play a larger role with regard to repairs. Whereas HUD allows no more than a five percent price reduction; the VA will sometimes take as much as ten percent off the price of the foreclosure home. The VA will also allow for six percent closing cost help. Investing in foreclosures is much more than numbers. Many people are looking into Real Estate as an investment. The first thing that comes to mind is buying low and selling high. Most buyers think, to buy low you need to buy a foreclosed property. That may be true but some very good deals can be found by looking at individual sellers. There are a few things to look into when considering a foreclosed property. The condition is obvious. One aspect often over looked is the competition. Check to see the number of foreclosed properties in the general area. This is very important. When it comes time to sell the property you do not want to be competing with a dozen or so foreclosed properties listed at rock bottom prices. Every potential buyer looking at your property will be considering the prices in the neighborhood. When it comes to write an offer they will expect you to sell at the lowest price they have seen. A good Real Estate Agent will be able to help you locate an area and send you updates on the prices. Both list prices and actual sale prices. Assemble a team of professionals that will help you. Your team should consist of a lender and Real Estate Agent with knowledge and experience of REO (Bank Owned) properties. Depending on your skills you may also need contractors for the plumbing, electrical, roofing and other areas of the structure. Know how much money you will have to spend before writing an offer to purchase. Put everything in writing. Make a list of all the costs. Not only will you have to pay the purchase price you will have to pay closing costs if you are getting a loan. You will also have to pay interest. Detail the cost of improvements. Make a detailed check list for yourself before you begin looking. When I deal with clients looking at building a new home I supply them a detailed list of everything they may want to consider. This list is constantly growing. I also have a list for every buyer and seller I work with. As each step is accomplished I check it off and fill in the date it is completed. Invest wisely and you will know how much money you will need to invest and you 7

8 will be able to estimate your profit. The most successful buyers/investors will not try to make a fortune on one property. They will price it to sell quickly, at a reasonable price. They will then take the profit and reinvest in another property. It is like the story of the tortoise and the hare. Better to have a small and steady income than to be sitting on a large one waiting for something big to happen. I can not even take a stab in the dark at a budget for investing. Each property has advantages and disadvantages. Prices for labor and materials depend on your area. Here is a list to consider but this list is far from complete. Purchase Price Closing Costs Repairs Taxes City Inspections, Licenses and Fees Insurance Time, Money, Gas Materials Unexpected Losses and Expenses Chapter 6 MAKING AN OFFER Before making an offer, have your agent contact 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? 8

9 How long does it take the bank to accept an offer? How does your agent deliver the offer? If after you have visited the property and you still wish to continue with the purchase you will most likely make the bank or Loan Company an initial offer. If the house is in the lower price ranges, under $250,000, or priced to sell quickly you may have multiple offers coming in on the home since they are drawing so much interest at this time. Don t expect the bank to give the property away. Lots of savvy home buyers want to hit the jackpot and buy that REO foreclosed home, many of which are often under-priced. When banks price REO s under the comparable sales, multiple offers are often the response. This means you could be up against stiff competition for that bank-owned home. It's not unusual for some REO homes to receive 15 or 20 offers. Sometimes the bank will throw out all but two or three offers and then ask the selected buyers to resubmit what is called "Highest and Final" offer. Sometimes the bank simply accepts the best offer at inception. 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. Most banks will not provide financing on their REO s but it doesn t hurt to ask. Especially if the property has extensive damage and you are purchasing it "as is." Since there is no face-to-face presentation to the bank, provide the bank with a pre-qualification or better yet a pre-approval letter. Make your offer easy to accept. We at Barrans Realty and SouthSoundForeclosures.com will be able to help you negotiate these deals for you and guide you throughout this process from writing an offer, to negotiating, to organizing / handling repair lists, and all the steps needed for a smooth closing. A Buyer's Agent is a Real Estate Agent who will represent your best interests when you buy a home. In contrast to the listing agent who has a duty to the seller to get the highest price, the Buyer's Agent has a duty to the buyer to help the buyer get the lowest possible price. And, best of all, the buyer's agent is paid by the property seller. The buyer doesn't pay any real estate fees. Instead, the Buyer's agent receives a portion of the fee collected by the seller's agent when 9

10 the property sells. So it only makes sense to have competent representation on your side of the transaction when you buy a home. You don't pay any more than you would otherwise, and you have a professional on your side. Chapter 7 CHECKLIST: FOR BUYING A BANK-OWNED REO PROPERTY Buying a bank-owned home in foreclosure isn't easy, and it's hardly without risk. Before you consider plunging into the foreclosure market, be sure to do some in-depth research. Here is a list of things you can do to successfully purchase a bank-owned REO: 1. Finding Properties For most home buyers and investors this can be the most difficult part. This is where & come into play. We update daily the most accurate and free list of Bank Owned Properties in the Puget Sound area. Our website, ServingPugetSound.com will send you the newest foreclosures as they come on the market. Once you've found properties of interest, it is important that your Real Estate Agent prepare a comprehensive market analysis to determine the likely "market price" of the property. Most banks price their foreclosure properties at 15% to 20% below "market value" but that is not always the case. Sometimes banks rely on bad appraisals or bad advice from their listing agents. A good Buyer's Agent will be thoroughly familiar with putting together a good Comparative Market Analysis (CMA). Sites like Zillow offer CMA tools to the public, but Zillow is not particularly accurate. When you find a property that interests you, perform some preliminary research to make sure the property represents a good bargain opportunity. Your research should not take more than one or two days because you do not want to delay too long before contacting the foreclosing bank. The key pieces of information you need to gather are the estimated market value of the property and the bank's break-even amount, we would love to help you with this research. The bank's break-even amount includes the unpaid balance of the loan, any fees and costs incurred during the foreclosure process and any other liens the bank had to pay off to take ownership of the property. The unpaid loan balance plus any foreclosure fees and costs are included in the opening bid. 10

11 2. Contact a qualified Real Estate Agent to assist you as your Buyer's Agent. Preliminary research of MLS listings will allow you to become familiar with the inventory of homes for sale in any neighborhood. But that is just a start. In order to proceed with buying a foreclosed home, you really need the help of a competent professional. IMPORTANT: Remember that the agent who puts the listing on the MLS represents the home seller. In the context of REO foreclosure properties, the home seller is the bank. The banks hire listing agents to sell their REO inventory. Banks are in the business of lending. The bank's real estate agent cannot help a buyer get a "great deal" on a foreclosure property. They must help the bank get the highest possible return from the sale. Our agents deal with banks constantly and are some of the most experienced in the area dealing with REO properties from the buyer s side. 3. Pre-Approve for a Mortgage Loan When you find the right foreclosure property you will need to be prepared to act fast. Contact a bank or mortgage broker early in your research phase to determine the type of loans and loan amounts for which you are qualified. 30-year fixed rate FHA loans at very low rates are available with a minimum of 3.5% down payment. Ask your Buyer's Agent to refer you to a reputable lender to determine your loan options. You can request a mortgage preapproval on our website, One of our preferred loan officers specializing in REO (Bank Owned) homes will contact you. 4. The Offer Although most banks want to unload their foreclosed properties, they won't necessarily do so cheaply. So you aren't guaranteed a fabulous price. But remember you're dealing with an eager seller. Even though the bank's REO manager or their listing agent might suggest that the list price is "firm," never be afraid to negotiate price especially if the foreclosed bank-owned home needs repairs. When submitting a low offer, you need to substantiate the reduced price in writing and document your case. Your purchase offer should include a goodfaith deposit check called Earnest Money in the amount of 1% to 3% of the purchase price. This is always negotiable and less is often accepted. Your buyer s agent will do everything possible to protect you and your Earnest Money. 5. Bank Addendums If your offer is accepted, you will likely receive a "Bank Addendum" which modifies the purchase offer. Typically the bank will shorten the inspection period, limit the seller's responsibility for repairs, and impose late-fees if the Buyer fails to complete the purchase on time. The banks that are selling foreclosure properties have every intention of protecting their own interests, and usually these terms 11

12 aren't negotiable. Your Buyer's Agent will help you understand your rights and duties under the agreement. 6. Inspect the property thoroughly. Hire a professional inspector to conduct inspections and provide evaluations of the property condition. Remember that the bank/seller has never lived in the house, so in Washington they are NOT required to provide detailed disclosures about the property condition. If your buyer s agent has protected you, they will provide for an inspection period in your offer. If the inspection uncovers defects, during the inspection contingency period the buyer can cancel the purchase agreement without losing their good-faith deposit. After contingencies are removed, however, the goodfaith deposit becomes liquidated damages to the seller if the buyer cancels. So do your inspections early! Most foreclosure properties are referred to by investors as "distressed" properties. Bank-owned foreclosure homes are usually sold "as is," which means that the 15 to 25 percent discount you just saved on the purchase price can easily be eaten up by unforeseen expenses such as repairs not immediately apparent in an exterior inspection. Many home owners that go into foreclosure have been struggling financially, which usually means that the house has not received needed repairs or general maintenance for a while. Some homeowners who lose their property to a lender frequently damage the property. So be prepared to do renovations and repairs. Hire a licensed home inspector and a contractor to give you a written estimate of the cost to repair the property. Budget that number into your purchase price to determine the true purchase price of the home. 6. Title Search Once a home has been located, search the public records for liens and outstanding taxes. Banks should clear the title before selling but never assume this is the case just as you would if you were buying a property from anyone else. Your agent will be in contact with a Title Company to help in this process. Your offer should include the right to have a clear and clean title. 12

13 Chapter 8 Bank Addendums Buyer Beware If your offer on a bank-owned or short-sale property is "accepted", you will receive the bank's addendum to sign. Many buyers (and their agents) just skim through it, sign on the dotted line and send it back to the listing agent. But they don't truly understand what the addendum says nor how it could affect them. Real Estate Agents in Washington use a contract that was painstakingly created by lawyers and a contracts committee. They try to design it as evenly as possible with several "fill in the blanks." Agents are given hours of training on these contracts. While a client might want to also have the contract reviewed by a lawyer, there is some comfort knowing that everyone uses the same contract and it was written by lawyers with a neutral bias. When you buy a bank owned property, you start with a standard contract, but then the bank sends the oftentimes non-negotiable "bank addendum." Some say, "It's just an addendum. The original sales contract has been accepted and those terms are what count." Wrong. The bank's addendum always has language in it that says something similar to, "This addendum supersedes the terms of the contract of sale and all other addendum." or "In the event any provision of this addendum conflicts in whole or in part with the terms of the contract of sale, the provisions of this addendum shall control." In layman's terms the bank's addendum trumps any and all terms of your original offer which you thought the bank "accepted" and "agreed to". They might appear innocent, but they are not. They are written 100% IN FAVOR of the banks. Every bank has a separate bank addendum, there is currently no training for agents so that they can fully understand them. Bank lawyers are clever in their means to achieve their end. Some of the most commons things in the sales contract that are trumped by the bank's addendum are Contingency time frames time frames can begin before both sides have signed the documents called mutual acceptance Title/deed Inspection contingency terms Septic inspection and pumping Closing cost assistance/concessions HOA assessments 13

14 All of these could potentially have a devastating financial and legal impact on a buyer. An experience REO (Bank Owned) Real Estate Agent can help you as a buyer to fully understand what the terms of the bank's addendum say and mean. Let's look at an example Let's say you put "10 days" for the financing contingency, but the bank addendum says "buyer's time frame for financing contingency is 5 days". You don't notice and your agent doesn't notice. You, your agent and, more importantly, your lender doesn't notice. Your lender thinks he has 10 days to get final approval on your loan and is working on your loan accordingly. On day 7, your lender comes back and says, "Sorry, the underwriter found some things they weren't happy with and wouldn't approve you for a loan." You immediately call your buyer's agent and say, "I couldn't get final approval so get me out of the contract using the financing contingency." Your agent calls the listing agent to get you out of the contract only to find out that you are out of luck because the financing contingency is only 5 days per the bank addendum (which you signed 7 days ago). You've gone from getting out of the contract to forfeiting your earnest money deposit. If you're wondering whether you can change or counter any of the terms of the bank addendum, the answer is "no". If you want to buy the property, you have to agree to the terms as they are. If you don't like the terms, feel free to back-out and look for another property. But all bank-owned and short-sale properties have bank addendums that all pretty much say the same thing using different language. So next time you go to buy a bank-owned or short-sale property, make sure you have a buyer's agent that knows what they're doing and that you read the bank addendum carefully and in its entirety. If you don't, you could get burned badly. Chapter 9 HOW TO FINANCE A FORECLOSURE So you found a bank owned property and you want to finance it with a mortgage loan. Here is the dilemma. REO (Bank Owned) properties typically need repairs, but banks want to sell as-is. Meanwhile, your lender wants you to make repairs before they will approve the loan. So what can you do? 14

15 Getting a standard mortgage can prove to be complicated enough for the average homebuyer. Knowing how to finance the purchase of a foreclosed home can be even more tricky. However, with just a little information, even the leastexperienced of real estate purchasers and investors can find adequate funds to finance virtually any foreclosed home. The type of property you anticipate buying will greatly influence what type of financing options are at your disposal. PRE-FORECLOSURE SALES Also called notice-of-default sales or NOD sales, pre-foreclosure sales happen before the current owner loses the home through default of the loan. As a result, NOD sales are conducted in the same way that any normal home sale would be. For an NOD sale, most basic mortgages will suffice. Your down payment, interest rate, and repayment terms will be dictated by the terms you and your lender agree to. AUCTION HOMES Once the pre-foreclosure period is over, homes are put up for auction to the public. Although foreclosed homes sold at auction can be very inexpensive, they are a bit trickier for the average homebuyer to finance. Buyers often must pay 10-20% at the time of the sale, and the rest within 24 hours making a typical mortgage impossible for such a purpose. Financing an auction home is possible, though, with a little ingenuity (and some capital). If you are waiting to sell your current home until you purchase a new one, begin by asking your local loan officer if a bridge loan is possible. Often, this is not possible for the purchase of an auction home, but can be in some circumstances. They key is asking. If you have access to a large amount of stocks or bond or even another property, now is the time to use them as collateral on a secured loan for your foreclosed home. Secured loans tend to have lower interest rates, and can offer a great way for you to gain access to large amounts of cash. Be aware, however, that it will take a great deal of equity for you to secure a large secure loan. When secured loans aren t an option or won t provide enough capital to purchase your foreclosed home obtaining an unsecured loan may help. Your income level, credit history, and ability to repay will affect the amount and terms of your loan. However, once you purchase the foreclosed home, you can always refinance your unsecured loan into a standard mortgage. Usually you will have to wait a seasoning period of six or more months before refinancing. 15

16 REO (BANK OWNED) Once a home has been repossessed, it is officially a "foreclosed home," and is put up for sale on the market by the lender. Often foreclosed homes are listed just as any other home would be, making obtaining a normal mortgage the most obvious and easiest answer for the homebuyer. However, when a home is listed as a HUD or VA foreclosure, homebuyers often become confused, thinking that FHA (Federal Housing Authority) or VA (Veteran s Administration) loans are their only alternative. This is not true! If you are looking to buy a Housing and Urban Development foreclosed home (HUD) or a Veteran s Administration foreclosure (VA), then the original loan was initially purchased with a Federal Housing Administration (FHA) or Veteran s Association (VA) mortgage. When an FHA home is repossessed, the Federal Government is responsible for repaying the lender. What does this mean for you? Easier financing for your foreclosed home. Once HUD or the VA for accepts your purchase offer, you have days to obtain standard mortgage financing. In addition, you may be required to only supply 3-5% as a down payment, so buying a HUD or VA home can make owning and financing a home even easier for those strapped for cash. Keep in mind, however, that financial requirements vary from home-to-home so make sure to ask your real estate agent for details. No matter how much capital you have at your disposal, buying and financing a foreclosed home is almost always possible. They key to success, however, is understanding that different types of foreclosure properties can require different methods of financing. Once financial limitations are realized and planned for, almost anyone can successfully purchase a foreclosed home. However complicated a process it may be, do not discount bank owned or distressed homes as a viable deal or way to get into today's real estate market. Bank foreclosures can present a rare opportunity to buyers and investors alike. Before you jump into the bank foreclosures market, be informed and make sure the lender you decide to work with has the necessary loan products to lend on bank owned homes. The greatest challenge in buying a bank owned home is the financing. Most lenders will not lend on a home that is not habitable. There are many things lenders look at when it comes to the condition of the home. Some of these items include: missing appliances, toilets, sinks, wiring, flooring, siding, handrails and other safety items, etc. Lenders also look at the condition of the structure, roof, foundation, fireplace, siding, etc. Most bank owned homes are sold as-is and the seller will not make any repairs nor allow you to make repairs prior to closing. So if the home you have selected is not lend-able per the lenders guidelines then 16

17 you need to look for a lender that will allow for Escrow Hold Backs or provide a Rehab Loan. Escrow Hold Backs are when your lender holds enough of your money in a trust account to complete the necessary repairs on homes that are not lend-able. After closing your lender will allow you to access your funds they have collected to complete the repairs. Example: You purchase a home that needs $20,000 worth of repairs; your lender will collect $20,000 at closing and hold it in a trust account for the repairs. The lender will now allow you to close on the purchase of your distressed home because the money needed to repair the home is in trust. Once the work is finished the lender will send out their appraiser to verify the completion of the work and any funds that you have not used will be returned to you. A Rehab loan is similar to a Hold Back except the funds in trust are not your funds they are the lenders. After closing, the predetermined amount needed to repair the home is placed in your account for the purpose of repairing the home. Once the work is finished the lender will send out their appraiser to verify the completion of the work. The loan amount is adjusted to equal the cost of acquisition plus repairs. Your payment will also be adjusted to reflect the new loan amount. Other loan programs that you may want to explore with your lender are VA, FHA and USDA. All of these loans provide money for energy upgrades and repairs to the home. HomePath Financing HomePath Mortgage Financing This special financing is available on certain Fannie Mae homes. The Benefits Include: Low down payment and flexible mortgage terms (fixed-rate, adjustable-rate, or interest-only) You may qualify even if your credit is less than perfect Available to both owner occupiers and investors Down payment (at least 3 percent) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit organization, state or local government, or employer No mortgage insurance No appraisal fees Also eligible for HomePath Renovation Mortgage (see details below) HomePath Mortgage financing is available from a variety of lenders - both local and national 17

18 HomePath Renovation Mortgage Financing Available only on homes you make your primary residence and offers these benefits: Financing to fund both your purchase and light renovation Low down payment and flexible mortgage terms (fixed-rate or adjustable-rate) Down payment (at least 3 percent) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit, state or local government, or employer No mortgage insurance HomePath Renovation Mortgage financing is available from several lenders If you're an investor interested in renovating a property, you may qualify for financing under the HomeStyle Renovation Mortgage product. Most HomePath Renovation lenders also offer the HomeStyle Renovation product. Keep in mind that the process of purchasing a bank owned or distressed home is different than your usual home buying process. Be sure to have a good realtor and lender to help you out in the process. We at Home Front Mortgage specialize in lending on distressed homes. For a no cost consultation please contact us at or visit us on the web at Chapter 10 WHY YOU NEED A HOME INSPECTION When you make a written offer on a home, you should insist that the contract state that the offer is contingent on a home inspection conducted by a qualified 18

19 inspector. You will have to pay for the inspection yourself, but it could keep you from buying a house that will cost you far more in repairs down the road. If you are satisfied with the results of the inspection, then your offer can proceed. Buying a home is one of the most important purchases you will make in your lifetime, so you should be sure that the home you want to buy is in good condition or in the case of a bank owned home what the condition actually is. A home inspection is an evaluation of a home s condition by a trained expert. During a home inspection, a qualified inspector takes an in-depth and impartial look at the property you plan to buy. The inspector will: Evaluate the physical condition: the structure, construction and mechanical systems Identify items that should be repaired or replaced Estimate the remaining useful life of the major systems (such as electrical, plumbing, heating, air conditioning), equipment, structure and finishes The home inspector does not estimate the value of the house After the inspection is complete, you will receive a written report of the findings from the home inspector. General Home Inspection Checklist Items Structural Elements Construction of walls, ceilings, floors, roof and foundation. Exterior Evaluation Wall covering, landscaping, grading, elevation, drainage, driveways, fences, sidewalks, fascia, trim, doors, windows, lights and exterior receptacles Roof and Attic Framing, ventilation, type of roof construction, flashing and gutters. It does not include a guarantee of roof condition nor a roof certification 19

20 Plumbing Identification of pipe materials used for potable, drain, waste and vent pipes, toilets, showers, sinks, faucets and traps Systems and Components Water heaters, furnaces, air conditioning, duct work, chimney, fireplace and sprinklers Electrical Main panel, circuit breakers, types of wiring, grounding, exhaust fans, receptacles, ceiling fans and light fixtures Appliances Dishwasher, range and oven, built-in microwaves, garbage disposal and, yes, even smoke detectors Garage Slab, walls, ceiling, vents, entry, firewall, garage door, openers, lights, receptacles, exterior, windows and roof Home Inspection Checklist Items Needing Service Home inspection reports do not describe the condition of every component if it's in excellent shape, but should note every item that is defective or needing service. The serious problems are: Health and safety issues Roofs with a short life expectancy Furnace / A/C malfunctions Foundation deficiencies Moisture / drainage issues 20

21 Chapter 11 How Title Insurance Protects The Consumer When Purchasing A Foreclosed Property By Kim Costulis, Pacific Northwest Title Why Do You Need Title Insurance? You need title insurance because any home, no matter how new or apparently secure, is built on land as old as the dirt itself. Undoubtedly, this land has had many previous owners. Claims against any one of these persons can be filed against the property and against you as the present owner. Such hazards as fraud, missing heirs, old liens and many others can and often do arise like ghosts out of the past. Title Insurance protects you against claims and title faults. It makes your home safely yours. Your title insurance policy is your shield of protection and will defend your ownership against loss. You pay one premium only - your protection and peace of mind last as long as you and your heirs remain in ownership. Purchasing A Foreclosed Property After the foreclosure is complete and there is a Trustee s Deed conveying the property back to the bank, it is at that point the bank is in title and has the right as record owner to sell the property. From a title company perspective, there are a few things to review before clear title can be issued on the property. One of the first things researched is the firm that facilitated the Foreclosure (the Trustee firm) to make sure the company is reputable and that everything was done correctly it is important to confirm that the Trustee notified all lien holders and anyone else involved in the foreclosure action. If the previous owner was involved in a bankruptcy, we need to make sure that there is a court order authorizing the foreclosure as the bankruptcy stops all foreclosure proceedings. At that point the Trustee has to obtain a court order authorizing or releasing the property from the bankruptcy. It is important that the title company makes sure that the trustee has notified all necessary parties and that all bases have been covered before clear title can be issued on the property. When purchasing a foreclosure property from a private individual, the title examination is much more intense and scrutinized as far as prior matters of record are concerned. There still may be many liens and judgments affecting the title of the property that have not yet been dealt with. 21

22 Who Pays For Title Insurance? Customarily, the seller pays for the title insurance premium that protects the buyer s title to the property. If the buyer is obtaining a loan to purchase the property, the lending institution will usually require a title insurance policy to protect their collateral interest in the property. The buyer is responsible to pay the lender s title policy as one of the costs of borrowing the money, unless the seller has agreed to pay that portion of the buyer s closing costs. How Much Will Title Insurance Cost? The title insurance premium is determined by the amount of the coverage to be provided. Unlike other types of insurance, the premium for title insurance is paid only once and the coverage lasts as long as the insured holds an interest in the property. How Long Does Title Insurance Last? Title Insurance lasts as long as the insured has an interest in the property. For the buyer, the policy is in effect for as long as the buyer or his/her heirs own the property. For the lender, the policy is in effect until the loan is paid in full. If I Was Insured When I Bought The Land, Why Should I Have My Title Policy Re-Issued To My Purchaser When I sell? The coverage of your title policy is against all matters that appeared of record up to the date of issuance of your policy. Since that time many documents may have been recorded, some which may affect the title to your land. Taxes and assessments may have accrued and be unpaid. There may have been actions in court affecting your title. The purchaser is entitled to have full information and protection as to the condition of the title right up to the date of his/her purchase. In addition, there may be matters of record which would prevent either the seller or buyer from selling, buying or mortgaging land until such maters have been cleared. These items include such things as federal tax liens, judgments, incompetencies, divorce actions and other conditions which the title search may disclose. ***The information contained in this chapter is for informational purposes only and is not intended as legal advice. 22

23 Chapter 12 PERSONAL BANK OWNED FORECLOSURE COACHING We specialize in helping first time bank owned foreclosure buyers find that just right home. A large percentage of our business is related to bank owned homes. We follow the market and work diligently to find homes that fit the unique criteria for our clients. We point out pitfalls and create comparative market analysis to help determine the true value of each scenario. We will read over each bank addendum doing our best to protect you from changes that the bank may have made. Foreclosure coaching is free. However, we are only able to coach a limited number of people at one time. Right now the interest is high. Please click on the following link and fill out the form. I ll be happy to get back with you as soon as possible to let you know if my client load permits me becoming your personal foreclosure coach. Chapter 13 BANK-OWNED PROPERTIES AND REO (FAQ) What is an REO? REO is an acronym for real estate owned and is industry jargon for foreclosure property repossessed by banks or lenders. If a lender or bank is the highest bidder at a foreclosure auction or if no third party bids at the auction the property reverts back to the lender and becomes an REO. REO s are 23

24 owned by banks. Lenders go to great lengths to sell REO s. For banks, however, bank-owned homes are a liability. Where can I find REO s? There are several ways to locate bank-owned REO properties. With the advent of the Internet, finding bank-owned REO properties is easy. In the south Puget Sound area you can find the most up to date list of bank owned homes at This list is free and updated daily. We will be sending you the newest foreclosures as they come on the market from our website, How can I buy a bank-owned REO? Anyone can buy a bank-owned REO. You will be assigned your own Real Estate Agent from our website that will represent you in this process. They will help you find the right home and then negotiate for you with the listing agent and bank. Why should I buy a buy bank-owned REO? One of the primary advantages of buying a bank-owned REO property is that investors are purchasing a property without liens or other encumbrances. Before lenders make REO properties available for sale, they typically expunge all liens or claims against the property. Any cloud on the title a second or third mortgage, mechanics liens, taxes or any other liens attached by creditors are wiped out. What are the advantages of buying bank-owned properties or REO homes? For real estate investors and homebuyers, bank-owned properties and REO s offer opportunities that are not available in the pre-foreclosure and auction phase of the foreclosure process. Buying bank-owned real estate offers the foreclosure buyer many advantages: Bank-owned properties are usually sold at below-market Buying bank-owned properties involves less risk and less competition 24

25 Foreclosures that are owned by banks are usually clear of any liens that may have been recorded against the property Bank-owned properties are usually vacant because the banks have evicted the previous owner, saving the investor or homebuyer time, money and emotional toll involved in the eviction process What will it cost me to use an agent from Barrans Realty & SouthSoundForeclosures.com? The banks pay the commissions for our agents, you pay nothing. Yet it is critical that you are represented in this process. Although the banks pay the commissions, we do not work for them. We will be working for you and representing you throughout the whole process. 25