2010 Buyers Guide to REO Properties Mike Bridges Property Express CRM 2/22/2010
Table of Contents Table of Contents... 2 Introduction... 3 What are REO Properties?... 3 The Buying Process... 3 Select a Good Agent... 3 Take Advantage of MLS Listings... 4 Engaging with The Lender... 4 Due Diligence... 5 Structuring the Deal... 5 Pre-Qualification Letters... 6 Get Professional Help... 6 Searching for Bargains... 6 Cast a Wide Net... 6 Assess the Value... 6 Evaluate the History... 7 Structure Flexibility into your Offer... 7 Assess the Market Demand... 7 Exhibit a Professional Image... 7 Target Lenders That Have Large REO Portfolios... 8 Plan your negotiation... 8 Split Fees... 8 Target Unsold REOs... 9 Tenacity is a Virtue... 9 Location... 9 Benefits... 9 Free Resources... 11 2 P a g e h t t p : / / w w w. p r o p e r t y e x p r e s s c r m. c o m
Introduction Banks are selling real estate owned (REO) properties at very low prices. REO properties are fast becoming popular among prospective buyers as they can save thousands of dollars if they buy bank owned homes today. However, before you go out and start looking for an affordable REO property, it is important that you have a clear understanding of what REO properties are and how to purchase them. What are REO Properties? Real estate owned properties are assets owned by lenders such as banks, credit unions, and mortgage companies. Also popularly known as bank owned homes, REO properties are different from foreclosed properties in that lending institutions have already tried to sell them at a foreclosure auction but received no bids for the houses. A REO property has already gone through the foreclosure process and is now owned by lenders, usually banks. Lenders seek to repossess a house when the homeowner defaults on his or her mortgage payments. A house enters the foreclosure process when the homeowner receives a Notice of Default. A homeowner can prevent his property from being foreclosed upon either through paying off the default amount or selling the house. A short sale occurs when a property owner manages to sell his house before the foreclosure sale date. In a short sale, the lender agrees to accept less than the mortgage amount owed by the existing homeowner. In most cases, the lender typically agrees to forgive the rest of the loan. If a house is not sold in a short sale, then it will be auctioned off at a foreclosure sale. At a foreclosure auction, banks typically set the opening bid for at least the outstanding loan amount. If the properties do not receive bids, then the lender legally claims ownership of the houses. As soon as ownership of the houses reverts to the bank, they are automatically listed as real estate owned properties and are considered as non-performing assets. The Buying Process Buying a house, including a real estate owned property, is a complicated process. It involves a lot of paperwork, negotiations, and procedures that most buyers do not know about. But if you re armed with the correct information and proper guidance, getting that bank owned home that you want could be a breeze. Here are 6 easy steps that will help you get that house you ve always wanted, for a price you can afford. Select a Good Agent The first thing you need to do when you want to buy a real estate owned property is to find a realtor. Not just any realtor, but someone who will look after your interests. There are a lot of buyer s agents in any given locality but many of them often handle several clients at the same time. That s why it is important for buyers to hire the services of a realtor who will closely monitor their needs and go the extra mile to help them find and acquire a home that fits their taste. Find a realtor who will protect your rights and fight to get you the best deal. Some experts suggest that you do not need the help of a realtor but the real experts know that hiring the services of an experienced real estate agent is key to acquiring a home that suits your taste, budget, and lifestyle. Seeking the help of a realtor who has extensive experience in the area where you are looking for a new home is vital. Real estate agents can 3 P a g e h t t p : / / w w w. p r o p e r t y e x p r e s s c r m. c o m
provide you with all the information and guidance you need in purchasing a house, which is a complicated and time-consuming process. Realtors know the ins and outs of the local real estate market, that s why it is important that you hire a skilled and knowledgeable broker. One of the more common ways of finding a realtor is through a referral system. Many buyers are often referred by family, friends, or colleagues to a buyer s agent. However, individuals relocating to a new area often do not have contacts who can refer them to a reliable realtor. Buyers can search the Internet for real estate agents who are licensed in the area where they want to purchase a home. They should thoroughly check the background and track record of the realtor they chose to represent them. It is also important for buyers to hire the services of a realtor who is an expert in selling real estate owned properties. Most realtors sell various kinds of residential properties but negotiating for a real estate owned property is an entirely different process. Your realtor must be experienced in dealing with REO properties to ensure that you acquire the bank owned home that you like in the easiest and fastest way possible. Find a realtor who has a proven track record in selling bank owned homes. Most REO listing agents generally represent the seller. You should find an REO realtor who will represent you the buyer. Take Advantage of MLS Listings The next thing you need to do after finding a realtor is to search the Multiple Listing Service (MLS). You can ask your realtor to provide you a list of real estate owned properties in the city where you want to buy a house. Most banks post their entire inventory of REO properties on the local MLS so it should be easy for your realtor to provide you a list. Some realtors also have access to a list of the latest bank owned homes before they are posted on the MLS. The MLS is a system used by real estate professionals to share information on properties that are for sale. Lenders that own REO properties post their entire inventories of houses for sale in the MLS, the most updated version of which is only accessible by realtors. The MLS contains all the specifics, such as the address, age, square footage, number of bedrooms and baths, and other amenities of all houses that are for sale in a given locality. Attending foreclosure auctions is another good way of finding REO homes. Note down the addresses of the houses that were not sold and visit the properties. In some cases, buyers do not need to browse the MLS as they have already found the home that they like. However, they still need the assistance of a realtor to help them in the negotiation process with the bank that owns the property that they intend to buy. Engaging with The Lender After finding the house that you want to purchase, the next step is to contact the lender to express your interest in the property. Ask your realtor to help you in making the initial contact with the bank that owns the REO property that you want to buy. Several big banks have separate departments that handle the sale of REO properties. You also need to request permission to inspect the house you plan to buy during your initial 4 P a g e h t t p : / / w w w. p r o p e r t y e x p r e s s c r m. c o m
contact with the bank. Include a clause in your offer for the property to be subjected to a home inspection. Due Diligence It is very important for buyers to inspect the REO property that they want to purchase. It is no secret that many owners of homes that were foreclosed experienced financial difficulties, which means that many, but not all, REO properties need repairs and general maintenance. In inspecting your preferred home, it is advisable to hire the services of a licensed home inspector so that you will have a clear picture of the property s actual condition. You should include photographs and the estimated repair costs to support your opening bid during the negotiation process with banks. Just like your realtor, you should find an experienced home inspector who will look after your interests. Most home inspectors have lots of clients and some do as many as ten inspections a day. Find an inspector who will thoroughly check the house that you want to purchase. Have him check everything and ask him to spend more time in inspecting the property. Home inspections could cost anywhere between $150 and $500 depending on the property s location but it could avoid a $100,000 mistake. It is critical that you know what you are buying. Ask the home inspector to determine the complete estimated amount for repairs and include the cost in your opening bid. Structuring the Deal Once you ve decided that you want to buy the property, you must now make an initial bid to the lender that owns the house. Ask your realtor to draw up your initial offer. Most buyers do not know how to draft an offer, that s why it is advisable that you find a realtor who is experienced in getting REO offers accepted by banks. When making an initial offer, you must include the estimated repair cost in your bid. Buyers who will offer cash for the properties are more likely to get the houses compared to those who rely on financing to acquire the homes. Banks prefer buyers who offer cash with proof of funds. In some cases, lenders would accept an offer even if it is below the property s listing price if the buyer will pay cash for the house. If there are no offers on the REO property, the bank might accept your offer even if your bid is below the list price. If the house has multiple offers, you will most likely need to increase your bid for it to be considered. If you need financing to buy an REO property, it is vital that you get a preapproval letter from a lender. A preapproval letter is a note from a lender that verifies the borrower s credit, bank references, and employment. While having a preapproval letter does not guarantee that a borrower will be granted the loan, it is preferred by sellers as the letter indicates that the borrower is serious and is more likely to be able to buy a house. Lenders are not known to give preapproval letters easily but if you get one, it will make your 5 P a g e h t t p : / / w w w. p r o p e r t y e x p r e s s c r m. c o m
hunt for a real estate owned property much easier. If you get a preapproval letter, you will have more time examining the right houses as you would know the range of homes that you can afford to buy. A preapproval letter would also increase your bargaining and negotiating power and would speed up the closing period. In practice, however, lenders are likely to give prequalification letters over preapproval letters. Pre-Qualification Letters In a prequalification letter, a borrower s employment, asset, and income information were reviewed by the lender but his or her creditworthiness has not been assessed. Lenders will almost always make a counter proposal to your initial offer. More often, banks will try to change the deal in their favor. They might ask for an increased deposit, change your contingency time period, or counter any request for them to cover fees such as home warranties, county and city transfer taxes, homeowners association fees, and so on. Basically, banks will try to get the highest price and the least amount of expenses for the REO property that you want to buy. That is why it is vital for buyers to seek the help of an experienced realtor who is an expert in negotiating with banks. Get Professional Help Once you have come to an agreement with the bank, it is important to close the deal right away. Remember that many buyers are after REO properties, including the house that you just bought. Closing the deal includes signing documents related to the property and your mortgage arrangements. The papers include the title and the deed, which shows proof that you now own the house. Hire a real estate lawyer to examine closing documents and have your title company conduct a full title search. It is critical that you close the deal on the predetermined closing date. Banks often charge buyers a penalty for each day they pass the closing date. You should also scrutinize the purchase contract, especially if the agreement was drawn up by the bank. Ask your lawyer for advice if you do not understand a section of the contract. Banks are known to draw up contracts that favor them. That s why it is important that you have a lawyer who would protect your rights. Searching for Bargains Cast a Wide Net One of the most common mistakes that buyers commit is falling in love with a house without taking a look at other properties. You should check as many REO properties as possible. Ask your realtor to show you as many bank owned homes that fit your budget and taste. If you have already decided on the neighborhood you want to live in, check all real estate owned properties in the area. Doing a thorough search of the area could save you thousands of dollars. Find a home that suits your budget and preference and never fall for a property that is beyond your means. Assess the Value It is important for buyers to study comparable sales of houses in the area where the REO 6 P a g e h t t p : / / w w w. p r o p e r t y e x p r e s s c r m. c o m
property they want to buy is located. Comparable sales show sales for a specific period of time compared to sales for the same period in the previous years. Knowing comparable sales would allow you to determine the offer price for the property that you want. Ask your realtor to determine this information through the local MLS and to give you a Comparable Market Analysis (CMA). A CMA is an informal assessment of a property s market value. It is a very useful information and you need an experienced realtor to give you a good CMA. Realtors who have good track records and great knowledge of the local marketplace usually produce CMAs that are in line with the property s appraised value. Evaluate the History If you have identified the house you want to buy, ask your realtor to determine the property s history. Find out the lender s purchase price on the Trustee s Deed or Sherriff s Deed and compare that price to the lender s asking price. You should also ascertain the amount of loans secured to the REO property you want to purchase. In many cases, lenders will accept an offer that is somewhere between the original mortgage balances and the sale price if the house is underpriced. Structure Flexibility into your Offer Specify that you are willing to buy the house AS IS when you make your initial offer to the lender that owns the property. Nearly all lenders sell REO properties AS IS and offers that include demands for them to pay for the repairs are likely to be rejected. Remember that many people are also after bank owned homes and you are likely to get competition for the house that you like. You should not invite banks to reject your offer. Assess the Market Demand You should also know the number of offers on the house that you want to buy. In some cases, lenders accept offers that are lower than the listing price if there are no offers on the property. If the house has multiple offers, you may need to increase your offer on the property to beat off the competition. You should also offer a higher price for the REO home if you are relying on financing to help you acquire the house. Exhibit a Professional Image Your chances of buying an REO property would increase if you show the lender that you are a serious buyer. You can do this by proving that you have all the financing needed and are ready to close the deal as quickly as possible. Try to become a cash buyer or show your preapproval letter. You should also be ready to show proof of income. Paying in cash is a great way to show that you are a serious buyer. Lenders prefer cash, and it is almost always certain that you will get the house that you intend to buy if you offer straight cash for the property. Cash buyers who offer to close a deal in a shorter period of time are more likely to get the property that they like. If you are really keen on buying an REO property, convert your assets into cash so that you can show to the bank that you have the funds to acquire the house. Offering a bigger down payment is also an effective way to show that you are a serious buyer. Aside from showing that you are serious, offering a big down payment would get the bank s 7 P a g e h t t p : / / w w w. p r o p e r t y e x p r e s s c r m. c o m
attention and make your offer stand out. You would also beat off competition if you show that you have the finances to close the deal. Another good way to show that you are a serious buyer is to offer a shorter inspection period. Lenders would consider you the more serious buyer if you need only a shorter period of time to inspect the property. Target Lenders That Have Large REO Portfolios You would increase your chances of acquiring a house if you offer to buy a home that is owned by a lender that has lots of REO properties. Remember that lenders, particularly banks, consider these houses as non-performing assets. They are eager to sell these houses as quickly as possible and if they get a reasonable offer, they are likely to accept the bid. It is advisable for buyers who rely on financing to target houses that are owned by lenders that have hundreds of bank owned homes. If a bank with lots of REO properties receives a single offer for a house, chances are that the bank will accept the bid, even if the offer is low and depends on financing. Plan your negotiation While banks are perceived as tough negotiators, this should not stop you from asking for a better price and favorable terms. Most bank representatives would tell buyers that the listing price is non-negotiable but negotiating properly with the bank could prompt them to consider your requests. Once you have established a good relationship with the bank, you could try to ask for a lower asking price, a lower down payment, a lower interest rate, or a reduction in the closing costs. Closing costs refer to the fees incurred during the time when a real estate contract is actually executed and the title to the property is given to a buyer. Examples of typical closing costs include title policies, recording fees, attorney fees, inspections fees, courier charges, and home warranties, among others. Nowadays, most lenders are not keen on paying typical closing costs but many banks are oftentimes willing to waive some closing costs or offer a break on the down payment or interest rate. Some lenders would also loan you the full price of the property if you have good credit and many banks would accept only a 10% down payment if you plan to use the house as a rental. Split Fees A good way to entice a bank to accept your bid is to offer to split the fees. Many lenders are not keen on paying for the transfer and escrow fees but if you offer to split the charges, you will put yourself in a good position with the bank that owns the REO property. It is also advisable to get your own title and escrow company. However, as banks deal with hundreds of transactions every day, they prefer doing business with the same title company. Lenders are known to make enticing offers, sometimes even coax you into using their title company. If you decide to use the bank s title company, make sure that the firm closes the deal as stated in the contract. Some banks offer big discounts on the title search if you use the same title company that they used during the foreclosure process. 8 P a g e h t t p : / / w w w. p r o p e r t y e x p r e s s c r m. c o m
Target Unsold REOs Another great way to get a low price for an REO property is to offer a bid for a house that has been on the market for over a month. Banks are oftentimes willing to lower their asking price if a property is not sold within 30 days. They might also accept very low offers for REO properties that were not immediately sold. You will have more negotiating and bargaining power if you submit offers for properties that have been on the market for a long period of time. So if you bid on an REO home that has been for sale for 60 days, chances are that the bank will accept your offer, even if your bid is way below the lender s asking price. Tenacity is a Virtue Buying a real estate owned property could sometimes take a longer period of time compared to traditional home sales. You should be patient and persistent, especially as the transaction process needs to go through a lot of layers. It could take weeks, even months, to close a deal. Negotiating with banks is a time-consuming process and you should be willing to exert a lot of effort and time to close a deal. Several big banks have their own departments that handle the sale of REO properties. You should develop a good rapport with the manager or the bank representative who is handling your offer. If the bank rejects your offer, wait for a month then submit an improved offer. Location As any real estate agent would tell you, the most important thing to consider when buying a property is location, location, location. Ensure that the property you intend to buy is located in a desirable part of town. Check the house s proximity with important places such as schools, hospitals, banks, and financial centers. Benefits Real estate owned properties are the ultimate catch for people looking to save thousands of dollars when buying a new home. REO properties are selling for very low prices as lenders that own the properties are determined to sell the houses quickly. Banks are losing money just by owning repossessed homes. They are required to pay for all the costs associated with the foreclosure process. They also have to pay for the taxes and maintenance of all REO properties that are on their books. Thousands of banks across the country are loaded with real estate owned properties due to the economic crisis. This means that lenders are even more willing to sell repossessed homes at very low prices as they are under pressure to quickly dispose of the houses and cut their losses. Banks also run the risk of getting penalized by regulators if they have too many REO homes on their books. An REO property could be a better buy than other types of residential properties for several reasons: All liens and claims against the property are erased once a house becomes a bank owned home. If you purchase an REO home, you are guaranteed of getting a new title to the house as the bank that owns the property will wipe out all liens against it. Lenders typically erase all second and third liens, as well as delinquent taxes, of all bank owned properties. 9 P a g e h t t p : / / w w w. p r o p e r t y e x p r e s s c r m. c o m
While many foreclosures are in dreadful conditions, most real estate owned properties are typically restored and in sellable conditions. Buyers can also find many REO properties that are well-maintained and in great shape. Contrary to what reports say, there are a lot of real estate owned properties that are in mint condition. The real estate crisis led to a huge number of well-maintained bank owned homes as many families defaulted on their mortgage payments. This means that buyers now have more choices and more chances of getting a real estate owned home that fits their budget and taste. REO properties are usually vacant and buyers can immediately move in to the houses once they sealed the purchase agreement. Banks are tasked to evict tenants of houses that are under foreclosure. They often hire a company that deals with the eviction process. Buying bank owned homes will save you the time, money, and emotional toll involved in the eviction process. Another big advantage of REO homes is that you can inspect them. Since bank owned homes are already vacant, you can inspect them before you finalize a deal. You cannot do this with other types of foreclosure properties as most of them are still occupied. You can buy real estate owned properties on your own time. With REO properties, you do not have to compete with other buyers in auctions and you can submit your offer any time. There are thousands of REO properties across the country today. If you decide to purchase a bank owned home now, you have more options and more opportunities to acquire a home that fits your lifestyle, preference, and budget. Bank owned homes can provide you security for a very low price. Nothing beats having your own home. And buying a real estate owned home today could provide you that security for a bargain price. Real estate owned properties can be great investments, especially if you carefully plan your approach. Lenders simply want to dispose of these properties. And if you find the right REO home for you and are guided by the proper professionals, purchasing a real estate owned home could be the best decision you ll ever make. There has never been a better time to buy an REO property. With real estate prices poised to rise in the coming months, housing experts and smart investors know that now is the best time to get a real estate owned property. 10 P a g e h t t p : / / w w w. p r o p e r t y e x p r e s s c r m. c o m
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