Buying bank owned properties?

There is much being made of bank owned properties these days.  Though it can be a great way to buy a new home, there is a lot of misinformation out there.  This is an attempt to help you better understand the in an out’s, as well as the process, in regard to purchasing a bank owned property.

Often, you will find information on bank owned properties for sale with the promise that you can make a lot of money if you have “the secret formula”.  With this formula you will make millions with “little effort”.  The fact is, there are no secret formulas, and it takes effort to make money in real estate.

What is a REO Property?

REO stands for “Real Estate Owned”.  These properties have gone through the foreclosure process and are now owned by the bank or mortgage company.  These properties are not up for auction on the courthouse steps.  They have already gone through the foreclosure procedure and auction.

If you are interested in purchasing a property during the foreclosure auction, you will be required, at the very least, to pay the loan balance plus any interest and other fees accumulated during the foreclosure process.  You must have cash “on hand” as it is mandatory to pay cash at the time of purchase.  To top that off, you take procession of the property 100% “as is”.  This includes existing liens and current occupants that need to be evicted.  You are totally responsible for paying off any existing liens and evicting the owners.

Purchasing a REO is much “cleaner” and more attractive to the average investor or homeowner.  Since this REO property did not find a buyer during foreclosure auction, the bank now owns it.  The bank will make sure the tax liens are removed and, if needed, the occupants are evicted.  The bank will also generally prepare for the issuance of a title insurance policy to the buyer at closing to insure a clear title for you the buyer.

You should be aware that REO’s may be exempt from normal disclosure requirements since they have not lived in the property.  Banks in Tennessee are exempt from giving a Transfer Disclosure Statement.  This document normally requires sellers to tell you about any defects they are aware of and since the bank has not lived in the property, they won’t know of any defects.

Is it a bargain?

If you listen to the infomercials, you may assume that buying a REO is a bargain and an opportunity for easy money.  Don’t believe it.  You must be very careful about buying a REO, especially if your intent is to make money off of it.

While the bank is typically anxious to sell these properties quickly, they are also strongly motivated by their investors to get as much as they can for them.  When considering the value of a REO, look closely at comparable sales in the neighborhood.  Working with a Realtor can be a great help evaluating the neighborhood and the comparables.   You will also want to take into account the time and cost of any repairs or remodeling needed to prepare the house to live in or for resale.

There are some great buys that have money making potential, and many people do well buying foreclosures.  However, there are also many REO’s that are not good buys and not likely to turn a profit.  If you end up with one of these, you will not be happy.  The key is to put a team together who can help you through the process so you can make the best decision possible.

Want to Make an Offer?

Most banks have a REO department, often called loss mitigation departments.  These REO departments will use a listing agent to get their REO properties listed in the local MLS. This agent represents the bank as the sellers agent and they are the agents that you’ll work with in buying a REO property.

Before making your offer, you’ll want to contact either the listing agent or REO department and find out as much as you can about the property you are interested in.  They might not know that much about the property but they should know the general condition of the property and the process for receiving your offer.

Make sure you include an inspection contingency in your offer as banks almost always sell REO properties “as is”.  This insures that you have plenty of time to check for hidden damage, and if found, terminate the offer.  Treat this offer as you would any real estate offer and include documentation of your ability to pay, such as a pre-approval letter from a lender.  This makes your offer much more appealing to the bank.

Just like other real estate deals, expect a counter offer from the bank.  It will be up to you to decide whether to accept their offer or counter back.  Because you’ll be dealing with a process that probably involves multiple people at the bank, it will likely take longer for you to get an answer.  Bankers don’t traditionally work evenings or weekends so it’s not unusual for the process of offers and counter offers to take days or even weeks.

If you’re a first time homebuyer, I have some great information that will make the buying process easier.