Bank Owned Real Estate Facts
So you’d like to buy a bank owned real estate cheap?
I always have the pleasure to speak with a new real estate investor that has watched one of the late-night real estate investing infomercials and they’re ready to do the bank a favour and take a problem off their hands.
Investors expect to make a killing in the process and they're ready to quit their jobs to flip bank owned real estate full time.
Sounds great and it might just happen but first, take a look at some facts and get prepared so you’re not disappointed.
REO vs. Foreclosure, What’s the difference?
An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful
foreclosure auction sale.
The vast majority of properties that go through the foreclosure auctions do not even result in bids so it goes back to the lender.
If there was enough equity in the property to pay off the loan, the owner would have just listed the property for sale with a local realtor and would have probably sold the property and paid off the bank.
When there is not enough equity to sell the property that property ends up at a foreclosure or trustee sale.
Foreclosure sales or a trustee sales begin with a minimum bid as determined by the lender. Sometimes that includes the loan balance, any accrued interest, plus attorney's fees and any costs associated with the foreclosure process, but sometimes it doesn’t.
In order to bid at a foreclosure auction you must have a cashier's check in your hand.
For example, in Arizona you need a cashier’s check for $10,000 to bid and you have 24 hours to pay the balance. If you are the successful bidder and pay the balance within 24 hours you receive the property in "as is" condition which may include someone still living in the property.
If you are not careful there may also be other liens against the property which you will be responsible to pay.
Since what is owed to the bank is almost always more than what the property is worth very few foreclosure auctions have enough built in equity which would result in a successful sale.
If the property does not generate an interest from real estate buyers at the auction, the property reverts to the bank. It becomes an REO or bank owned real estate.
REO Properties For Sale
The bank now becomes the new owner of the property and the mortgage loan no longer exists.
The bank will hire an asset manager to evict anyone living in the property and make any necessary repairs. The asset manager on behalf of the bank will negotiate to remove any liens and pay off any home owners association (HOA) dues.
As the new owner of an REO property the lender now has all the cost of ownership.
The Asset manager will also contact a real estate agent to list the property for sale.
* Here is where most people lose sight of the reality of bank owned real estate...
Since the bank is now the owner of the property, like every owner they want to sell their house for as much as possible.
Because the bank wants to sell the property for as much a possible, most bank owned property is not great bargain. Do your homework before making an offer.
Make sure that the price you pay is comparable to other homes in the neighborhood.
* Always consider the cost of renovations and the time to complete them.
Don’t get caught up in a ‘bidding war’ and end up paying over market value. It’s an old myth that foreclosures are a great bargain.
How Is Bank Owned Real Estate Sold?
Each bank works a little differently but they all have similar goals just like every owner...
...They want to get the highest price possible and they have no interest in selling their real estate cheaply.
Generally a bank has an entire department set up to manage their REO inventory and if they don’t they will hire outside companies to look after their bank owned real estate.
Once the bank owned real estate is listed for sale you make an offer to purchase and the bank will generally present a counter-offer. It may be at a higher price than you expect but they have to demonstrate to shareholders and auditors that they attempted to get the highest price possible.
Your offer or counter-offer will probably have to be reviewed and approved by several individuals within the bank.
Most banks have an approval committee that will review and accept offers.
Once an offer is accepted, the bank will come back to you with a contract and it will be full insert wording like..."subject to corporate approval with 5 days", "sold as is", "seller makes not representations".
Bank owned real estate can also be packaged in bundles and sold in bulk as
Bank owned real estate is always sold in "as is" condition.
The bank will allow you to get all the inspections you want at your expense but they will not agree to do any repairs or give you a credit off the selling price.
* Your offer should include an inspection contingency period that allows you to terminate the contract if the inspections reveal unexpected damages that the bank will not correct.
Most banks will not provide financing on their REOs but it doesn’t hurt to ask. Especially if the property has extensive damage and you are purchasing it "as is."
Making an Offer
Before making an offer make sure you go see the property and have your agent contact the listing agent.
Have your agent ask the following information if available:
• Are there any inspection reports?
• What work has the bank agreed to or has done?
• Is there a special "as is" form?
• How long does it take the bank to accept an offer?
• How does your agent deliver the offer?
Offers are usually faxed to the bank. The listing agent needs your originals. There is no formal presentation.
Keep in mind, banks are closed evenings and weekends, so nothing happens during those periods.
* Provide the listing agent with a pre-qualification or pre-approval letter better yet, proof of funds and buyer biography. This will make you stand out from anyone else and make your offer easy to accept.
Hopefully these tips will manage your expectations of over-night riches.
Remember that bank owned real estate sells at pretty close to full market value and they are not the terrific deals presented by real estate gurus on late night television.
Learn about REO sold in bulk packages at steep discounts
8 Tips for Buying Foreclosures
Have a question about Bank Owned Real Estate? Ask Here!
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