Homes that are acquired by a bank from foreclosure are called REOs: real estate owned. These are properties that have gone back to the mortgage company in the aftermath of an unsuccessful foreclosure auction. You might ask, "Why would an auction on an already deemed to be foreclosed home be unsuccessful?" Well, they almost always are. And the reason is that the minimum bid on such properties would have to cover the costs of all that is currently owed to the bank/lender, and this includes: the loan balance, accrued interest, any attorney fees and every cost associated with the foreclosure process.As you might imagine, what is owed to the bank is almost always more than the value of the property. At the point of an unsuccessful auction, where the minimum bid is not met, the property reverts to the bank as an REO.
Now that the bank owns the property, the former mortgage no longer exists and bank will sometimes even handle repairs, evictions, negotiations with the IRS for removal of tax liens and the payment of any homeowner association dues. Take note that many banks are moving away from paying typical closing costs. Some fees such as transfer taxes, county and state fees, are the responsibility of the buyer and not the bank.
There is some strategy to understand when purchasing an REO. The banks/lenders are still all about securing profitable situations and have no interest in quickly dumping off their inventory for a dime- or two. Rest assured, there will be some bargaining involved if you wish to secure a desirable price. Once you make an offer, they will usually present a counter-offer, which may be at a higher price than you expected. Remember it's in their interest to demonstrate to shareholders, investors and auditors that they most certainly attempted to get the highest price possible. In other words, be prepared to counter, their counter-offer, as this is all part of the game.
Don't expect that the deal will be as quick to come off, as in other real estate transactions. Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. For example, you might receive a preliminary approval subject to corporate approval. Again, this is just one of the differences that exist with REO transactions.
Lenders may often want to sell the property in "as is" condition, so you want to be sure to clarify your subjects in terms of inspections and repairs. Don't bank on the bank! They may refuse approval of repairs, and so consider this when you evaluate what your bottom line offering price will be. Likewise, if after inspections you find that the repairs are significant, you can try to renegotiate. Sometimes at this further point into a transaction the lender may opt to lower the price as opposed to the hassle and cost of putting the property back on the market.
If the bank won't budge and you receive an offer rejection, consider waiting another 30 days and then resubmit your original offer, with the original date crossed off and your new date inserted. If they haven't sold in a month, they may well re-consider your offer.
Before making an official offer have your agent contact the listing agent and ask the following:
- Are there any existing inspection reports that you can look over?
- Is there an "as is" form?
- How long does the bank take to accept an offer? That is, up front, how many lines of approval will an offer have to go through and how long is this process typically?
- How will offers be exchanged/delivered?
Keep in mind that as you are dealing with a bank, nothing will happen on evenings and weekends. Most usually offers are faxed to the bank and there is no face to face presentation to the bank. Given this, you can help your offer along by providing the listing agent with pre-qualification on your mortgage or a pre-approval letter. Have the right ammunition to have your offer accepted.
REO homes are often considered the best way to purchase a distressed property as the seller is out of the picture. It's just the investor, the investor's agent, the bank and the bank's agent who are negotiating the transaction.
