In today’s market most homes sold are usually bank owned homes or REO’s. The process is similar to a traditional real estate transaction, however a REO transaction might be more time consuming and challenging depending on the condition and legalities affecting the property.
It is important to use to services of a knowledgeable real estate broker in a REO transaction. A good broker will carefully guide you through the transaction to protect your interests and better position you with the lender.
What is an REO or bank-owned property?
A property acquired in foreclosure and now owned by the bank that foreclosed on the property is called an REO or bank-owned property.
How did this property become an REO?
The last owner of this home was not able to make the mortgage payments. After 3 months and 21 days of delinquency the home went into foreclosure in which the lender seized the property and evicted the owner. The lender attempted to auction the property in a trustee’s sale and pay off the existing liens. If that was not successful, the lender was then deeded the property by the Trustee. It is now an REO property.
How do banks sell REO properties?
The banks are not in the real estate holding business so they must sell these homes and turn them into cash. Because most foreclosed properties are not successful at auction, REO properties have added lots of inventory to the market.
The banks have independent, professional real estate agents that assist them is marketing and selling their REO inventory. The banks also assign asset managers who work closely with these agents negotiating terms and the pricing of a sale.
How do banks price their REO properties?
When a bank takes over a property, they conduct their own research to get an accurate idea of the value of the home. They hire a real estate broker to assess the current market value of the property through a Real Estate Broker Price Opinion (BPO).
Based on these findings, they usually price the home within 10-15% of the current market value. There are always exceptions.
How do I find an REO property?
There are thousands of REO properties in California. There is only one way to effectively research them all in a timely manner…hire a professional real estate broker to be your agent. The seller, upon the successful completion of the transaction, typically pays for the buyer’s agent commission. This will cost you nothing, but may save you tens of thousands.
Are REO properties damaged?
Some are. Some are not. It is important to inspect the home yourself before making an offer.
It is equally important to have a professional home inspector inspect the property before you commit to purchasing it. Your real estate professional will refer you to a good home inspector.
What does “As-Is” mean?
Nearly every bank-owned property today is sold “as is.” You will have to sign a waiver that states you are willing to accept the home in the condition it’s in with no further repair.
If a bank is marketing their home “as is”, there is a possibility that the home needs repair and they are not willing to make them. Have your Real Estate Professional give you a thorough run down on what “as is” means to you during a transaction and once you have closed on the property. In addition, consult with your lender before making an offer on an “as is” home as not all loan programs will allow you to buy a home that needs substantial repairs.
I am pre-qualified and ready to make an offer. What is next?
Your offer is submitted to the listing agent. The listing agent may have to submit to the lender’s Asset Manager and this is where the negotiation happens. It may take a few days for a response. The bank will likely respond in the first 48 hours. Some banks take 3 – 7 business days. Be patient. This is not your regular seller.
What does bring my “highest and best offer” mean?
Because the homes are priced so well, it is very common for the bank to get multiple offers.
If the bank gets multiple offers, instead of making a counter offer to you, they may go back to all of the potential buyers and ask for each buyer’s highest and best offer.
This means come back with your best offer, as the bank will choose one at this point. In many cases, the bank will not return counter-offers after they have requested this.
You now have one more opportunity to increase the price or better the terms of your offer. You can choose to do nothing at this point but it may not get you anywhere.
Meet with your agent. Determine the true value of the home. Review your down payment, closing costs needs, and loan terms and then come back with your best shot.
I made a listing price offer but they didn’t respond. Why?
Many REO properties, especially those listed below market value receive multiple offers. Some houses sell above list price. The bank is like any other seller in the market. They can choose not to accept your offer if one comes in they think is better than yours.
If you offer list price and ask for your closing costs to be paid and another buyer offers list price and doesn’t seek closing costs, the other buyer’s offer is stronger.
I am in escrow and we discovered some repairs that need to be made to the home…what do I do now?
Many people that have lost their homes to foreclosure have been struggling financially for a while. This usually means the home has not been kept properly and is in need of repairs and general maintenance. Other homeowners, once they know they are losing their home, damage the property purposely or remove things such as the fridge, dishwasher etc.
When buying an REO property, you must be prepared to do some repairs. Banks may not agree to make these repairs and therefore they might not pay for the repairs. This may require out-of-pocket expense for you.
The bank or lender may be willing to help with some, but don’t plan on it. Know what you are buying before you make your offer and be prepared to spend some money for repairs before you move in.
In most contracts in California, after you present an offer to purchase you can back out of the purchase if you find problems with the property during the inspection period stated in the contract. This is one of the contingencies set in the contract to protect your best interest. You agent will carefully guide you through all of these. Please visit our homebuyer’s guide for more details on the home buying process.
What about home owner association dues?
If a Home Owner’s Association (HOA) manages the community in which your property is located, your title company will request an HOA demand on the property. This demand will ensure that the bank pays any association fees and fines at close of escrow. If they are not paid at closing, they will transfer with the property into your name and will then be your responsibility.
It’s likely that there hasn’t been an actual person living in this home in sometime. This means the home has not been maintained properly. There may be a lot of fines (landscaping, upkeep, trash, etc.) levied from the HOA. The lender should cover these expenses at closing coordinated by the escrow company.
Key Points to know:
- Most REO’s are priced within 10% of the property’s fair market value.
- Those property’s priced at a significant percentage below fair market value tend to dissapear from the market within 3 days of being listed due to their attractive pricing.
- It’s very important to have a loan pre approval in hand prior to even looking at REO’s. Those that are great buys tend to dissapear from the market in a few days (which is the approximate timeframe that a loan pre appoval usually takes). Therefore by having a loan pre approval ready better positions you to send an offer likely to arrive on time to be considered by the lender. It also shows your financial ability and seriousness in buying the property.