Investing with REO Properties
REO Properties
An REO is a property that is ”real estate owned” by the mortgager. These properties begin as foreclosures, but unfortunately, the lack of equity in the home makes the price higher than the home’s value and no one bids on them when they go to auction. When there are no bids placed on the property, as often happens, they become property of the mortgage company.
When individuals go to purchase a home in foreclosure at auction there are many variables that the buyer needs to watch out for. The minimum bid price usually includes the mortgage balance, any additional interest that has accrued, plus foreclosure legal and process fees. The buyer must have a cashier’s check ready on the day of the auction for the entire amount of the bid. The house is then sold “as-is” which includes any additional liens, the current condition of the home along with possibly existing tenants. When buying a home in this manner, the buyer has to conduct a large amount of research to insure they are getting a good deal.
When the property does not sell at auction and becomes an REO, the situation changes. At this point, the property is under the ownership of the mortgage company and the original loan no longer exists. The mortgage company will evict any tenants and may even complete necessary repairs to the home. They will also negotiate with the IRS to remove any tax liens that are on the property.
How to Purchase Bank Owned Homes
Each bank or mortgage company will have their own guidelines for selling real estate owned (REO) properties they have acquired after a foreclosure property goes to auction but does not sell. Though it may seem as though these properties are priced too high to make investing a reasonable option, that is not always the case. There are two situations that may prove these properties to be quite valuable:
- The bank originally auctions off foreclosed homes at a price that will cover the amount that is still owed on the mortgage. If this price does not sell, the bank or lending company may lower their price and/or accept a lower bid to get rid of the property. The sooner they can find another source to cover the money they have lost, the better it is for their company. As you are looking at homes, be sure to see how long they have been sitting with the bank; properties that have not sold for the bank for many months may offer a better deal.
- If additional loans were taken on the home such as a second mortgage, a sweet deal can quickly be soured. However if the lender of the additional loans does not file for foreclosure and complete the process, they are released from the home with the foreclosure. This means good news for a potential buyer as these loans can be up to one-fifth of the market value of the home. If that extra cost is expelled, you may be able to find a beautiful home for a reasonable price - and make a quick profit on the turnaround.
Make the Right Contacts
Begin by contacting the bank or mortgage company that owns the property to find out their specific process for collecting offers on available properties. When there are a large number of foreclosures on the market, most companies have a separate department dedicated specifically to this purpose.
Learn All You Can About the Property
Now it’s time to do your research. There are several questions you will need to have answered prior to placing an offer. You can either contact the listing agent yourself or have your agent contact them. Use this list of questions as a starting point for your research:
- Is the property being sold “as is”? Is there a special “as is” form?
- Has the bank agreed to perform any work on the property?
- What inspection reports are available for review prior to making an offer?
- What is the time frame for acceptance after an offer is made?
- Where should the offer be delivered? Is there a specific office/individual?
Make an Offer
There are many advertisements showing banks “giving away” properties for extremely low prices. In reality, most of these properties are priced close to full market value. The mortgage companies are trying to recoup lost money and need to attempt to get as much for the property as possible. Be prepared for the banks to send a counter offer after your submission. This is their way of ensuring they are receiving the most they can for the property. Plan to send a counter to their counter-offer.
After the offers are submitted, it may take some time, depending on the company, to receive a response. Many of these banks are dealing with large numbers of properties and several individuals have to review the offer before a final decision can be made.
You may need to have sufficient funds available to cover the cost of the mortgage, as some banks will not finance REO properties.
Conditions of REO Properties
The condition of the home can make or break a deal. Most mortgage companies will want to sell the property as is. They do not want to invest additional monies into a property that has already caused them to lose financially. They are required to report any known problems, but you may want to take matters into your own hands and have the property thoroughly inspected. This allows for fewer surprises and headaches after you have completed the sale.
If you want the bank to cover repairs or inspections, you will need to make it clear in your offer and be prepared to negotiate. The acceptance rate for these additional coverages varies depending on how long the property has been on the market, the amount of the loan and/or the number of offers received. Some mortgage companies may negotiate the inspections or offer a credit to keep from having to place the property back on the market.
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