by Armando Serrano, a Realtor in Southern California

So you’re thinking of buying a bank owned property?

It would be difficult to go through the day these days without hearing or seeing an advertisement about REO properties being offered for sale. Whether you are a “first-time home buyer” or simply trying to move up to a larger home, one can’t help but to think about how good of a deal you might be able to negotiate with a lender to purchase a REO home. As an investor, the temptation is difficult to ignore to possibly do the bank “a favor” and take one of these problem REO properties off their hands (possibly making “a killing” in the process!). Sounds too good to be true? Well, it could happen! In order to swing the odds your way, you should first research some of the facts and information to be much better prepared and know what one could expect.

Please read on …

Default/Foreclosure vs. REO

First, a brief explanation of what a “Real Estate Owned” or “REO” is. These are properties that revert back to the beneficiary lender (bank) if no one bids at the foreclosure auction. In the real estate industry, what we know as a “trustee sale” (this is a public auction in a non-judicial foreclosure state as is California). For the most part, and unless there are bids over and above the opening bid (bank’s book value), foreclosure/trustee sale auctions end up simply going back to the banks and the main reason why they now have so many. After all, if there was sufficient equity in the property being foreclosed, the homeowner would have probably made some reasonable attempt to sell the home paying off the bank(s), all of this prior to the trustee-sale.

Trustee or Foreclosure sales start with an opening bid which includes the outstanding loan balance(s), any accrued interest, late fees, attorney’s fees and any other associated cost(s) with the foreclosure process. For anyone to bid at a trustee sale (foreclosure auction), they would have to “qualify” by showing the “auctioneer” a cashier’s check to cover at least the opening bid of the auction. Should the bidding process go higher than the amount of your cashier-check, you will not be allowed to continue to bid and participate in the auction (the obvious reason why the bidder would have to first qualify and register with the auctioneer, the auctioneer writes down the amount of the cashier check and will know the maximum bid from that individual that could be placed).

If by chance you are the winning trustee-sale bidder, expect the following:

You will receive a “Trustee’s Deed” granting you ownership title to the property, you will have accepted the property in “as is” condition including anyone that ‘may’ still be living in or in procession of the home. Be prepared to start an eviction process and don’t be surprised and expect your eviction to be “contested”. The homeowner may have visited a bankruptcy attorney just prior to the auction setting the sale aside, etc. Oh, by the way, if by chance you failed to run the “GI” (if you don’t know what this means, stay away from Trustee-Sales!) prior to the trustee sale auction, and failing to do ALL your homework, beware that there may also be other “senior” liens and encumbrances recorded against the property or the previous owner that will ultimately affect title for the future conveyance of the property

In contrast to what happened in the early 90’s, and due to the more recent liberal loan program offerings of 100% and 125% CLTVs (Combined Loan to Values) and a declining market, current balances owed to banks today are almost in every case much higher than what these properties are really worth. Consequently, very few foreclosure/trustee sale auctions result in a successful 3rd-party bid resulting with the property “reverting” back to the foreclosing lender, thus becoming an REO or “real estate owned” property.

REO Properties Available For Sale

As the story goes, these properties are now owned by the banks and the mortgage(s) are literally wiped out, no longer in existence. As the new owners, these banks will have to handle the evictions (when applicable) and also having to decide what will be the “must-do repairs” in order to quickly put them back on the market. Negotiating with the IRS for the removal of income tax liens along with delinquent property taxes and pay-off of any homeowner’s association dues, these are also other significant expenses that can add thousands of dollars more to the holding costs of their new assets. As a buyer of a REO property offered for sale in the normal channel (MLS, etc.), the good news is that a new buyer will be able to obtain and receive a title insurance policy and the opportunity to request a home inspection during the escrow (even though most REO properties are sold by the banks “as-is”).

Besides being a Realtor, I’m also a California licensed real estate appraiser and know that bank owned properties (REO) are NOT always a bargain and it’s up to you and your real estate agent to really do your homework. One must be very careful and conscious that the price we’ll pay is as good as other homes that have “recently” sold in the same area (during these challenging times, a comparable sale over 3 months old and more than a mile away from the subject can be an issue if an Underwriter request a “appraisal field review”). Also, please think about the costs of renovations and the time required to complete them, it can add thousands more dollars to the basis of the purchase of your new home. Lastly, don’t make the emotional mistake in getting caught up in the “counter-offer bidding-war”. You certainly don’t want to end up paying more than fair market value of the home.

If the area current market direction in that particular zip code is projected to continue to be in a downward trend, or has previously lost 1% to 1.5% of value per month, please factor that variable into the equation and deduct the potential loss of equity you calculated you had. It all adds up! The more informed and educated you become, the better you’ll feel about the purchase. When you come across that little “gem”, you’ll recognize it and will waste no time in pulling the trigger! Believe me, you won’t need a Realtor to tell you “this is a good deal!”

How the Lending Institutions/Banks Liquidate their REO Portfolios

Even though each individual bank works a bit differently, they all strive for very similar goals. Those goals simply are to obtain the best possible and highest price with the lowest cost of liquidation. Truthfully, these are the very same goals you as a seller would have. Banks have ZERO interest in “dumping” real estate cheaply. They generally spent a lot of money to set up and maintain entire departments devoted to manage the complex and very time consuming issues required by the liquidation of their ever growing REO inventories.

To be expected… Once an offer to purchase is presented to the bank or the assigned loss negotiator, they generally reply back with a “counter-offer”. It could very well be that the counter-offer price is higher than you would expect, but keep in mind that Banks have to demonstrate to their auditors and shareholders that they are indeed trying to negotiate the best and highest possible market price

In all cases, offers or counter-offers received are always reviewed and approved by several individuals and companies, especially in the case where there are two separate loans, two different banks with different losses to consider. Even after an offer is accepted by all involved, the bank(s) may insert additional “conditional approvals” such as “…subject to corporate approval within 7-days”, etc. Always plan on countering their counter-offers and please don’t be discouraged.

Property Inspections and Condition Reports

Expect the banks to always want to sell you their property in an “as is” condition, the take it or leave it attitude! The majority of the banks will provide a pest certification under Section 1 (Section 1 is a “must-do” list while Section-2 is only “recommended work”). You must always include your repair request in your offer and negotiate it. The bottom line, the banks will allow you to, and you have all the rights to get ALL the inspections you feel are necessary, albeit, at your very own expense. Just be aware that they may not agree to do any repairs, you will not be surprised or upset, and should always expect it.

One more important point. All offers should include a “contingency” period for a home physical inspection allowing the buyer(s) to cancel the sale should the inspections results expose unexpected damages the bank has no intentions to correct. THIS IS A MUST!

Although you may have agreed to purchase the REO “as is”, give the bank an opportunity to make necessary repairs or possibly giving you a “Seller Credit” after you’ve completed and had a chance to carefully review all inspections. Every now and then they’ll re-negotiate in an effort to help save the transaction instead of opting to place the property back on the market, don’t take it for granted! In some special cases, a bank ‘may’ agree to complete some requested repairs. It all depends on the specific situation, the asset manager and the costs to cure. Some banks know better and are willing to negotiated, others, simply don’t (have no common sense and don’t care).

In most cases, if not all, the financial institutions don’t want to transact with a lot of proprietary disclosures; they are exempt from the California Seller’s Transfer Disclosure Statement (TDS-14) and frequently enough they’ll use their own purchase contracts overriding the original purchase contract used while submitting the offer. You will not receive a SPDS (Seller Property Disclosure Statement) or CLUE* report. Moreover, the real estate agent(s) involved, either representing you or the bank, those real estate agents are required to provide you their own disclosure statements from material facts they know.

* C.L.U.E. (Comprehensive Loss Underwriting Exchange). A claims history database created by ChoicePoint enabling insurance companies to access consumer claims information when they are underwriting or rating an insurance policy.

One more point to keep in mind is that most financial institutions don’t normally provide or facilitate financing on their portfolio of REOs, however, you are encourage to ask as some banks do have selected lenders, if not their own offering “competitive loan programs”. In the case where the subject REO property has extensive damage, and you are purchasing it “as is”, there could be more flexibility to explore.

Presenting the Purchase Offer

As you will see, it’s not that simple and there are some steps one must take. Before presenting a purchase offer, the “selling agent” should contact the “listing agent” and ask some very important questions.

Here are some that come to mind:

  • Have you already contacted the bank? If so, what can you tell me?
  • How many loans are recorded against or affecting the property?
  • If there is more than one loan, are they from the same bank?
  • Is the bank(s) requiring any special “as is” forms?
  • Were any property inspections done? If so, are the reports available?
  • If repairs are needed, has the bank agreed to do the repairs?
  • How will the offer be delivered?
  • Do you know how long it may take the bank to accept our offer?

As a Buyer presenting an offer, these are things you will need to provide the Listing Agent/Bank

  • At a minimum and from your lender, a “Pre-Qualification Letter”, ideally, a “Pre-Approval” letter as a “prequal” is not ever viewed favorably, in my opinion, worthless!
  • Provide the FICO Score page of your credit report. IMPORTANT! Have your loan officer delete all social security numbers (the Seller does not need to see those).
  • Provide proof of funds required to close. A copy of your most recent bank statements and/or asset accounts showing available balance(s).
  • You may also be asked to apply and submit a loan application with the REO bank’s pre-assigned lenders (banks are not willing to spin their wheels with people that truly cannot perform, those that cannot close escrow wasting precious time).
  • Keep in mind that the stronger your offer (more down-payment, greater cash-reserves, good FICOs, low qualifying ratios), these will ALL contribute in getting YOUR offer accepted over the others. Believe it or not, if you happen to be a stronger borrower overall presenting a lower offer, you may still WIN the deal. The higher offers are not always necessarily the BEST offers on the table and being better prepared is always in your favor. ; )

Most purchase offers are generally faxed to the bank(s) with the listing agent needing originals. Usually, there are no formal or “fact-to-face” presentations as this is a very impersonal process, often times the bank assigned “loss negotiator” may not even be the same key-contact during the entire transaction. Also, note that the REO departments for these banks are only open during the week and nothing will ever happen during evenings and weekends.

I remain hopeful that this article and information will assist you, in some way, to make a successful and rewarding REO purchase. Please keep in mind that REO properties, in my experience, are currently priced approximately 10-15% below market values, some selling pretty close to market price but none are ever priced at the ridiculously low prices one often hears on the radio or sees in late-night television. Again, do your homework and seek the advice of a real estate professional.