Buying bank owned properties
There is a lot of interest in buying bank owned properties these days. A lot of information, some good and some bad, is floating around about the subject. Often the information offered is for sale, with the promise that you can make a lot of money with little effort once you know “the secret formula”. The fact is that there are no secrets, and to make money does require effort.
What’s an REO?
REO stands for “Real Estate Owned”. These are properties that have gone through foreclosure and are now owned by the bank or mortgage company. This is not the same as a property up for foreclosure auction. When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accumulated during the foreclosure process. You must also be prepared to pay with cash in hand. And on top of all that, you’ll receive the property 100% “as is”. That could include existing liens and even current occupants that need to be evicted. A REO, by contrast, is a much “cleaner” and attractive transaction. The REO property did not find a buyer during foreclosure auction. The bank now owns it. The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing. Do be aware that REO’s may be exempt from normal disclosure requirements. In California, for example, banks are exempt from giving a Transfer Disclosure Statement, a document that normally requires sellers to tell you about any defects they are aware of.
Is it a bargain?
It’s commonly assumed that any REO must be a bargain and an opportunity for easy money. This simply isn’t true. You have to be very careful about buying a REO if your intent is to make money off of it. While it’s true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it. When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale. The bargains with money making potential exist, and many people do very well buying foreclosures. But there are also many REO’s that are not good buys and not likely to turn a profit.
Ready to make an offer?
Typically the REO department will use a listing agent to get their REO properties listed on the local MLS. Before making your offer, you’ll want to contact the listing agent and find out as much as you can about what they know about the condition of the property and what their process is for receiving offers. Since banks almost always sell REO properties “as is”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it. As with making any offer on real estate, you’ll make your offer more attractive if you can include documentation of your ability to pay, such as a pre-approval letter from a lender. After you’ve made your offer, you can expect the bank to make a counter offer. Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer. Realize, you’ll be dealing with a process that probably involves multiple people at the bank, and they don’t work evenings or weekends. It’s not unusual for the process of offers and counter offers to take days or even weeks.
This is a very simple explanation of a short sale
For owners who can no longer afford to keep mortgage payments current, there are alternatives to bankruptcy or foreclosure proceedings. One of those options is called a "short sale”. Sellers, if faced with foreclosure and ruined credit, can use a short sale to get out from under without going into foreclosure, and can even salvage their credit.
Definition: A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed.
Examples: If the unpaid balance of a loan is, say, $100,000 and a property sells for $90,000, under a short sale the lender might accept $90,000 as payment in full.
Title – the worry of obtaining clear title in a short sale
In order to pass clear title, all liens must be released. The lien holders are either paid in full, or agree to accept a lesser amount to release the lien they hold. Not unless all liens are cleared, can a clear title pass. If a buyer is financing a property, the lender will require clear title in order to fund the buyer's loan.
It takes much time and endless patience to see a short sale through. There is no predictability and banks do not make decisions rationally.
If the amount you are willing to pay is less than the collective acceptances and approvals of all lien holders, it won't work.
A bank can also abandon your offer in favor of another if one comes in a few thousand higher than yours. Be prepared for surprises.......and be patient.
If you are lacking in time or patience, a short sale might not be the route for you.
When lenders agree to do a short sale in real estate, it means the lender is accepting less than the total amount due. Not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales.
Sometimes, to avoid going through the costs of foreclosure, a lender will sanction a short sale by letting a buyer purchase the home for less than the mortgage balance while the home is in pre-foreclosure stage.
The hope is that both parties to the transaction win by profiting from a timely transfer of title -- which produces a good investment for the investor and divestment for the home owner -- and it might spare the home owner's credit rating before things get any worse.
After the home is listed and an offer comes in it can take several months to get an answer from the lender. In the meantime the agent that is listing the property can take any number of offers, so it tends to be a bidding war; however it is possible that the agent will share with the buyer’s agent how much these offers are. The lender usually prefers a cash buyer with few or no contingences to the sale.
What is not a Short Sale
A Short Sale does not exist simply because the seller is willing – or has – to sell property for a price less than the seller owes to lienors.
A lender will not consider the situation to be a Short Sale if a seller has other assets which are available to pay a deficiency.
The member will not generally consider the situation to be a Short Sale if the property is an investment or second home, and not a primary residence
Checklist for a Short Sale Transaction
Why Do Sellers Go Into Foreclosure? Sellers stop making payments for a host of reasons. Few choose to go into foreclosure voluntarily. It's often an unpredictable result from one of the following:
Laid-off, fired or quit job, Inability to continue working due to medical conditions Excessive debt and mounting bill obligations, Squabbles with co-owner, divorce Job transfer to another state
The Three Types of Foreclosures There are three ways to acquire distressed property, based on where the property lies in the foreclosure process. The three stages are as follows: pre-foreclosure, foreclosure, and post-foreclosure.
Pre-Foreclosures In the pre-foreclosure stage, investors will likely be able to do the most good for the distressed homeowner and for themselves. Pre-foreclosure is where further damage to the home owner's credit rating can be forestalled and the home may be transferred at a mutually-agreed-upon price before it is necessary to get the lender involved. The best potential leads to locate a property at this stage may come from attorneys, accountants, or real estate agents.
Foreclosure Stage In the next phase, when a property is at the foreclosure stage, the best way to identify a potential property is through the County Clerk's office. Find out where the notices of default are filed and determine how to sort through the general index to discover pending foreclosure sales
Post-Foreclosure And last, at the post-foreclosure stage, the lender has already taken control of the property. The home is then in the possession of the lender's REO (Real Estate Owned) department, or in the hands of a new owner or investor who purchased the property at auction.
A key investment decision to make is where to enter into the foreclosure process. It is critical that you identify one of the three aforementioned stages and become an expert in that particular process, which will help you to achieve the most success at becoming a long-term investor of distressed properties.
Attorney General's Office
The Capitol Tallahassee, FL 32399-1050
Ph: (904) 488-2526 Fax:(904) 488-5106
Disclaimer: The information provided herein is supplied by several sources and is subject to change without notice The author of the above information is not an attorney, accountant, or governmental representative. The information herein contained is not comprehensive, nor is it intended as a substitute for legal, accounting or immigration advice from duly licensed or otherwise appropriate individuals.