So, you are interested in knowing how to buy a foreclosure property, also called an “REO” property. REO is the term used by banks and financial institutions for ” Real Estate Owned”. Maybe you have watched infomercials, or heaven forbid, you have paid to attend a seminar offering to teach you how to buy bank owned properties for 50% to 75% of the value. Remember the old saying “There Ain’t No Free Lunch” !! Banks usually DO NOT sell properties for less than their market value. And the properties are NOT sold for the amount public records show the previous buyer owed on their loan. Just like any seller, a lot of due diligence is completed when deciding what the list price should be for a property. Usually, 2 valuations are requested from local agents familiar with the local market. And there is also an appraisal by a certified local appraiser. Many inspections are completed and estimates are gathered from local contractors to assess the cost of bringing the property to a condition which is comparable to the other homes in the same neighborhood. The appraiser and agents give an opinion of the property value “as is” and property value “as repaired”. The asset manager in charge of the disposition of the property compares the 3 opinions of value, studies the local market, decides if the best marketing plan is with or without repairs and decides on the price.
Many times consumers confuse Foreclosure or REO properties with properties listed as a “short sale”. Short sales are homes listed for sale for less than the current owner still owes on the loan. The ownership of these properties has not changed. Short sale properties are still owned by the borrower. Normally, the owners have financial hardships which have caused them to get behind on their payments and have decided that their best option is to sell the property. The owners are working with the lender to try and sell the property before a foreclosure action is filed. The lender takes into consideration what the legal and marketing costs would be for them to take the property back and put it on the market for sale. There will also be a “holding cost” to the bank while they own the property including utilities, property taxes, maintenance and preservation expenses. The bank will approve a short sale, if the legal, marketing and holding costs support allowing the borrower to sell prior to filing a foreclosure action. Short sale purchases sometimes, but not always, take longer to purchase as there are more parties involved whose approvals are required for the sale to close.
REO properties, or foreclosed properties, have already changed ownership. The property is owned by the bank or financial institution and the deed has been recorded in the name of the new owner. There is no delay in waiting for the bank to take possession when purchasing a foreclosed property. You will be expected to close in 21 days for a cash purchase. And the closing period expected if financing is needed will normally be 30 to 45 days.
Most foreclosure properties are listed for sale by a local real estate agent hired by the seller. Many of the banks and financial institutions hire Asset Management Companies who are in business to sell properties. The Asset Manager assigns the property to a local agent approved as a Realtor Partner.
Sometimes Auction Companies are used to sell properties, which may or may not include a local MLS listing. There are also lots of investment companies that buy foreclosure properties in portfolios offered by the sellers without ever being placed on the market locally.
Many of the Banks, Financial Institutions and Auction Companies also have their own web sites where the current inventory of REO properties are listed.
When you find a foreclosed property you are interested in purchasing, make sure to find out if there is an inspection period before you write an offer. You will probably be buying the property “as is”. Most of the sellers will offer the buyer a 7 or 10 day inspection period to have structural and mechanical inspections completed. But some REO sellers (HUD would be an example) sell strictly “as is”. HUD, and some of the other REO companies, require that any inspections be done prior to submitting an offer. The purchase contract will not have a due diligence period. A buyer cannot terminate a contract on a HUD property without forfeiting the earnest money deposit.
Call your local agent for a list of available foreclosure properties in your area.
For a list of Auction Companies and Bank REO listings, see our list below.