Buying Foreclosures or Bank Owned Properties

The majority of properties on the market these days, 80% in fact, are either Short Sales or Bank owned properties aka REOs or Foreclosures. 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 or Foreclosure?
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 an REO i.e. foreclosed property, it means that the property has gone through a foreclosure auction and the bank now owns it. The bank will see to the removal of tax liens, on most ocassions evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing. There also is a high possibility that other existing liens need to be cleared during the escrow process, which could delay escrow a bit, and if it is a condo, the HOA fees could also be an issue. 

In most cases, you’ll receive the property 100% “as is” meaning that no repairs will be made to the property.    Also these REO’s are generally 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?
These properties are typically listed on the local MLS.  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.  As with making any offer on real estate, you must include documentation of your ability to pay, such as a pre-approval letter from a lender, FICO scores and proof of funds.  After you’ve made your offer, you can expect to receive a counter offer as it is common for these properties to received many offers...often selling at a higher than listed price. The counter will typically ask for your "best and final" offer. Then it will be up to you to decide whether you wish to offer more $$$ or walk away.  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 and then when Escrow opens, it typically takes longer than a standard 30-45 day escrow.

Please contact me if you have any further questions.

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