I am a REO listing agent, and I list foreclosures for over 35 banks, asset management companies, and hedge funds. In this article I want to discuss how a typical REO transaction will go, and what a buyer should expect through the entire purchase process. One thing to keep in mind is every bank and asset manager has different policies and transactions are not handled exactly the same. Not only am I a listing agent for REOs and foreclosures, but I buy them as well as an investor. For more information on my investing strategy and rental properties, check out my complete guide to purchasing long-term rental properties. Here are my tips on how to buy a REO property.
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What is a REO property?
REO stands for Real Estate Owned, and is the term banks use to describe their foreclosures. The previous homeowners fell behind on their payments, the bank started the foreclosure process, the property sold at the foreclosure sale, and the bank took title to the property. REOs are homes that are owned by the bank, are almost always vacant, and can be purchased fairly easily. Just because a bank is selling a home does not mean it will be an awesome deal. Banks also have many restrictions on who and how their properties can be bought.
Who can buy a REO property?
There is a huge push in the REO industry to sell foreclosures to owner occupied buyers. HUD, Fannie Mae, Freddie Mac, Wells Fargo and other banks, have owner occupied only bid periods. This makes it very tough for investors to buy REOs from these companies, but there are still opportunities for investors to buy REOs. I go into more detail on strategies to use when buying a foreclosed home in my article on how to buy properties below market value. The key for investors is to watch REO properties like a hawk, and submit an offer as soon as the owner occupant period expires (if that property has an owner occupant only bid period). The first day investors can purchase, an offer should be sent in on the property. I also watch for any properties that come back on the market which are eligible for investor purchases. Many of the properties I buy were under contract at one time, came back on the market, and I made an offer that same day. I just bought a fix and flip using this technique and I go over the process here.
Many may think I have an advantage buying REO properties because I am list REO properties. However, I am prohibited from buying any of my own listings and cannot buy any HUD homes at all.
Why should you buy a REO or a foreclosure?
Buying a REO property can be more difficult than purchasing a regular listing. The reasons for buying foreclosures are simple; they can be priced lower than similar fair market properties. In reality, I don’t care if a property I buy is a REO, a short sale, a fair market sale, or not listed at all. I care what the price is, and if I am getting a great deal. The main reason REOs are cheaper than other homes is they may need work and may even need so much work that they can’t qualify for financing. If a home can’t qualify for financing, that eliminates 75 percent of buyers in my area. The less buyers there are, the lower the price, and the better deal I can get. Just because a home is owned by the bank does not make it a great deal.
How to make an offer on a REO property
Making an offer on a foreclosure is similar to making an offer on a regular listing with some additional paperwork. Banks all tend to use their own addendum to go along with state contracts, unless the home is a HUD or VA property, in which case the HUD or VA contract is used. Here is much more information on the HUD process. You will need a licensed real estate agent to make an offer on HUD homes or REOs. I wrote a great article on how to write an offer, that gives tips on how to get the best price. Besides negotiating the price, there are a few things to remember.
- The bank will require a pre-qualification letter or proof of funds letter, before they will even consider your offer. A pre-qualification letter is a letter from your lender, saying you have the ability to get a loan.
- The bank will require a copy of the earnest money check when you submit your offers, and may require the check to be certified funds.
- The bank can take a long time to sign docs or respond. Some banks act quickly (1 or 2 days) while others can take 10 days or longer to respond!
- The bank has the right to cancel the contract at any time for any reason. They very rarely cancel contracts without a reason, but they have the right to do it.
- Nothing is under contract until all documents are signed by all parties! Banks are very clear that their verbal offers or counters are not binding. If you have something agreed upon with the seller, get the docs signed and go to the bank ASAP. The bank addendum also supersedes the state contract.
- Make sure you read the addendum, especially in regards to the inspection, appraisal and closing process. If there is a difference in the state contract and the bank addendum, the bank addendum will win every time.
How much below list price can you offer on a REO listing?
As a REO listing agent I see many offers come in from buyers, and I see the bank’s response to those offers. I have very little influence on if the banks accept offers, but sometimes I have a little. There is a misconception among many buyers that banks simply want to liquidate their properties and don’t care how much money they get for them. The banks want to get as much money for their properties as they can, just like any seller. The amount they will accept below list price, varies depending on the bank and the property. The longer a home has been on the market, the less the bank will accept. In my experience, banks might negotiate up to ten percent off the list price when a home is first listed. They rarely negotiate more, until a home has been on the market for 60 days.
Do not expect a bank to accept offers 50 percent below list price simply because they want to get rid of them.
How does the inspection process work on a REO property?
Once you get a REO under contract, you usually have the right to do an inspection (sometimes an investor will remove his inspection contingency to make their offer stronger). Usually the bank gives a buyer 10 days or less to complete the inspection on a foreclosure. The bank may or may not de-winterize a house for you. In states where it gets cold enough to freeze, banks will winterize their properties during the winter months. Winterize means the bank hires a plumber to shut off the water, blow out the pipes and put antifreeze in toilets and p-traps. This process hopefully prevents the pipes from freezing if the heat is not on, or the heating system fails. In order for the buyer to complete their full inspection, REOs need to be de-winterized: water turned on, any leaks fixed and system pressurized. Some banks will de-winterize a home for the buyer at no cost, some banks will de-winterize and charge the buyers for it, and some banks (HUD) leave it up to the buyer to de-winterize.
If during the inspection, the buyer finds problems with the home, the bank may or may not fix the issues. Each bank is different in how they handle inspection requests. Sometimes the banks will make minor repairs on items that might delay financing like a plumbing leak. Other banks won’t do any repairs, and others may make other repairs that are only required for financing. There really is no way to know what the bank will do because each situation is looked at on a case by case basis. The rule of thumb is not to count on any repairs being made, although you may get lucky with some sellers.
How does the appraisal process work on a REO property?
If you are getting a loan on a foreclosure, you most likely will need an appraisal to be done on the home. An appraisal is a report done by a licensed appraiser that gives a value on the property. If the appraisal comes in low, your loan can only be based on the appraised amount. If an appraisal comes in low, then the bank may or may not lower the price for the buyer. Low appraisals are a huge issue for us right now, although low appraisals are rare on bank owned homes.
The appraiser may also say the house won’t qualify for a certain loan if it is not in good condition. For a home to qualify for FHA appraisal guidelines it has to be in decent condition. The plumbing, electrical, heating and other systems all have to be in working order. If the appraiser determines these systems are not in working order or the home needs other repairs, the home can’t go FHA. The only option is to have the seller make the repairs before closing or add an escrow account for repairs to be made after closing. Some banks will make repairs, but many will not even if the deal dies because of the needed work. Many conventional loans have the same guidelines as FHA. VA, USDA and other loans have basic requirements all homes must meet to get a loan as well.
What does “as-is” mean on a REO listing?
Most REO properties are listed as being: sold in as-is condition. That means the way the home sits as it is it is now, is how the bank will sell the home. Now as you can see from what we have discussed in this article, some banks will make repairs and some will not. Just because the home is listed in as-is condition, does not mean no repairs will be made, but it might. There really is no way to know what the bank will do until you formally ask the bank to make repairs after an inspection or appraisal. With HUD it is strictly as is, they will not make repairs.
What does “no inclusions” mean in a REO contract?
Many bank contracts state there are no inclusions with the home. Inclusions are items that are not attached to the home, but may be sold with it like a dishwasher or stove. This can be confusing because there may be a stove, refrigerator or other items that are normally listed as inclusions in a REO. The bank’s policy is to always list nothing included even if there are items in the home. The bank will not take these items out before closing, and the homes are sold just as they are when they are listed.
Should you ask for the seller to pay closing costs on a REO?
When you get a loan on a property it can cost about 3 percent of your loan amount for closing costs. This money must be cash brought to closing by the buyer, unless the buyer asks the seller to pay for part of the costs. Most banks and HUD will pay closing costs for the buyers, but it must be stated in writing in the contract. Remember those closing costs will make your offer look lower than a similar offer without closing costs. The seller may also ask you to raise your purchase price to make up for any closing costs that are paid by the seller.
Can the buyer choose the title company on a REO?
Many banks and REO sellers have title companies they like to use on their transactions. Many states like Colorado, have laws that state the buyer may choose their own title company. However, that does not mean the seller has to pay for the buyer’s title work. It is typical for the seller to pay for the buyer’s title policy (although HUD and VA do not), but many banks will not pay for the buyer’s title policy if the buyer chooses their own title company. Title policies vary in cost, but a typical policy can cost $1,000. Title policies are very important and guarantee clear title to the property.
For more information on how to buy the best rentals, which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.
There is a lot involved with buying any property and a few more things to remember when buying a REO or foreclosure. If you have a great real estate agent, they can help you with the entire process and get you through it. If you need a great real estate agent, I wrote an article on that as well. If you have any more questions feel free to comment below!