When banks or other lenders offer mortgage loans, they see them as an investment, because they will earn money from the interest on the loan. If homeowners do not repay their mortgages, banks lose money. To salvage their investment, banks foreclose on homes with unpaid mortgages and sell the properties at foreclosure auctions. If a home doesn’t sell at auction, it becomes a real estate owned property, or REO property.
Why foreclosure auctions don’t always work?
Many foreclosure auctions fail to bring in any bids. Banks or other mortgage lenders do not set foreclosure prices according to the home’s market value. The lenders try to cover their losses and fees. The foreclosure minimum bid price usually includes the balance of the unpaid mortgage loan, interest owed, attorney’s fees, and costs generated by the foreclosure process. Especially in a soft real estate market, the asking price could tower above market value.
When foreclosures become REOs
Once a property becomes an REO, the lender will prepare the house for sale, including removing the occupants, clearing liens on the property, and determining a price. Generally, lenders do not do any upgrades or repair work on REO properties, which are sold “as is.”
When the home is ready for sale, the lender will work with a broker to put the property on the market.
Finding an REO
Typically, even if the lender has an excess inventory of REO property, it will not offer a house at an unbelievably low price. In most cases, the lender and the broker have researched market fluctuations and recent comparable sales to determine a fair price. As with any property, you might find a great deal, but don’t expect REOs to be severely undervalued.
To find REO properties, you may have luck contacting lenders directly. Some lenders may be willing to provide you with a list of their REO properties available for sale. However, working with a real estate agent is an easier, and often more reliable, way to find REOs. The agent will be able to find several options in your area from more than one lender, and help guide you on the right price.
Making an offer
Buying an REO is a complex process. You will have to be a savvy negotiator to purchase the home at a price you want.
An offer on an REO should include a cover letter, stated willingness to buy the home “as is,” and an escape clause that lets you out of the deal if later inspection reveals extensive property damage. You usually won’t be able to inspect the REO before you send your offer.
To increase your chances of landing the REO, make your offer for or close to the asking price. However, if your research reveals the house is overpriced, you might decide to offer below asking price and explain your reasoning in a cover letter.
If you’re in the market for a good deal on a home, you may have heard about bank-owned properties being sold at discounted rates.
Before you make an offer for one, you should know what they are.
In the pre-foreclosure stage, homeowners have defaulted on their mortgage loan but have an opportunity to pay up and stay put. Failure to pay leads to the auction stage, wherein the bank forecloses the property and auctions it to the highest bidder.
Finally, homes not sold at auction officially become bank-owned properties—also known as REAL ESTATE OWNED PROPERTIES (REOs).
Advantages of Buying a Bank-Owned Property
For some home buyers, these properties are a great fit. Here are four reasons why.
1. No Homeowners: Deal Directly With the Bank
When you buy bank-owned property, you only deal with the bank. Some home buyers may prefer to not deal with homeowners. REO properties often are vacant, so home buyers don’t have to deal with tenants reluctant to leave, troubled homeowners or former owners threatening legal action.
Plus, the bank has no emotional attachment to the home, which means you don’t have to deal with a seller reluctant to negotiate for sentimental reasons.
2. No Outstanding Taxes
Did the last homeowners stop paying their property taxes? That shouldn’t be a problem.
To entice buyers, the bank should waive any outstanding real estate property taxes due on the property. However, be on the safe side and do a title search.
3. Option for a Home Inspection
Unlike properties sold at foreclosure auctions, you can request to se and inspect bank-owned properties before you close on a deal. And you absolutely should.
REOs are typically distressed homes, and the former owners are not likely to have kept the place up to date or even move-in ready. Serious work may need to be done.
4. Discounted Prices
Probably the biggest reason that people first get interested in bank-owned properties is because of their below market value prices. But that doesn’t mean you are necessarily going to get a steal.
Homes that require too much repair work can quickly become just as expensive as—or even more expensive than—move-in ready, homeowner-sold properties.
Compare the bank’s asking price with other comparable homes in the area and be sure to get a thorough inspection.
