REO vs. Foreclosure
An REO (Real Estate Owned) home is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure homes do not sell at auctions and most don’t even generate bids. If there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank.
Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney’s fees and any costs associated with the foreclosure process. If you are the successful bidder, you receive the property in “as is” condition, which may include someone still living in the property. The redemption period for most foreclosures in Michigan is six months in which time the foreclosed upon owner have time to catch up on their payments, refinance, or sell the home at a price to satisfy their mortgage debt. NOTE: There may also be other liens against the property.
REO Properties For Sale
The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a standard title insurance policy.
A bank owned property might not be a great bargain (consider the costs of any need repairs and renovations vs. what the property value will be upon completion of those repairs). As your real estate consultant I make sure that the price you pay is comparable to other homes in the neighborhood or less. Don’t get caught up in a “bidding war” with other buyers and pay over market value. When multiple offers are placed simultaneously by different buyers on an REO or foreclosure property, the bank usually asks all parties to come forth with their “highest and best” offer. All parties may try to outbid each other and the result may be the sales price being higher than the asking price. Again as your consultant I can advise you on what your maximum offer should be to make financial sense for the current market values.
How Banks Sell REOs
Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in “dumping” their real estate cheaply. Bank sellers will generally price their properties at fair market value for the condition of the property, regardless of the amount owed and defaulted by the previous owner. Generally, banks have an entire department set up to manage their REO inventory, or often will outsource their REO homes to various asset managers.
Once you make an offer to purchase, banks generally present a “counter-offer.” It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible. You should plan to counter the counter-offer if this is not a reasonable market price. Banks almost always counter offer close to the list (asking) price.
Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, the bank may insert wording like “ … subject to corporate approval with five days.” Generally, each accepted offer from the bank is accompanied by addendums for the buyer to sign. In Michigan, these include, but are not limited to, “As-Is/Where Is” addendums and Mold addendums. Basically, you are agreeing in writing that you are buying the home “As-Is.”
Property Condition
Banks always want to sell a property in “as-is” condition. They make no warranties, expressed or implied, about the condition or functionality of the property. They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs. Remember, the prior owner left the premises after losing their home. They may or may not have been concerned with the condition the home was in and the bank does not know many details about the property or its working condition. Remember — there are many bank foreclosure homes out there that are in wonderful condition.
As your Realtor, the offer I write will include an inspection contingency period that allows you to terminate the sale or amend your offer in the event the inspections reveal unanticipated significant impact damages that greatly negatively impact the value of the property.(keep in mind the asking price "might" already reflect these issues). This could be a defunct furnace, seriously damaged plumbing, non-functional well or faulty electrical. These would be examples of “significant impact” damages. I always recommend that you have a certified, licensed professional inspect the home prior to purchase.
Even though you agreed to “as-is,” you can give the bank another opportunity to make repairs or adjust the sales price after you’ve completed your inspections if major items are found. Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted.
Most (not all) foreclosure homes are in need of some sort of repair. Ask yourself these questions:
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Am I willing to do, or do I know someone who can do the work?
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Will the home, in its present condition, appraise for the value I am trying to buy it for?
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What will the home, after my repair efforts, be worth at fair market value?
Making an Offer
Bank Repo homes are generally bought with cash and financing only. Banks will not consider alternative financing, such as land contracts, rent-to-own or 1031 Exchanges. Banks also will not consider offers that are contingent upon the sale of another home. For example, if your home is for sale and locked under contract to sell at the end of this month, the bank will not enter into a contract with you to buy one of their REO's until your house is sold and the closing has occurred.
Offers are sometimes faxed to the bank, but normally the listing agent emails the offer to the bank and the negotiations are done more or less verbally. There is no formal presentation. Keep in mind: nothing happens evenings and weekends (banks are closed). It sometimes takes a lot of patience when waiting to hear back on an offer that is placed on a bank-owned home. These banks have hundreds, if not thousands, of properties that are being offered on. Patience is a virtue!
Since there is no face-to-face presentation to the bank and they do not know how financially secure you are, provide a pre-approval letter for financing or verification of funds (if cash purchase) with your offer so the bank knows for a fact you are able to conclude the purchase of their property. It’s also required to put down an escrow deposit or "good faith money" at the time of the offer.( usually a bare minimum of $1000 (can vary by bank) and 10% min. for cash deals, however the larger the deposit the more seriously then bank will consider your offer). Imagine you were selling your car and someone wanted to put a $10 deposit down to hold it so you wouldn’t sell it to anyone else in the meantime. How serious could the buyer be?
If you can close on the home sooner, this is also much more attractive for your offer, as getting this home “off the books” sooner is much more appealing to the bank. Make your offer easy to accept and more attractive to the seller, and you will up your chances of an approved offer.
Hopefully these tips will help in your search for a bank foreclosure or REO property. Remember that REOs generally sell reasonably close to current market value and are not usually the deals promised on late night television and radio commercials.
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