Purchasing Bank Owned Properties
A bank owns a property which it had formerly carried on a mortgage, through an agreement with the owner, or at a public auction, or before foreclosure happens. The term REO means real estate owned, and it’s used when the home has gone through foreclosure and is now owned by the former lender, the bank.
What happens then is that the lender (bank) tries to sell the property in order to get the unpaid mortgage amount back, and then clear the title for any new owner of the property. Bargains here are often not so good as when the property has gone to auction or is in pre-foreclosure (short sale). Following is a list of tips and tricks to help in buying REOs, or bank owned properties.
1) Locate Properties & Then Take a Look
Properties listed in the MLS ( Multiple Listing Service) used by real estate agents, are usually designated as REO, so you can tell they are bank owned. Ask your agent to check for these types of properties. Contact the agent directly if there are any listings of interest. If a listing agent is involved then the amount paid for the property will have the agent’s commission tacked on to it.
Individuals may also contact any banks for a list of bank-owned or REO properties. Some digging for the right person to talk to, may be involved. Properties located online can often be found through services such as RealtyTrac. Drive buy the properties you are interested in and pay close attention to the neighborhood. Take pictures and make notes and take a photo for reference of any signs on the property.
2) Check Out The Potential “Bargain”
Gather up information such as the bank’s break even amount — this is the unpaid loan balance, costs and fees incurred, and other liens involved so that the bank could take back the property and own it.
Obtain the estimated market value of the property. Write down your monthly costs if you were a homeowner — taxes, mortgage payment, repairs, insurance etc. Take off all of your buyer’s expenses (break-even amount, repairs, liens) from the market value of the home (estimated), and that’s your offer to the bank. You can get all of this info yourself as it’s public, and can be found by checking with a local real estate agent, the country recorder, or a service such as RealtyTrac (found online).
3) Tell the Lender You Want to See & Perhaps Make an Offer
If the owner of the house isn’t clear, then check with the property assessor (county or city) and see who’s listed. The owner’s mailing address should be at the assessor’s office, too. You can find your local property assessor’s office here:
When you make the call, request the bank-owned homes department, asset management department, or the REO department. Always be persistent, but patient and polite. A lender is more interested in lending money, not property ownership so you may find yourself hunting for this department for a little while.
You can also fax or send an “overnight” letter to the lender about how interested you are in the property. Include a check made out to the local escrow in the amount of a small percentage of the total amount the bank would need. This shows you are serious, and indeed, putting your money where your mouth is. If the deal doesn’t happen, you should get this check back.
4) Purchase Agreement Negotiations
After making contact with a bank’s REO officer or asset manager, try to arrange a walkthrough of the property, and with your agent if you have one. A bargain that you don’t like is not a bargain. If both you and the bank want to proceed, negotiations regarding price are in order.
Some states have a redemption period for the former owner so you may have to wait several months, or weeks, before the bank can sell the property. The former owner may “buy back” their house by paying the bank the total amount owed, in addition to any foreclosure expenses. The bank wants to break even on costs so there is leeway all around.
You, as a new buyer, want to get the home at below market value, less any repair costs which have been estimated. Contact the bank quickly when you spot something you like, and be well prepared to purchase it.
Buyers may get a better bargain if:
- They buy the property “as is”.
- Have either a pre-approval for a loan letter, or cash on hand. Be able to quickly show proof of income.
- If lenders have a glut of foreclosures, they are more than likely to bargain. Foreclosures and their non-performing assets so they like to unload them.
- Build a relationship with the REO officer or asset manager at the bank you are working with. Ask them to let you know if the bank wants to unload any foreclosed properties.
5) Get That Property & Close Your Deal
Put any agreement in writing when you’ve reached it. You can ask a local realtor or real estate attorney for help. The deal should be contingent on:
- A full title search being run by an attorney or title company.
- A home inspection being done. Certainly, the house is being sold “as is”, but if you don’t like its condition, you can walk away.
Use an escrow company to handle all of the funds and title transference involved with purchase. After you have financing secured, this will be pretty smooth sailing. Banks don’t have to sell their REOs within any time limit. But, they often want to sell them quickly. Therefore, many REOs do sell quickly, so be prepared.