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Buying REO property, for Real Estate Investors

As the credit crunch tightens and real estate inventory piles up, opportunities abound for savvy investors who are prepared and have cash. Here’s how to find em and close em.

REO – Real Estate Owned, term used for homes and properties taken back by banks and lenders after foreclosure.

Banks & Lenders take back properties by foreclosure and usually list them with several local real estate brokers. They can be found on your local MLS and as well as the lenders REO online database.

How to Find REOs in Your Area

Unless you have $10M plus, the bankers won’t talk to you. Your best course of action is to talk to the local realtors/brokers who have the most listings (sellers agents with the most REO listings). These realtors can also provide you with other MLS listings, CMAs, market conditions and keep you abreast of good deals.

Q: How do you find one of these brokers/realtors?

A: Visit the online REO databases of the major lenders in your area, search the zip codes you’re interested in, and look at the listings and the listing agents.  Find the lenders with the most listings in your area and the agents with the most listings in your zip code. These are the agents you want to contact.

Here is a Directory of all major lenders in the US, and links to their REO databases:

REO Listings for Bank Owned Properties of all major Lenders and Government Agencies

Talk to the listing agents, tell them what you’re interested in, listen to their advice, and remember they make money when you buy one of their listings, regardless if it is a bad deal, so do your own due diligence.

Be Prepared

If you are a serious real estate investor, you know how to value a property, estimate repairs, inspect properties, plan an exit strategy, and make offers.  You have identified zip codes that you are interested in and track those markets.  In addition, you have cold hard cash and/or excellent credit.  At a minimum you should plan on putting at least 20% cash down and reserves to cover carrying costs and fix-up.  If you are an all cash buyer better still.  Get pre-qualified at a bank for a conventional loan.

Use the following check list below to buy REO..

REO Buying Checklist:

Inspect the Property, Do a Title Search, Negotiate Payments and Rates, Evaluate the Offer, and Financing and Credit.

Essentially, there are three different stages at which you can buy a foreclosure property. Investors and homebuyers can purchase a foreclosure property in the first phase of default — before a foreclosure auction takes place. Secondly, investors can purchase a property in at the public foreclosure auction. And finally, a foreclosure property can be purchased from the bank or lending institution if no one bids at the public sale and the bank repossesses the property.

Once a property is repossessed by a bank or lender, the property will probably be listed for sale through a real estate agent. Good buys are available, but they require research, preparation, patience and persistence. Buying a bank-owned home in foreclosure isn't easy, and it's hardly without risk. Before you consider plunging into the foreclosure market, be sure to do some in-depth research.

Here is a list of things you can do to successfully purchase a bank-owned REO:
 

1. Inspect Property.

Most foreclosure properties are referred to by investors as "distressed" properties. Bank-owned foreclosure homes are usually sold "as is," which means that the 15 percent discount you just saved on the purchase price can easily be eaten up by unforeseen expenses — such as repairs not immediately apparent in an exterior inspection. Many owners of homes that go into foreclosure have been struggling financially, which usually means that the house has not received needed repairs or general maintenance for a while. Some homeowners who lose their property to a lender frequently damage the property. So be prepared to do renovations and repairs. Hire a licensed home inspector to give you a written estimate of the cost to repair the property. Budget that number into your purchase price. Repair costs can be used later in your negotiation with the bank to reduce the asking price.
 

2. Title Search.

Once a home has been located, search the public records for liens and outstanding taxes. You can perform a preliminary check of title on RealtyTrac and then hire a title company to run a full, insured title search before closing the deal. Liens on the property can drive up the purchase price. Common liens typically are placed on a property for unpaid loans borrowed against the property, taxes or unpaid contractors (mechanics liens). These liens remain intact until the money is paid, which means that you may have to pay off the liens on the foreclosed property you are buying — even though you're not the one who didn't pay the property taxes. Banks should clear the title before selling but never assume this is the case — just as you would if you were buying a property from anyone else.
 

3. Negotiate.

Investors should be prepared to negotiate a lower down payment, a lower interest rate, a reduction in closing costs and a lower asking price. Many lenders may be willing to waive some closing costs, maybe even offer a break on the interest rate or the down payment. Moreover, some lenders might offer to finance the property at a below-market rate or with a lower-than-usual down payment. Don't be afraid to ask for a better price and favorable terms.
 

4. The Offer.

Although most banks want to unload their foreclosed properties, they won't necessarily do so cheaply. So you aren't guaranteed a fabulous price. But remember you're dealing with an eager seller. Even though the bank's REO manager or their listing agent might suggest that the list price is "firm," never be afraid to negotiate price — especially if the foreclosed bank-owned home needs repairs. When submitting a low offer, you need to substantiate the reduced price in writing and document your case. You should furnish photographs and cost estimates for repairs to support your offer amount.
 

5. Financing.

With good credit, many banks will loan the full price of the foreclosure or more. If the home is to be used as a rental, many banks will require only a 10 percent down payment. Foreclosure investors with a large amount of equity in another home may get a line of credit from their bank to purchase a foreclosure. When they convert the line of credit to a mortgage, no down payment may be required.
 

Visit Foreclosure Center

Visit our Foreclosure Center to read more detailed information about foreclosures.

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Contact Owner: Bank Owned

If the property is Bank Owned (REO), your first step is to contact the lender, whose information is usually on RealtyTrac's Property Details page. You should contact the lender directly and ask for their REO or asset management department to find out how you can view and possibly make an offer on the property. REO means "Real Estate Owned" by the lender. It's another way to say the property has gone through the foreclosure process and has now been repossessed by the foreclosing lender.

If you haven’t done it already, you’ll want to evaluate the property’s value and check for any additional loans or liens encumbering the property so that you can make an informed decision about whether the property is a wise investment. On the Property Details page, click on the Comparable Sales section to view a report that evaluates the home’s market value based on comparable sales in the neighborhood. Click on the Loan & Lien History section to view a report that lists additional encumbrances on the property.

Some bank-owned properties on RealtyTrac will give you the option to contact the property's listing agent directly. You'll see a link to do this either at the top of the property details page or in the Contact section of the property details page.

RealtyTrac usually has the name of the lender/bank listed on the property, but if you have trouble finding a phone number or address for them through the Internet or otherwise, below are suggestions for tracking down the lender.

1. Contact an Agent to find a local real estate agent in the RealtyTrac Agent Network who can help you contact the lender and who can check if the property is already listed on the market with a real estate agent.

2. Use the History of Notices tool to check if RealtyTrac has any further information on that property. To use this feature, click on the "History of Notices" link on the Property Details page (under property photo). This feature will give you a list of records RealtyTrac has for the property. Other records may have more information, such as the lender name, address and phone number that was missing on the original property record.

3. You can use RealtyTrac’s Xamine tool to check if the property is listed with a real estate agent. RealtyTrac's Xamine tool can be accessed by clicking "What's Next>Evaluate The Property" on any Property Details page. On the Xamine worksheet, select the MLS tab and click "Search" at the bottom of the page. If the property is not listed with an agent, then you will need to contact the lender directly.

4. You can contact the local property assessor to find out the owner’s name and mailing address. Since the property is bank owned, the property assessor should have the bank or lender listed as the owner. Go to statelocalgov.net to find the local property assessor in your area.

 

Contact Owner: Government Owned

Many government-owned properties are already listed with a real estate agent, and you should see a link to contact that agent in the Contact section of the property details page. If the listing agent's information is not available, you can contact a local agent using RealtyTrac's Agent Network (click on the "Contact an Agent" tab at the top of any member page on the website). Or you can try to contact the government agency listed directly.

 

STEP 5. Make an Offer

If you have never purchased a foreclosure property before, we recommend that you have a real estate agent help you prepare and make an offer. Contact an Agent to find a local real estate agent in the RealtyTrac Agent Network.

To get an estimate of the potential bargain for any property, you need to find out the estimated market value of the property, how much is owed on the property and if the owner has any other loans or liens encumbering the property. On the Property Details page, RealtyTrac usually provides the estimated market value and the estimated balance of the loan in foreclosure, called either the Balance, Opening Bid or First Loan Amount.

Click on the Check Loan & Lien History section to view a report that lists additional loans or liens on the property. Click on "Check Comparable Sales" to view up to 15 recently sold neighborhood properties and an analysis of property values in that neighborhood.

Add together any outstanding loans and liens and estimated repair costs and subtract that total from the estimated market value of the property. You can plug the numbers into RealtyTrac’s Xamine tool and it will calculate the potential bargain for you. RealtyTrac's Xamine tool can be accessed by clicking "What's Next>Evaluate Property" on any Property Details page.

Based on your research of the potential bargain, you can make an offer. Usually the offer amount is somewhere below the market value but above the total outstanding liens and estimated repair costs. If the property is a pre-foreclosure or bank owned, you could prepare an offer similar to a typical purchase offer, contingent on a full inspection and title search.

If the property is selling at auction, you will need to make your offer, or bid, at the auction. In many states, bidders are required to pay in cash in the form of a cashier’s check at the auction. You probably won’t be able to conduct a full inspection and title search when you buy at an auction, so it’s important to do careful research before attending an auction.

Making the Offer

When making offers, you will get better results if you look like a serious qualified buyer, with no contract contingencies.

  • Money talks, a deposit is essential even if it is only $5k – its better than nothing.
  • Know the value of the property before you make the offer, run comps, get a CMA from your agent.
  • Attach a bank statement showing that you have the rest of the down payment in a bank account (25% suggested).
  • Attach a credit report showing your good credit (black out your SS#).
  • Attach a bank prequalification if you have one – some lenders such as Countrywide, require that you are pre-approved prior to making an offer on one of their REOs.
  • Make lots of lowball offers – many will get rejected, some will get countered, if they are immediately accepted, your offer was probably too high.
  • Follow-up regularly (once per month) and make another offer, maybe raising your price purchase price by 2%.
  • Target properties which have been on the market for more than 100 days
  • Target properties which don’t show well, due to cosmetic flaws or if you’re a good rehabber look at the major fixers.
  • Target properties without good exposure – IE no picture in the MLS listing.
  • Put a time limit on your offer, ask your realtor for opinions on this (my suggestion is 5 business days).
  • Use hard/private money lenders to facilitate faster closings.
  • Consider attaching a cover letter, stating you are a qualified buyer and why they should accept your pitiful offer. Identify all the negatives of the property.  Why it isn’t selling and has been on the market for so long.
  • Find out what the lenders cost basis is, and never make an offer exceeding that amount. The listing agent may have this info. This info is available on some MLS systems (via realist), and can also be found at the county recorders office by looking at the trustee’s deed or the amount of the trust deed/mortgage that they foreclosed on. A title company can also provide this info.

Financing

If you are a cash buyer, use it to your advantage, make cash offers and promise a fast closing, not contingent on financing.  If you have good credit, steady verifiable income and a health deposit, use conventional financing and get pre-qualified.  Hard Money and Private lenders, although more expensive than bank financing may also be valuable tools, allowing you to close faster, and if you will not be holding the properties for long, may be cost effective as well. Most private/hard money loans don’t show up on your credit report, where a conventional almost always will show, and getting a new loan on your credit report always hammers your credit score in the short term.  If your deal is too thin to accommodate the added expense of a hard money loan, it is probably too thin period.  If your plan is to buy with cash or Hard Money Loans and later refinance to a better rate, talk to a local mortgage broker or bank about seasoning requirements. Refinancing may make more sense if you are acquiring rental property or will be selling with lease/option, rent to own, land contract or wrap mortgage.

When you approach your lender have a full file of docs including: copy of credit report, 1003 standard loan application, copy of W2 income statements (or 1099s for self employed), bank statements, and summaries of your successful real estate deals you have done.

A Few Other REO Buying Tips

  • Skip Short Sales – they take too much time and the lenders are not as motivated, at least not in most areas at this time.
  • Don’t buy marginal deals – blowing your bankroll on a bad deal is the surest way to failure. Be cautious and pessimistic when calculating rehab costs, time to resell the property. In a falling market be extra wary when establishing your after repair value (ARV). Better to get no deals than a bad deal.
  • Don’t get over-extended. Pace yourself, there will always be more deals. Don’t bite off more than you can chew.
  • When valuing property – look at active comps as well as sold comps. In falling markets it’s common for active listings to be cheaper than the last sold comps.
  • Look at the inventory and appetite in the zip code. On MLS you can count the sold comps for the last 6mos and the number of active listings. How many months of inventory are on the market now?
  • If you plan to resell the property, plan on pricing it below market value.  You are competing with every other house for sale in that neighborhood.
  • Do your rehab work fast and on budget.  If you will be reselling the property, get it back on the market fast, and sell it fast using creative selling techniques.

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