Should I buy an REO Property?

SHOULD YOU BUY A BANK-OWNED HOME?

Before you set out to find the perfect bank owned property, there are some things that Eric and Soledad would like you to know based on their inside experience:

• The bank is the only seller on a bank-owned (also known as foreclosure) property; the old owner is out of the picture.
• Bank acquired title to the property through a foreclosure action; thus, they depend on local agents to secure the property and to market them at the fair market value;
• Seller will transfer the title to the property free and clear of all liens and will issue “insurable title vs. marketable title”
• The seller will select the closing agent, but will pay for the title company as customary per local customs (there are few exceptions);
• Banks will not make repairs to the property.  The property is sold in its “AS IS” condition.  However, buyer has the right to inspect the property and determine if buying a particular bank-owned home makes financial sense.

Banks do not want to own Real Estate because they only lose money while they own real estate. Banks make money by lending out their money.  The bank looks at a foreclosure property as “stuck cash”; money that they cannot use for their main function until the property is sold and the new buyer gives the bank cash for the property.

By the time the foreclosure action has been completed, the banks costs include any or all of the following:

• attorney fees for the foreclosure;
• the delinquent property taxes and all the penalties attached to the taxes;
• the cost to place hazard insurance on the property to protect them against any damage to the property while they own it;
• association dues likely are delinquent;
• city liens for city ordinance violations might have also been attached;
• and to top it all, the price that the home can be sold for today is much less than the amount of the loan the bank gave to the previous owner.   

Every month that a bank holds a property in their name, costs the bank more money in maintenance fees and insurance.  When Soledad worked for GMAC, she sometimes reviewed foreclosure expenses that were over $20,000 for just one property!  To minimize their losses, banks market their properties at the lowest prices in the area to sell fast and free up their cash.

How Do You Know IF Buying a Bank-owned property is right for you?

Of course, everyone thinks that buying a bank-owned property is right for them initially because they know that the prices on bank properties are the lowest of the low. But before you go stampeding toward bank properties, ask yourself a few questions:

Are you willing to take the property in its current condition?

Contracts for bank properties are clearly outlined as buying as-Is, Where Is.  This means that the price you negotiate is your agreement that you will take the property in its current physical state.  Now, you do have the opportunity to have the property inspected by a professional after you are under contract, but before you close.  If you find something in the inspection that you did not know when you negotiated the contract, you may cancel the contract (within the allotted time) and get your deposit back.

How much repair work and cosmetic upgrading are you willing to make after you buy?

Typically the uglier the colors, the dirtier the grout and the smellier the carpet, the better deal you are going to get on a bank-owned home.  Everyone has their own threshold for filth.  Knowing your limits in this area and conveying your preferences to Eric and Soledad will help immensely in focusing only on properties that you might consider buying.  There is a lot of JUNK out there and there is no need to see it unless it’s the kind of junk you would want to turn into something nice.

If the property is a fixer-upper, do you have cash or have you lined up a rehabilitation loan to buy the property?

To get a regular loan on a property, the property must be inhabitable.  The definition of inhabitable are slightly different for an FHA loan and a conventional loan, but in general, the property must be free of all wood-destroying pests, all floors must have floor covering, appliances must be in place, the roof must keep rain off of the inside and electrical and plumbing must work.  If the property is not inhabitable by your lender’s definition, you will not be able to get your loan approved until you find another property that does fit your lender’s definition of inhabitable.