Foreclosure/REO

What is the Process When Buying a Pre-Foreclosure or REO?

There are three different types of properties that can be considered when buying in this category:

• Pre-foreclosure or short sale: When a borrower is in default on their mortgage they sometimes make arrangements with their lender to sell the property in order to avoid foreclosure proceedings. If the sales price of the home is less than the balance due on the mortgage, but is in line with the fair market value, the bank may approve the sale of the property. This is what is known as a short sale. There is no guarantee the bank will approve the short sale proposal, but in some cases it is the best course of action for all parties involved.
• Foreclosed properties: When a borrower has been unable or unwilling to reach a settlement with their lender, a property goes into foreclosure. The foreclosure process and timelines vary from state to state, but the final step is the public auction. Properties can be purchased at auction, however there is often no time to inspect the property before purchase. Also, in many cases a large portion, if not all of the purchase price, is due at the auction site.
• REO: Also referred to as a lender or bank owned property. This is when the foreclosure process has been complete and the lender was the highest bidder at the public auction. Ownership of the property reverts to the lender and the property is listed on the market for sale.

The first step, as when buying any other type of home, is to secure financing. It allows you to search for homes that fall into your price range. But more importantly, it saves time once your offer has been accepted since transactions are extremely time sensitive when dealing with foreclosure and bank owned properties.

Next, find the home you want to purchase. Research the area and compare the home’s price to other similar properties in the area. Verify the property taxes and any maintenance or homeowner association fees that may apply. If you are purchasing a pre-foreclosure property it is very important to find out if there are any other liens on the property since they will have to be paid in order for your to take clear title to the home. During this step it would be a good idea to contact an agent who specializes in REO and foreclosure properties. They will be able to guide you through the process and ensure that nothing is overlooked.

Once you have decided that you want to purchase the home, have your agent present your offer. Due to the competitive real estate market, be sure that your first offer is your best offer since there may not be an opportunity to amend the amount of your offer. The offer will then be submitted to the owner of the property along with your pre-qualification.

What Should I Look For When Buying a Pre-Foreclosure or REO?

When buying a pre-foreclosure, REO property or a home at foreclosure auction it is crucial to consider all the numbers involved.

Some properties may have additional encumbrances (liens) that you could become responsible for in order to take title to the property. It is important to be aware of any taxes owed or unpaid utilities since these charges can also be assessed to the home. If you plan to purchase a pre-foreclosure it is essential that these issues be addressed.

Also, in the case of distressed properties, it is important to take into account any foreseeable repairs and how they add/detract from the home’s value. Be sure to compare your property to available and recently sold homes in the area to have a better understanding of your property’s worth.

In most cases, foreclosed properties are sold “AS-IS” and are priced accordingly. This means that there are no guarantees or warranties as to the home’s condition. Consider the “sweat equity” or cost benefit of making those repairs in comparison to the marketable value. Inspections are not always available, but if they are, you may run into problems during the colder months because of winterization. These “down-cold” conditions often make it difficult to inspect plumbing and heating functionality, so be sure to keep that in mind when you are buying a foreclosed property that is vacant. You may not be given the opportunity to have the home de-winterized in order to complete the necessary inspections so may allowanced for repairs that may be needed.

Finally, be sure you are working with an agent that specializes in REO and foreclosure
properties. Many of the documents and disclosures are specific to these types of transactions. It is best to have someone who is familiar with the process since there will be many conditions to meet and an agent inexperienced with this field could find it daunting.

For the buyer’s agent, this means, (a) exercise reasonable skill and care in performance of the agent’s duties; (b) deal honestly, fairly and in good faith; and (c) disclose all facts known to the agent materially affecting the buyer’s ability and/or willingness to perform a contract to acquire seller’s property that are not inconsistent with the agent’s fiduciary duties to the buyer.

There is also a Dual Agent designation, where the agent acts on behalf of both the seller and the buyer. This kind of representation hinders an agent’s ability to entirely fulfill their duties were they working in only one capacity or the other, so it is important that they explain and you understand those ramifications beforehand.

Why Do I Need an Attorney that Understands Foreclosures?

Contracts that are used in REO and foreclosure transactions are highly specialized and can differ greatly from the contracts used for traditional real estate transactions. When purchasing an REO property the seller of the property is a lending institution that is selling the house merely to recover their investment in the quickest and most efficient manner possible. The attorneys who represent the banks in these transactions specialize in REO transactions and spend their time working almost exclusively on these types of sales. It is important for you to have an attorney protecting your interests with the same qualifications and experience as the attorney representing the other side. You need to feel comfortable with the unfamiliar information you are being exposed to, and your attorney should be able to explain the process to you in a way that is not overwhelming or intimidating.

Foreclosure and REO contracts contain very specific language that many real estate attorneys are not familiar with, especially if they have never personally handled this type of transaction. Also, the time frames included in these contracts are very often shorter than those that would be found in a traditional contract. Your attorney needs to be familiar with what they are looking at so they can process the information correctly and in a timely manner.

The terms that are agreed to when negotiating an REO contract must be strictly adhered to. If you fail to comply with their specified requirements for any reason that is not included as an acceptable delay you could be considered in default and there is a possibility that the bank will keep your down payment. It cannot be stressed enough that to the banks, time is money and the timeframes set forth in the contracts must be met.

The Difference Between an REO and a Foreclosure

Foreclosures are homes that the bank does not own yet. The borrower still has ownership of the property but has fallen behind on their mortgage payments to the lender. In the event that they cannot reach an arrangement with the lender to resolve their delinquency, foreclosure proceedings may start. Foreclosure procedures and timelines vary from state to state, and just because a foreclosure action has been started does not guarantee that an auction will take place. However, the final stage of a foreclosure in any state is the public auction of the property. It is important to know that the lender cannot sell a property to an interested buyer while the foreclosure action is still in progress. The borrower retains ownership of the house until foreclosure is complete.

REO (Real Estate Owned) is an industry term that refers to a property that ownership has reverted back to the lender through some means. A property can be surrendered to the bank in order to avoid the completion of a foreclosure or the bank may be forced to complete the entire foreclosure process. If a foreclosure auction is scheduled on a property the bank will determine the amount of money they have invested into the property which is referred to as their total payoff. If the auction takes place and there are no bids placed higher than the bank’s maximum bid, the bank takes the deed to the property.

If a property is purchased at public auction it is sold in “As-Is” condition and potential purchasers usually cannot inspect the property for potential occupants, severe property damage or other defects before the sale takes place. If the property is purchased as an REO, it is still sold in “As-Is” condition but a viewing of the property can be arranged through the bank’s selling agent. This ensures that you are fully aware of any possible defects within the property before committing to purchase.

Remember: throughout this process the bank is simply trying to recover their investment in the asset. They are not in the property management business and do not want to delay recovery of their investment any longer than necessary.

REO and Foreclosure Myth vs Fact

Myth: Banks will sell their property at a huge reduction in price just to “dump” the property.
Fact: While banks do not want to hold inventory any longer than necessary, they are also not in business to lose money. Once a property has been foreclosed a bank has already increased their investment by lost mortgage payments, unpaid taxes, legal fees and other costs. The bank will price the property according to the fair market value and will work to get the highest and best offer possible.

Myth: Buying an REO with cash entitles a buyer to a discount in price.
Fact: Banks are concerned with recovering their money from a property and nothing else. They will accept a qualified financed offer that is higher, over a lower cash offer.

Myth: Every lender liquidates their inventory in the same manner.
Fact: This is false. Each bank has its own business plan and bottom line. Some may be able to accept lower offers on certain properties due to a large inventory, while others choose to wait for higher offers on every home. There is no industry standard with regard to REO sales prices.

Myth: An REO purchaser must use the bank that owns the property to obtain financing.
Fact: Banks, like any other seller, are only interested in receiving fair market value for the property they are selling. They will accept a pre-qualification letter and financing from lending institutions other than their own.

Myth: The list price is the list price- there are no price negotiations for REO properties.
Fact: The price for REO properties is negotiable as in any other real estate transaction. It is important to keep in mind that the bank is trying to recover an investment. All reasonable offers will be considered, but the bank’s primary concern is their bottom line.

Myth: Buyers can use a HELOC (Home Equity Line of Credit) to purchase an REO.
Fact: Showing that you have a HELOC on your existing property is not acceptable as proof of funds on its own. In order to make this an acceptable proof of funds you will need to provide additional information to the seller that you have available credit remaining on the HELOC and that the lender will be able to release those funds within the time frame needed. Sellers of REO homes, just like any other property, need proof of money actually at your disposal in order to determine your qualifications to purchase the property.

Myth: It is easier for the bank to sell the property before the foreclosure auction in order to save time and money.
Fact: The bank cannot sell the property to an interested buyer until they have taken title to the property. While the foreclosure process is still taking place, the bank does not have legal ownership of the property yet.

What to Know about REO

What to Know about REO There are a few important differences to understand when buying REO properties as opposed to traditional real estate. First and foremost, the seller is a financial institution with no emotional attachment to the property for sale. In most cases, no one from the lending institution has ever even been inside the property. They are only concerned with receiving the highest offer and best terms possible. In fact, most of the negotiation process is completed via internet. The only information the bank will receive is the terms of the offer. They, unlike a traditional homeowner, do not have any personal interest in who is moving into “their home”.

Since you can’t rely on personal interaction it is important that your offer makes a good first impression. Be sure you speak with your lender before submitting an offer on a property. A pre-qualification letter is required along with your offer so that the bank can be sure they are only considering offers from buyers that will qualify for the necessary funds. Time is money and the bank wants to avoid any potential problems before they arise. Be sure to look for a loan program that applies to the type of property you are looking to purchase. REO properties are sold in “As-Is” condition and may not qualify for all types of traditional financing. Many lenders now offer rehabilitation programs that can help bring a distressed property up to mortgage standards. The repairs will take place after the transaction has been completed.

Another aspect of buying REO properties that differs from a traditional purchase is the closing date. Traditional sellers are generally more flexible about a closing date. Usually the term “on or about” a certain date is used in the contract of sale. As long as the closing takes place within 30 days of the agreed to date, there are no penalties enforced. However, REO contracts use the term “on or before” a certain date. The bank selling the property expects the closing to take place no later than the agreed to closing date. Banks have strict guidelines and rely on the scheduled closings for a variety of reasons. You could be faced with daily penalties if the closing is delayed.
REO transactions differ from traditional purchases in a number of ways. Therefore it is highly recommended that you retain a real estate attorney who specializes in REO purchases. This type of attorney is best suited to both protect your interests and to ensure the bank’s requirements are met. An attorney who is familiar with REO transactions will be able to walk you through the various differences so that you are fully aware of all aspects of the transaction. Also, you will not be faced with unfamiliar terms or conditions you don’t know how to address.

Since you can’t rely on personal interaction it is important that your offer makes a good first impression. Be sure you speak with your lender before submitting an offer on a property. A pre-qualification letter is required along with your offer so that the bank can be sure they are only considering offers from buyers that will qualify for the necessary funds. Time is money and the bank wants to avoid any potential problems before they arise. Also, be sure to look for a loan program that applies to the type of property you are looking to purchase. REO properties are sold in “As-Is” condition and may not qualify for all types of traditional financing. Many lenders now offer rehabilitation programs that can help bring a distressed property up to mortgage standards. The repairs will take place after the transaction has been completed.

Another aspect of buying REO properties that differs from a traditional purchase is the closing date. Traditional sellers are generally more flexible about a closing date. Usually the term “on or about” a certain date is used in the contract of sale. As long as the closing takes place within 30 days of the agreed to date, there are no penalties enforced. However, REO contracts use the term “on or before” a certain date. The bank selling the property expects the closing to take place no later than the agreed to closing date. Banks have strict guidelines and rely on the scheduled closings for a variety of reasons. You could be faced with daily penalties if the closing is delayed.

REO transactions differ from traditional purchases in a number of ways. Therefore it is highly recommended that you retain a real estate attorney who specializes in REO purchases. This type of attorney is best suited to both protect your interests and to ensure the bank’s requirements are met. An attorney who is familiar with REO transactions will be able to walk you through the various differences so that you are fully aware of all aspects of the transaction. Also, you will not be faced with unfamiliar terms or conditions you don’t know how to address.

Can I Buy an Occupied REO? The Pros and Cons. 

The Pros and Cons. There are circumstances where a tenant or owner still occupies an REO property. When you purchase a property directly at the foreclosure auction, many times it is still occupied. Or, the bank may have taken ownership and wishes to sell the property before it has become vacant. The potential for a good investment makes this situation attractive to some buyers. With a tenant already in place who is caring for the property and paying rent on time, investors see this as a great incentive to purchase the property. However, this is the best-case scenario. A tenant may decide not to continue paying rent once you take ownership of the property. If the occupant is the former owner, they were unable to pay their mortgage at one point, leading to the foreclosure action. They could become unable to pay their rent as well. There is also the possibility of a disgruntled occupant inflicting extensive damage to the home and property that you will be legally and financially respo. The eviction process can be expensive and time consuming. Also, there is the issue of personal liability. You are opening yourself up to insurance claims or other legal action should any issues arise on the property while it is under your ownership. Before making this decision make sure you fully understand all of the potential issues that can arise. Consult an attorney regarding your responsibilities as a landlord and research the eviction laws in your area. An occupied REO can be a good investment provided the risks are acknowledged and properly addressed.