How to buy a Foreclosure or REO home

So you want to buy a foreclosure? Why wouldn’t you? Everybody knows Foreclosures are deals! Right?

Well, sometimes, yes they are. But just because a property is a foreclosure or REO does not necessarily mean it’s a deal. If you want to buy a foreclosure that is a deal here’s some things you should know.

What is a Foreclosure? What is an REO? A foreclosure is an action taken by a lender to forcefully take ownership of a property that was collateral for a loan that was not paid as agreed by the borrower. An REO, which is an acronym for Real Estate Owned, is the term used by lenders to describe property acquired through foreclosure.

REO properties can be privately held or held by an institution like Banks or Mortgage Companies. Real Estate loans are secured with either a Mortgage or Deed of Trust aka Trust Deed. These are collateral instruments and both are used by lenders. State law dictates which is used. The difference between the two is the foreclosure process. Arizona is a Trust Deed State. With a Trust Deed there is a neutral third party “the Trustee”  who is responsible to carry out the foreclosure process when a buyer defaults on a loan. The Trustee will hold a foreclosure auction of the property. The opening bid at the auction is set by the lender and is most commonly the amount owed plus the bank’s expenses. Basically the bank is the opening bidder. Banks will not bid after the opening bid.  Anyone can attend a Trustees sale auction and bid. If there are no bids above the bank’s the property goes to the bank. Whether a bank or another bidder buys the property it becomes an REO. The process can be very confusing and the pitfalls are numerous. This is no place for amateurs! I have purchased dozens of homes at Trustee’s Sale for fix and flip. I’ve made huge profits and lost my shirt. But that is another blog story. What you need to know for now is get professional help if you want to try to acquire property at a foreclosure sale. Unless you want to lose money and tons of it don’t try this alone. It would would be akin to performing brain surgery on your self to save a co-pay. Contact me if you want to know more info about TD Auctions. Watch for my future blog titled “How to buy a house at Trustee’s Sale”.

Banks don’t want to own real estate! That is why REO’s can be a bargain. Banks are also very sophisticated sellers of real estate. The bigger the bank the more homes they have sold and the more experience they have as a seller. Banks are very calculated and they are very good at minimizing losses and maximizing profits. They learn from their mistakes. What I’m driving at is they are not going to give the farm away for pennies on the dollar with out giving full price a shot first. You are not going to outsmart and take advantage of a bank. Accept this fact.

How banks deal with disposition of a property will depend on a number of factors and variables. In hot markets, like Phoenix in 2012, a bank is going to likely have offer restrictions on their REO’s. Currently in the Phoenix market most homes have multiple offers in a short period of time. Banks know they’ll have offers and will pit competing offers against each other to increase their net proceeds. For example they may put the house on the market for a period of time before they will consider offers. It’s also common for restrictions for who can make an offer for a period of time. The listing may say something  like: “offers will be not be considered by seller until after 5 days (specific date) for owner occupied purchasers only. If after 9 days no offers have been accepted by seller then non-owner occupied offers will be considered.”  The idea here is to generate as much competition as possible.

When no offers are received on a  bank owned REO the bank will reduce the price 3-5% and try again. Generally, banks will reduce their price about every 30 days if they have no acceptable offers. Banks are not likely to negotiate much on low ball offers. When too low of offer come in they tend to be more rigid on their counter offer. Normally an offer on a bank REO will need to be within 3-5% of asking price to have a chance. Offers more than 10% below asking are likely to be not taken seriously by the bank. Buyers who think they should hammer the bank’s price as a tactic for getting a deal are usually making a mistake that is counter productive to their effort.

For privately owned REO purchases the seller is usually more lenient about how to deal with the disposition of their property. Many will follow the bank’s lead and impose time frames for considering offers. They tend to be less strict about non-occupant (investors) purchasers. Banks typically have multiple loans on multiple properties in an area. The decisions they make dealing with REO’s can have an effect on other home’s values and add risk to other loans in a community. Those risks have an effect on their decision making. In other words if they sell too cheap or allow too many investor purchases and cause a decline in values in a neighborhood they may cause others in the area to walk away-default. Private investors have no such worry and are more interested in their bottom line and are unlikely to impose restrictions on investor purchasers. Whether Private Investor or Bank owned you will be likely dealing with a sophisticated seller working hard for their best net. The other factor to understand when dealing with REO home purchases is the deal is being processed by and decisions made by salaried employees of the seller-not the seller themselves. The decision maker is working in a sweat shop for crappy pay 9-5 M-F.  If they have a vacation day when your offer comes in they it will sit until they return.  They have no emotional involvement and they will get their paycheck on Friday whether they make a deal with you or not. They lack motivation get something done. They will simply follow the guidelines for selling laid out by upper management in what is called the “loss mitigation dept” of the bank or investor. They call it LOSS MITIGATION for a reason!

Isn’t what you really want just a bargain? If the answer is yes then I suggest you not get too hung up on REO’s. While REO’s may be a deal there are lots of deals that aren’t REO’s. Want the best deal? Get a knowledgeable Realtor that will bust their pick digging up a bargain. Don’t focus on one segment of the market but rather on the deal itself.

I’ve personally purchased or been a principal involved in the purchase of over 70 properties. I’ve made money on the vast majority of those deals. The biggest secret to my success is my ability to pull the trigger. While my competitors are thinking it over I’m opening escrow. In a buyers market forget below market and make the deal. The rewards in real estate investing can come in many different ways, cash flow, appreciation and tax benefits to name a few. A savvy investor is a chameleon. A savvy investor will change with the market and take advantage of what the market gives. Not savvy? Dial me up!

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