Uncovering Bargains in Bank-Owned Real Estate

As housing costs continue to soar, more and more people are looking into the option of buying foreclosure properties. Some opt to look for properties in the early stages of default; others frequent auctions or sheriff’s sales. But if you don’t have the nerve to approach homeowners in default or the cash in hand to bid at foreclosure auctions, buying a bank-owned property may be the best way for you to tap the hidden market of foreclosure real estate.

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Bank-owned properties are known as REOs, or Real Estate Owned (owned by the bank or lender). These properties have gone all the way through the foreclosure process and become the property of the lender. Once a property becomes an REO, the lender clears the title of any liens, evicts occupants if needed, typically does a limited amount of repair and clean-up work to the property, and prepares documents for the issuance of a title insurance policy for the buyer.

REO properties tend to be slightly less risky investments than properties purchased at an auction. In addition to the work done by lenders as noted above, potential buyers of REO properties are entitled to having a professional appraisal or inspection completed on a property they are interested in before making any sale final. They will also generally have the opportunity to tour the property personally and assess the neighborhood. None of these safeguards are available to someone buying a property at an auction. These benefits, along with the possibility of reaping a potential bargain, make REOs an attractive alternative for investors.

Homebuyers can often save money by purchasing an REO. Many banks want to get REO properties off their books and will price properties to move. This means REO sales tend to move rather quickly, so anyone interested in purchasing an REO property needs to be ready and able to make a quick decision.

But make no mistake! This doesn’t mean every bank is willing to dump REO real estate at pennies on the dollar. In recent years, some lenders have been willing to hold properties a little longer than usual, in order to benefit from steadily-increasing real estate prices. While finding a middle ground that works for both the bank and the buyer can be tricky, the following tips should help investors and buyers negotiate great deals on REOs.

Find REO Properties as Early as You Can
One of the often-overlooked strategies for purchasing an REO property is to make an offer on it before the lender has listed it for sale. Doing this ensures the bank of a short sales cycle and saves them the expense of listing and marketing a property. There are several ways of finding these REO properties early in the process — such as tracking properties scheduled for auction, closely watching the classified ads in the local newspapers and visiting the county recorder’s office. Online services such as RealtyTrac, which hosts the nation’s most comprehensive database of pre-foreclosure and REO properties and sends daily e-mail notifications when new properties arrive, make the process much easier.

Know who to contact — bank or agent
Once you find an REO property you would like to make an offer on, you should contact the bank in possession of the property directly and ask for the department or person who handles REOs. Some banks have REO or “asset management” departments that handle the sales of these properties, making the process much easier for potential buyers anxious to make an offer.

Sometimes you will hear that the sale of the property has been turned over to an agent. If this is the case, the bank should be able to refer you to the person handling the sale. Working with the bank’s agent is, in most cases, a lot like working through any other real estate agent.

Hold that offer! First find out what the property is really worth
Prior to making an offer on any property, you’ll want to do a bit of research to obtain as much information as possible about the property. It’s wise to obtain information about comparable sales in the area, either through a buyer’s agent or from the agent responsible for selling the property. You can also do this through online services like RealtyTrac, which offers a complete set of property valuation reports on its site.

Inquire whether any inspection reports are available, whether the property is being sold “as is” or if the bank plans to pay for any repairs and how offers should be presented to the bank for consideration. You’ll also want to find out how long it takes for the bank to review and accept an offer. In some cases, offer acceptance is subject to corporate approval within five days — a much slower turnaround time than is expected with traditional real estate transactions.

Lastly, never underestimate the value of a professional inspection. Inspectors are trained to find things you won’t even know to look for, so they are well worth the investment if you are really serious about a property.

Consider the bank’s bottom line
Banks foreclose on property to recover a debt owed them by the property owner. The amount of that debt — plus foreclosure-related expenses — is the bottom line that banks need to recoup when they sell the property to avoid a loss on their books. The more you know about the bank’s bottom line, the more leverage you’ll have in negotiating a great bargain.

The debt amount is included in the public foreclosure documents filed by the bank. You can sift through those documents at the county courthouse or find the same information online with services like RealtyTrac, which maintains a daily updated national database of REO properties.

Make an offer, but be ready to play hard ball
Once you’re ready to make an offer, who you present it to depends on who is handling the sale. If you’re working through the bank’s agent, the transactions will be quite similar to those with any traditional real estate purchase. The only real difference it that you are likely to have a bit more negotiating room, since the property is an REO that the bank is motivated to unload, rather than a property a seller has lots of personal attachment to.

If you are dealing with the bank directly, you need to be prepared for the process to take longer and be a bit more cumbersome than it might be with the help of an agent. This is a strong incentive for you to be as prepared as possible to at least move things along quickly on your end.

According to real estate investment trainer and author T.J. Marrs, “when presenting an offer to purchase an REO, one essentially needs to follow the same procedure a realtor would follow. Of course this is done without the benefit of having the realtor to help you complete the paperwork.” Marrs suggests the following three strategies to improve your chances of success when making direct offers to banks selling REO properties.

Have all your paperwork ready. Use a standard purchase and sale agreement and have your earnest money ready. In fact, Marrs suggests buyers have their earnest money already waiting in escrow, and send a copy of their escrow receipt to the bank along with their offer

Have your loan approval ready and submit it with your offer or have cash in escrow. The more you can prove you are a serious player, the more likely your offer will be taken seriously.

Do not EVER offer the asking price. “You can’t offer too little, but you can always offer too much,” says Marrs. “My rule of thumb is, if they accept your first offer, you offered too much. You can always negotiate a little but you can’t go down in price once the offer is accepted.”

Keep in mind that the bank must attempt to get the highest possible amount for the property and must demonstrate this to its shareholders and auditors. Once you present an offer, don’t be surprised if the bank submits a counteroffer that is much higher than your offer. The amount listed in the bank’s counteroffer is rarely the lowest the bank would consider. This is your cue to counter again.

The key to countering a bank’s offer is the understanding that, while they are certainly motivated to sell, bank representatives are also quite well-versed in managing money. They know precisely how much they can afford to sell the property for, but it’s your job to research what that amount is. The trick is to be patient and chip away at the bank’s price slowly in order to avoid paying over market value.

A bit of advice to remember when engaging in multiple rounds of counteroffers: try your best to separate your actions from your emotions. If you keep a clear head, you might find that the time and frustration spent countering with the bank has paid off, translating into your owning a property for a lot less than you might have paid in a traditional sale.

For Marrs, a successful investment is one that is purchased well below market value. “As an investor, you’ll never survive unless you stick to paying less than market value,” he advises. “When the market calms down, the over-paying speculators will get killed, while the real investors who work hard at buying below market value will win.”

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