A lot of things go into buying bank-owned (REO) properties. New real estate investors often expect the process to be simple, but there are many moving parts! The best way to make sure you don’t miss anything when buying bank-owned (REO) properties is to make a checklist for the process.
Of course, before you buy a bank-owned property, you need to know a little bit about them. REO properties get their name from the term “real estate owned” (REO) because they are literally real estate owned by the bank. Many real estate investors like buying REO properties because banks and other foreclosing lenders may sell at a discount in order to clear their books. Real estate investors may purchase REO properties individually or in bulk, but usually newer investors buy one at a time.
Here is a list of things you can do to improve your chances of successfully purchasing a bank-owned REO:
Most foreclosure properties are referred to by investors as “distressed” properties because the owner and, as a result, the property, were distressed by the loan delinquency and foreclosure. When you are buying bank-owned (REO) home, you must remember that the owner probably was financially unable to care for the property to the best degree possible if they were behind on their loan payments. As a result, the property may need repairs. You must identify them and factor in the cost of repairs before you buy an REO home.
Bank-owned foreclosure homes are often sold “as is,” which means that a discount on the purchase price can easily be eaten up by unforeseen expenses — such as repairs not immediately apparent in an exterior inspection. Even if there are not major, obvious repairs waiting, you may find that regular maintenance has been neglected, causing less-visible damage. Some homeowners who lose their property to a lender even damage the property before they leave. 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.
Once you have located a potential deal, 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.
Remember, liens on the property can drive up the purchase price. There are several types of common liens you may find placed against a property:
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.
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 or 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. Anything is possible, but you will never know if you don’t ask. Don’t be afraid to ask for a better price and favorable terms.
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
If you have good credit and do not already have numerous loans on other investment properties, your bank may be willing to loan you a large portion of the purchase price for the bank-owned (REO) property. Although you should expect the down payment on an investment property to be higher than it would be on an owner-occupied property, you still can try to discuss the interest rate and down payment with your bank. Sometimes credit unions or long-term private lenders will offer you good terms as well.
There are always good opportunities available to a determined real estate investor, but you have to be willing to look for them. Before you begin, prepare yourself! You will probably have to evaluate and even make offers on several REO properties before your offer is accepted. But if you persevere, with careful planning and preparation you will ultimately purchase a bank-owned property and build your investment portfolio.
RealtyTrac is here to help you buy investment properties whether this is your first deal or your 500th. Our vast database of national foreclosures, REOs, and is perfect for helping you find the best real estate investment for you. Sign Up Now and take full advantage of RealtyTrac’s FREE Trial, which allows you to search our real estate inventory free for 7 days. The perfect investment property could be waiting for you right around the corner!