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Bank Owned Foreclosures – REO’s
How to buy bank owned foreclosures – REO’s is somewhat different than buying a privately owned home, or a government foreclosure. REO stands for real estate owned, which can be a little deceiving. REO means bank owned.
When a bank or another lending institution provides a loan or a mortgage on a home, and if and when the buyer defaults on the loan, the bank or lending institution forecloses on the property, and this property then becomes part of the bank’s real estate inventory.
Some of the larger banks have a lot of homes in their inventory at any given time, while the smaller institutions accordingly have fewer foreclosed homes in their coffers.
Banks are not in the real estate business. They are in the business of making loans. Most banks do not like having homes on their books, and are anxious to sell them as soon as possible. This opens up a great opportunity for you the buyer.
Bank owned properties are listed on the Multiple Listing Service, or MLS. These homes are also sometimes listed on the bank’s website, usually depending on the size of the bank or lending institution.
Bank owned foreclosures can be sold in different ways. They can be sold via open auction, by sealed bid basis, or by normal negotiation basis.
Most bank owned foreclosures – REO’s are sold in a normal negotiation basis. It is possible to buy a bank owned home in the first few days it is on the market, if you move quickly with the offer, and if the offer is reasonable.
Usually however, banks will wait until they receive a sufficient number of offers before they respond back to the prospective buyers.
Once a bank receives what they consider to be a sufficient amount of offers on a property, it is then common for a bank to declare a ‘highest and best’ situation.
This is where all prospective buyers that have offered on the home, are given a second opportunity to offer with their top offer in order to buy the home.
Banks will also look at how the prospective buyer intends to purchase the home. Preference is usually given to a cash offer, as this will simplify the process, and guarantee the bank that they will receive all of the principal proceeds of the sale right away.
Otherwise, the bank will have to wait for the duration of the loan terms, and once again taking on the risk of the buyer or mortgage holder defaulting, and forcing another sales process.
Preference can also be given if the prospective buyer will take a loan out from the selling bank or lending institution that is listing the foreclosure.
This keeps the loan ‘in house’, and allows the bank to profit on the fees and interest that the loan generates.
Adding more money to the earnest money deposit, is also a good way to persuade the bank to accept your offer over other offers.
The normal earnest money deposit is $1000, but a $2000 -$5,000 EMD will really get the bank’s attention, and everything else being equal, will give you a leg up on securing the home purchase.
In most cases, bank owned homes are sold on an AS-IS basis. Some times however, a bank will negotiate repairs as part of the purchase process. This will usually be in the form of a credit, or deduction in the price of the home.
Each bank or lending institution goes by their own processes, and you should determine what those are, prior to making an offer. Just because a certain bank does things one way, does not mean another bank will operate under the same rules.
In my experience, some banks treat potential buyers like gold, sell at very reasonable prices, and close quickly, while other banks and lending institutions act like they are doing you a big favor by offering foreclosures to you. They may well be, but not always.
These banks can take a lot of time, are not flexible with their home prices, and can make the closing process lengthy, and difficult.
Your best bet is to ask a Realtor with bank owned experience, how a particular bank is to deal with in the foreclosure buying process prior to making an offer.
Once your offer is accepted, it is a good idea to schedule an inspection of the property, as most bank owned foreclosures – REO’s are not inspected prior to being listed for sale.
You have 10 days to schedule, and complete an inspection, unless the contract specifies a longer period. It is up to you, the buyer to both schedule, and pay for the inspection, again unless specified differently in the contract. Your Realtor can assist you with this.
It may or may not be possible to use the results of the inspection to renegotiate the contract. You can make the offer contingent on the inspection, but if you do, you are lowering your chances of having your offer accepted. Check with your Realtor as to how the bank or lending institution that is listing the home treats this situation.
By performing your due diligence, having a good cash reserve, having a pre approval letter, or a proof of funds ready, hiring a good, experienced Realtor, and keeping your expectations realistic, it is very possible to find a great deal in the Bank owned foreclosures – REO’s arena.