In recent years, most new buyers wanted to buy a new home from a homebuilder. Today, nearly every buyer I pre-qualify today says the same thing. “I want to buy a bank-owned property.”
In some counties around the country, foreclosures are at all-time highs. As a result, in today’s market, the best deal for homebuyers is quite often the bank-owned property.
While many real estate professionals claim their business is off by as much as 60%, agents who concentrate on bank-owned properties are experiencing the second coming of the gold rush.
In the Las Vegas, the bank-owned real estate market is somewhat of an unknown. For many years, someone who was on the verge of foreclosure simply listed their home for sale and found a willing buyer to step in and save the day. As a result, many experienced real estate professionals and homebuyers are not as familiar with the process of buying a bank-owned property. Hopefully, this newsletter will help.
A bank-owned property or REO for “Real Estate Owned” is any property where the lender or bank has taken back ownership through a foreclosure, short sale, or other related act.
In the Las Vegas market today our inventory has swelled with this product. Many pundits believe this is the very tip of the iceberg and many, many more are coming.
It’s important to understand there is a difference between a foreclosure and an REO. The REO is what happens after the act of foreclosure and after an unsuccessful foreclosure auction.
This newsletter will help you understand the process of buying a property that is owned by the bank. This is not about buying a home in foreclosure or in pre-foreclosure.
There are far more benefits, far less stress, and it’s much easier to buy an REO property than a pre-foreclosure. Let’s walk through it.
So Joe Smith bought a house in 2005 for $350,000. He did 100% financing, interest only, and he recently lost his job. Joe couldn’t make his mortgage payments so he called a real estate agent to sell the house. The agent regretfully advises him his house is worth $340,000 today and by the time he pays commissions, closing costs and late payments to the mortgage company, he will have to write a check to close his house for $30,000.
Joe can’t afford to do that so when he fails to make his mortgage payments, he is eventually foreclosed on by his bank, and evicted from his home.
Now, the bank has a foreclosure sale or auction. They require a minimum bid of $378,000 for the property. This minimum bid includes the balance of the loan, accrued interest, the attorney’s fees for the legal action to get to this point, and all of the other money associated with this foreclosure.
At the foreclosure auction, the bank requires that any bidder have their $378,000 money ready that day in the form of a cashier’s check for the full amount of their bid. They also let the bidders know that they will get the house “as is,” with no repair allowance, and with all other liens that are on it.
Since Mr. Smith didn’t have much equity, neither does the bank, and when they add all of these fees to the auction price, the minimum bid becomes a price at or well above market value, like in this case $378,000. That means it rarely ends up getting bid on.
This means the property ends up back in the hands of the bank and now you have an REO.
The bank now owns the property, and it gets recorded on their books as a sellable asset. Banks are in the business of loaning money and maximizing their value through strong business practices like checking, savings, lending, and making money for their shareholders.
They are not usually in the business of owning real estate.
They want to turn this asset into cash, so they put the home on the market with the goal of selling it as quickly as possible.
To accomplish this they will usually reduce the price of all of the costs they had at the foreclosure auction like the legal fees and such. They will list it and market the property with an experience REO real estate agent who can advertise it and put it on lock box for easy access. They will get rid of all of the liens.
They will put the property in the very best position possible to move. So in this case, you would expect the house to go back on the market for somewhere around the market value of $340,000.
But don’t read too much into this. Just because they want to sell it fast doesn’t necessarily mean that they will dramatically reduce the price further below market value. In some cases they will, but in others they won’t. It’s a sell-able asset and they want to make as much as possible.
This is where you come in.
First, you will want to contact a lender to make sure you are qualified to buy a home, the home is qualified for the lender, and how much you are qualified to buy.
Next, and equally as important, you want to contact a real estate agent and let them know you are interested in purchasing an REO.
Not all REO properties are a bargain. Its important that you hire a real estate professional who can let you know if you are getting a deal or not. Ask your agent to do a “CMA” or “comparative market analysis” on the property and find out what its worth in today’s market.
Do your research before making an offer. Buying a bank-owned property is often a great opportunity but is also has its challenges.
I spoke with Dan Humeston, with Century 21 Moneyworld, who is considered one of Las Vegas’ top REO agents. No one in this market today is busier than Dan.
A recent report listed Dan as the number one producing real estate agent in Las Vegas so far in 2007 and by a far margin. I understand he is currently #3 nationwide for all Century 21 agents.
I asked Dan, who is a long-time expert in REO, what you can do to make sure your offers are accepted and also what you can expect when making an offer on a bank-owned property.
Dan says agents and their clients have to understand what they are getting into before moving forward. Here is what you need to know.
#1) KNOW THE HOUSE AND HOW THE LOAN APPROVAL PROCESS WORKS ON BANK-OWNED PROPERTIES
Banks are exempt from providing you with a real property disclosure. Therefore, before you even think about making an offer you have to do an initial inspection of the house. You want to understand what damage has been done to the home and what your lender says about it. Some of this damage may not make it through the lending process and you need to be aware of that before making your offer.
Items like a damaged roof, broken windows, AC and heating problems, exposed wiring, or missing flooring can make it so your lender cannot loan on that home. Before making an offer, make a list of the repairs that you see that need to be done. Go over this list with the lender and the appraiser then decide whether or not to move forward.
Dan says this is the number one problem he faces today on offers. The client makes an offer but has no idea how the repairs necessary will affect his loan. The bank knows what damage will not make it through the lending process and may reject the offer simply because you haven’t done your research.
Knowing if the home is able to get a loan on it is something that needs to be done before you make an offer. The house has to qualify just like the borrower’s do.
#2) DEALING WITH REPAIRS
A quick tour of REO properties and you soon discover that people going into foreclosure rarely take care of the home at the end. It can take four to eight months for a person to be foreclosed on. They sometimes get angry and knowing they are losing the home anyway, they fail to maintain it in a satisfactory condition. It is not uncommon during your tour to find dead landscaping, broken windows, holes in walls, stained carpet, broken fixtures, missing appliances, and much worse.
Banks will often ask that you buy the property “as is.” You probably assume this means none of those items will be fixed should you decide to buy the home. However, Dan says that isn’t always the case. On occasion, you may be able to negotiate to get some minor repairs done.
Dan recommends that once again, before you make your offer, you analyze the repairs that are necessary. Get with the lender and his appraiser and find out which repairs will be absolutely necessary for the loan to happen. Put together a price for these, let’s say $3500.
When you make your offer, ask for $3500 in “appraisal-condition repairs” or “lender-required repairs.” Use those exact terms. Dan says he may be able to sell these to the bank. If you just say “$3500 for miscellaneous repairs,” you dramatically reduce your chance of acceptance.
However, let’s say you did your initial inspection of the house, you didn’t see a lot of problems and you make your offer. During the formal inspection with the home inspector, you learn the home has $10,000 in roof damage. Your lender tells you the roof needs to be repaired before you close escrow. The bank refuses to pay for it as it wasn’t in the original offer. Don’t plan on the bank giving you access to the home during escrow to fix this, Dan says. The liability and the risk are too high for the bank.
#3) SLOWER PROCESSING OF YOUR OFFER
You will make your initial offer in writing. Unless it’s a full list offer with no additional concessions, the offer may require the listing agent to go back to the seller, the bank, for approval. The bank may be in a different time zone. Banks are closed on weekends.
Also, always remember, that banks are in the money business, not the real estate business. Your transaction is secondary to their day-to-day business and may be treated as such.
If they have a dedicated department that handles REO properties for them, and many do, they may have 3-4 people who have to review it first.
I have heard stories of banks taking 30-45 days to answer counter offers. In this time, they may get an offer better than yours and you are out. If you really love the house and think it’s a great deal, you will want to be very careful about your counter offers.
I recently heard a story about a bank that took nearly 50 days to answer a counter offer that was only 3% off of list. The buyer got angry on the 45th day and walked. Five days later when the bank called to say they accepted the offer, the buyer had moved on. There is little sense of urgency from banks today if the offer is not clean and near full price.
Dan says if you want this to happen quickly, make a clean offer, with a higher net to the bank, and get your due diligence done in 10 days or less. If you are an agent and you want 2 additional points, make a higher offer. The bank doesn’t care what you make, they have a net figure in mind. And don’t ask for the appraisal to be paid by the bank. They rarely will accept that.
When you make your offer feel free to ask for what you want, like closing costs, repairs, and more. However, the more you ask for, the longer you will want to plan on waiting for the answer.
Its also very important that you or your real estate agent find out how much the bank has on the books for the loan on the property. If they have $350,000 on the books and they are listing it for $310,000, they will not be too excited about an offer for $290,000 where you are asking for closing costs.
If they have $280,000 on the books and they are listing it for $310,000, your offer for $290,000 plus closing costs may be a winner.
In a declining market it’s very important to know the actual market value of the property. I am doing a loan for a client who saw an REO that was listed for $465,000. His agent advised him the property was only worth $420,000. However, the bank had taken it back with a loan on it for $510,000. He offered $400,000 and got it.
Dan says banks decide how much to list their properties by studying the recent comps, not by what they have in the deal. They want to net as much as possible and that may mean they are selling it a big profit, not a loss.
#4) HIGHER EARNEST MONEY DEPOSITS
In today’s market with 23,000 houses, many sellers will let you make an offer with a deposit of $1000 or less. With bank-owned properties this number will usually be much higher. Plan on $5000-$20,000 or 3%-5% of the asking price. I recently saw $15,000 of earnest required on a $300,000 home.
#5) PREQUALIFYING WITH THEIR BANK
The bank that owns the property may ask you to get pre-qualified with their bank before making your offer. You don’t have to use them. You can choose whatever bank you want for your loan but they want to make sure you are a real candidate. They also want to try and make some more money on the home by being your lender.
I recently pre-qualified a low credit score buyer who was putting down 30% on an REO property that was held by a major bank who recently reduced their subprime guidelines. He couldn’t qualify with them but I demonstrated that I had him approved. They still turned him down.
On the flip side, if you end up in that spot, I highly recommend that you have your lender contact the listing agent to walk him through the strengths of your loan.
I have another loan currently where the property was the REO of another large bank, the borrower went through their pre-qualification process, and his offer was declined. I spoke with the listing agent, went over the entire loan with him and its strengths, presented him a detailed approval letter from my in-house underwriter, as well as a two-week close of escrow, and we got the deal.
Dan says these loan requests usually come from a different department at the bank that sees this as an opportunity to generate revenue. The REO departments simply want these homes off their books and don’t care who does the loan. However they have a right to make sure your lender is not a flake and the pre-qualification letter is real. Asking you to pre-qualify through them just to test your worthiness is not an outrageous request.
#6) THE HOME INSPECTION IS MORE IMPORTANT THAN EVER
Make sure you hire a very reputable home inspector and that he inspects the home very carefully. A lot of damage could have been done by the previous owners and a lot of it unseen by just walking through. As we discussed earlier, before making your offer you want to be sure to factor in the costs of the repairs you will have to do. However, you may want to make sure your offer is contingent on termination if the damages are far greater than originally disclosed and expected.
If your home inspector turns up additional damage like this, this could be an opportunity. If you are still willing to go forward, contact the bank and renegotiate the deal with the new information. They may be willing to lower the price and you may get a well-earned and valuable price break. However, you don’t want to plan on this.
A client of mine, who specializes in fixer-uppers, has had some success renegotiating on bank-owned properties by presenting a detailed list of the damage he sees to the bank before he makes an offer. After the formal inspection, he does a new list.
He gets a professional contractor to prepare a cost analysis to fix the damage after he gets the report from the inspector and then presents this to the bank. Once again, this won’t always work on “as is” but can be very effective as it gives the bank the opportunity to see a real list of the damage with details of the costs that it will take to repair.
The bottom line to buying a bank-owned property is get pre-qualified as a borrower, get the house’s damage pre-qualified with your lender to review the possible challenges in the loan before making your offer, don’t plan on the bank’s willingness to “give the house” away, and be patient for answers.
If you are preparing to make an offer on a bank-owned property, you want some advice, or you simply want more information on bank-owned properties, and you want to reach Dan Humeston, you can do so at [email protected].