Buying Bank Owned Properties (REO)

So you’d like to buy a bank owned property?

You’ve watched the late-night infomercials and you’re ready to do the bank “a favor” and take a problem off their hands. Plus, you expect to make "a killing" in the process. Sounds great and it might just happen, but first you should take a look at some facts and get prepared.

REO vs. Foreclosure

An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure auctions do not even result in bids. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank. That is why the property ends up at a foreclosure or trustee sale.

Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs association with the foreclosure process. In order to bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid. If you are the successful bidder, you receive the property in "as is" condition, which may include someone still living in the property. There may also be other liens against the property.

Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Then the property "reverts" to the bank. It becomes an REO, or "real estate owned" property.

REO Properties For Sale

The bank now owns the property and the mortgage no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a title and the opportunity to investigate the property.

A bank owned property might not be a great bargain. Do your homework before making an offer. Make sure that the price you pay (if you’re successful) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a ‘bidding war’ and pay over market value. It’s an old myth that “foreclosures” are a bargain.

How Banks Sell REO's

Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in "dumping" real estate cheaply. Generally, banks have an entire department set up to manage their REO inventory.

Once you make an offer to purchase, banks generally present a "counter-offer." It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible. You should plan to counter the counter-offer.

Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, the bank may insert wording like “..subject to corporate approval with 5 days."

Property Condition

Banks always want to sell a property in "as is" condition. Most will provide a Section 1 pest certification, but not unless you include it in your offer and negotiate the point. They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs.

Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct.

Even though you agreed to “as is," always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted.

Banks do not want to see a lot of proprietary disclosures; they are exempt from the California Seller’s Transfer Disclosure Statement (TDS-14). If there are real estate agents involved, either representing you or the bank, those agents are required to provide you their disclosure statements.

Most banks will not provide financing on their REOs but it doesn’t hurt to ask. Especially if the property has extensive damage and you are purchasing it "as is."

Hopefully these tips will manage your expectations. Remember that REO's sell at pretty close to full market value and are not the deals presented on late night television.

Green real estate

Our interest in "green" real estate will lead us to bring you information on the environmental side of real estate.Today's information is a database:Database for State Incentives for Renewables & Efficiency that describes itself as "DSIRE is a comprehensive source of information on state, local, utility, and federal incentives that promote renewable energy and energy efficiency."

Existing Home Sales Down in March

the National Association of Realtors reports that "The Pending Home Sales Index, a forward-looking indicator based on contracts signed in March, edged down 1.0 percent to 83.0 from a downwardly revised level of 83.8 in February, and was 20.1 percent lower than the March 2007 index of 103.9."

Foreclosures UP in First Quarter of 2008

RealtyTrac® reports that "...foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 649,917 properties during the first quarter, a 23 percent increase from the previous quarter and a 112 percent increase from the first quarter of 2007. The report also shows that one in every 194 U.S. households received a foreclosure filing during the quarter."

Tax Credit Would Get Buyers Off Fence

A temporary tax credit would be the best incentive to move hesitant home buyers into the market, the NATIONAL ASSOCIATION OF REALTORS® told Congress on Thursday.

NAR said the tactic has been successful before; A 1975 temporary tax credit helped to “clear an over-supply of newly constructed homes during an economic downturn.”“We urge Congress to move quickly to conference and final passage of this tax incentive,” said Jim Helsel, NAR treasurer and a partner in RSR, REALTORS®, in Lemoyne, Penn. “Failure to act quickly could further stall the housing market, hurting many of our members, who are predominantly small businesses owners and self-employed individuals.” Testifying for NAR before the House Committee on Small Business, Helsel said there are “three critical features for an optimal home buyer tax credit.”

The credit should apply to all residential real estate — not solely foreclosed properties.
It should be temporary and only apply for a short period of time.

It should provide higher income limits than those the House has imposed, particularly for single individuals. “If these measures are put in place, many individuals who are sitting on the fence will take steps to buy a home.

This would not only help homeowners, buyers and sellers, but also it could expand activity as individuals furnish, paint and improve their homes.

This would help boost the nation’s economy,” Helsel said.NAR also discussed the importance of updating the “passive loss” rules that were enacted in 1986 to bring small investors back to real estate. The passive loss rules were not indexed for inflation, making the tax incentive irrelevant in most cases, Helsel said.

Foreclosures, Delinquencies Hit Records

Foreclosures and mortgage delinquencies both continued to rise during the first quarter of 2008, hitting their highest levels since record-keeping began in 1979, according to the Mortgage Bankers Association.

The seasonally adjusted delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 6.35 percent of all loans outstanding at the end of the first quarter of 2008 on a seasonally adjusted (SA) basis, up 53 basis points from the fourth quarter of 2007, and up 151 basis points from one year ago, according to MBA’s National Delinquency Survey. The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure.

The percentage of loans in the foreclosure process was 2.47 percent at the end of the first quarter, an increase of 43 basis points from the fourth quarter of 2007 and 119 basis points from one year ago.

While these numbers seem disturbingly high, experts note that certain states and certain types of loans are skewing the national figures upward. Specifically, most of the problems step from prime and subprime adjustable-rate loans 60 and 90 days past due in California and Florida.

The 30-day delinquency rate is still below levels seen in 2002.

“The problems in California and Florida are extraordinary and they are the main drivers of the national trend,” said Jay Brinkmann, MBA’s Vice President for Research and Economics. The quarterly rate of foreclosure starts on subprime ARM loans in California was 9.24 percent. This rate, combined with Florida’s rate of 8.25 percent, drove up the national average foreclosure start rate to the point where 43 states were below the national average of 6.32 percent.

California saw a total of approximately 109,000 foreclosure starts and Florida 77,000. The next highest states were Texas, Michigan and Ohio with between 24,000 and 20,000 each.About 20 states had drops in their number of foreclosures started, including Michigan, Ohio and Indiana where problems have been the most severe for the last several years, Brinkmann said.

Source: The Mortgage Bankers Association (06/06/2008)

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