Buying A Foreclosed Home

Buying a foreclosed home can be a great way to get a great deal on a home. In some instances, you can save tens of thousands of dollars.

Known in the real estate world as a “Real Estate Owned,” REO properties are unlike any other type of purchase.

First of all, it is important to understand who the players are. Often that is hard to determine. It is also important to understand that in the past, many mortgages were placed in a pool of loans, packaged into security instruments, and sold to various investors.

Because of this, the mortgage on a home may be owned by multiple individuals or principles. It is possible that none of the parties know each other—they could even be in different countries. This can be one reason for long delays in getting offers approved and getting the final details completed on closing documents.

In traditional real estate, you would simply look at different homes and upon finding the right one, use a Realtor® to complete the transaction. However, when hunting for a good deal on an REO property, it is very important to find a Realtor® who is experienced in working specifically with the REO purchasing process. These properties represent a highly specialized industry.

How REO’s Work

In the past, most realtors specializing in REO simply worked with the seller of the property. The buyer would use any Realtor® to make the purchase. But now, many well known REO agencies have created specialized departments to assist buyers. These agents may have some access to the REO department where they can get insider information on the owners of the REO property.

If you have a friend or relative in the real estate business, make sure they have REO buying experience. If not, have them give a referral to a Realtor® who does. You will get a great deal and a knowledgeable Realtor®, and your friend or relative will get a referral fee for passing the name along to a capable Realtor®.

Almost all sellers of REO properties require pre‐approval when a loan is required to complete the purchase. Additionally, the seller may have specific lenders with whom you must qualify. This gives the seller assurance that you are qualified to make the purchase and that this qualification has been provided by a source they deem to be reliable.

For you, there is no risk that having your credit score pulled multiple times will hurt your credit score—this rule, which applies to home buying, was established specifically to prevent predatory lending. While you may feel justified in complaining about this process, you should be assured that it is not an unreasonable request.

Chances are, the seller will to be taking a significant loss on the property. The more time that passes, the more money they can lose on the property.

As a result, the seller needs to know that you can qualify for a loan to pay for the home. There is really no reason for you to resist pre‐approval with the seller’s pre‐determined lender. This practice makes the entire process easier for all parties. Your refusal could result in a refusal from the seller to sell the home to you – the uncooperative buyer.

Always Do Your Research

Always do your due diligence up front. REO homes are sold as‐is, meaning that the seller is not required to perform any repairs on the property. As such, this burden falls on you. Fortunately, most state purchase agreements allow a specied time frame in which to perform inspections.

Make sure you conduct your investigation work prior to placing an offer. By doing this investigation up front, and hopefully shortening the purchase agreements time frame for inspections, you can state, in the contract, that you have inspected the property thoroughly and do not anticipate requesting any repairs. In eect, you are informing the seller that the condition of the property is already considered in the offering price.

Closing on the Property

The escrow closing date is when you take possession and ownership of the property. When dealing with foreclosed homes, the closing date may not always occur on the exact date of the original agreement.

The bank seller expects the closing to fall on the agreed‐ upon date, and if you are unable to close on time, you may be required to pay a penalty to the seller for extending the closing. If however, the delay is not your fault, no penalty is charged to you, but the seller does not pay a penalty, either.

Why Asset Managers

Asset managers garner much of their compensation for closing a certain number of transactions each month. This bonus system makes up a good part of their overall compensation package, so they are sensitive to getting a certain number of transactions closed in a month.

Most asset managers will not allow the loss of a bonus to affect the outcome of the transaction. However, if all things are equal on the initial offer, and your closing date allows the asset manager to receive a bonus for that month, you stand a much better chance of having your offer selected.

The asset manager may be handling as many as three or four hundred files at a time. Each one can be in different areas of the country with different local customs and ordinances. In spite of these potential sources of delay, you should remain patient and flexible. Remember, the seller of a foreclosed home is taking a substantial loss, and you are probably getting a very, very good deal.

The massive savings represented in the purchase of a foreclosed home should more than compensate for the aforementioned inconveniences.

Know Your Local Market

It is prudent to learn about the local real‐estate market and confirm that your Realtor® has a good understanding of the market. In all markets, there are many publicly available statistics that can tell you how much a home is worth and the amount you should offer to purchase it.

Here are two statistics to include:

  1. The number of days it typically takes for a home to sell in the local market
  2. The average ratio between sale price and asking price

These statistics can tell you:

  1. How many homes are selling each month
  2. How many homes are entering the market each month
  3. How these numbers can be filtered to show only specific locations and property types

This is important information for you, and it is data that a good Realtor® will know and make available. If the Realtor® cannot supply such data, you should look for a new Realtor®.

Once You Find a New Home

When you’ve found the right home and are ready to write an offer, ask your Realtor® to contact the listing agent to determine whether other offers have already been made on the property and if more offers are expected.

The Realtor® should inquire about what you can add to their offer to make it more attractive to the asset manager. Here are a few ways to improve your chances of getting the offer:

  • Earnest money
  • Closing dates
  • Title companies
  • Be pre‐approved with the specific lender the seller has requested. This allows the seller an opportunity to recoup some of their loss by having their own company provide the new loan

Again, this is often the area of biggest complaint for you. However, it doesn’t change the fact that if you are serious about purchasing the home, you should comply with the wishes of the seller. Don’t just comply with these wishes, but go above and beyond them by seeking a full‐ blown loan qualification. This can provide additional information to the seller which will make your offer stand out from the others.

The Offering Price

When you have received pre‐approval or better yet, a full‐blown approval, it is time to determine the offering price by comparing the property being sold to anything else on the market. With these steps taken, you should then aim for a closing date in about thirty days. If you are willing to paying cash, there will be no need for loan approval. You will only need proof that you possess the available funds to complete the transaction.

For example, if you are writing an offer on the third day of the month, you could set the closing date to the twenty‐fifth day of the month. Such a time frame would still leave plenty of room for inspections. This makes the closing date soon enough to give the asset manager a chance at a bonus. Typically, closing dates that fall at the very end of the month are susceptible to problems, so they should be avoided.

Knowing the Net

For you, it is important that you understand what net means to the seller. The seller will be looking at how much money they have after expenses, repairs, allowances, closing costs, etc. have been paid. If you need closing cost assistance, you should never request more than the absolute minimum needed for the lender to complete the transaction. And you should only make this request if you are already putting down an amount equal to a loan‐to‐value benchmark.

For example, if you can only afford to put down 20% on a $200,000 sale and the closing costs are anticipated to run around $5,000, ask for $5,000 toward closing cost assistance.

But, if you can afford a higher down payment, such as $60,000 on a $200,000 sale, then it would be wise to lower the down payment (to $55,000, for example). Then pay the closing costs out of pocket while reducing the offer price to $195,000. If you are able to pay your own closing costs, this will make the seller happy and, in most cases, is making a smart financial decision for themselves.

Making Your Offer

Your goal is to simply take the path of least resistance and use the closing company or attorney the seller has selected. Limit the inspection period as much as possible and understand what as‐is means by obtaining the property as it sits today. So if you are serious about getting your offer accepted, inform the seller you are aware of any problems with the property.

You should be making your offer with any such issues already taken into consideration and should not ask the seller for any repairs or allowances for repairs. Understand that the seller has no information on the home and will not sign any disclosures.

Make sure to ask your Realtor® to explain the types of things that would be disclosed if the seller were making a disclosure. Then conduct your own investigation on any items of importance. Typically, there is a standard form that you can review to learn about the items normally disclosed by a seller.

If the minimum earnest money is $1,000 and you can put down $10,000, make the earnest money a more substantial amount. Remember, it’s called “earnest” money and from the perspective of the seller, a larger amount certainly seems more “earnest.”

Be certain that all parties understand and agree to the contract timeline and know when the earnest money will no longer be refundable. If you miss the inspection period deadline or the closing date, don’t expect to get your earnest money back.

Remember, the higher the selling price, the higher the earnest money should be.

The Closing

After the price and closing date have been selected and the seller’s preferred lender has issued an approval, you should fully intend on using that lender as well as the seller’s preferred title company.

Although you can choose another lender and title company, in most cases, the title insurance has already been purchased by the seller and the “seller‐preferred” lender may oer attractive perks to secure their business. Since there are only a few writers of title insurance policies, it makes little difference which title company that might be.

To summarize, your best strategies are:

  • Make a good and well‐informed offer up front with reference to earnest money and inspection timeline
  • Don’t request excessive sums of money for closing costs
  • Shoot for a realistic closing date that offers the asset manager the best chance at receiving a bonus
  • Have a firm understanding of what “as‐is” means by fully taking into account the present condition of the home and absorbing that into the offer price
  • Allow for a serious earnest money deposit, keep inspection periods at a minimum, and be mindful of the “net” amount the seller will receive
  • Above all, remember that you should be getting a very good bargain on the home. Be flexible, but also diligent

In the next month’s installment, we’ll be looking at if buying a For Sale By Owner really saves you money.

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