Negotiating
Bank-Owned Real Estate Bargains
By
James J. Saccacio, RealtyTrac Chief Executive Officer
As
housing costs continue to soar, more and more people are looking into
the option of buying foreclosure properties. Some opt to look for
properties in the early stages of default; others frequent auctions or
sheriff’s sales. But if you don’t have the nerve to approach homeowners
in default or the cash in-hand to bid at foreclosure auctions, buying a
bank-owned property may be the best way for you to tap the hidden
market of foreclosure real estate.
Bank-owned
properties are known as REOs, or Real Estate Owned (owned by the bank
or lender). These properties have gone all the way through the foreclosure process and become the property of the
lender. Once a property becomes an REO, the lender clears the title of
any liens, evicts occupants if needed, typically does a limited amount
of repair and clean-up work to the property, and prepares documents for
the issuance of a title insurance policy for the buyer.
REO
properties tend to be slightly less risky investments than properties
purchased at an auction. In addition to the work done by lenders as
noted above, potential buyers of REO properties are entitled to having
a professional appraisal or inspection completed on a property they are
interested in before making any sale final. They will also generally
have the opportunity to tour the property personally and assess the
neighborhood. None of these safeguards are available to someone buying
a property at an auction. These benefits, along with the possibility of
reaping a potential bargain, make REOs an attractive alternative for
investors.
Homebuyers
can often save money by purchasing an REO. Typically, banks want to get
REO properties off their books and will price properties to move. This
means REO sales tend to move rather quickly, so anyone interested in
purchasing an REO property needs to be ready and able to make a quick
decision. But make no mistake! This doesn’t mean every bank is willing
to dump REO real estate at pennies on the dollar. In recent years, some
lenders have been willing to hold properties a little longer than
usual, in order to benefit from steadily-increasing real estate prices.
While finding a middle ground that works for both the bank and the
buyer can be tricky, the following tips should help investors and
buyers negotiate great deals on REOs.
Find
REO Properties as Early as You Can
One
of the often-overlooked strategies for purchasing an REO property is to
make an offer on it before the lender has listed it for sale. Doing
this ensures the bank of a short sales cycle and saves them the expense
of listing and marketing a property. There are several ways of finding
these REO properties early in the process — such as tracking properties
scheduled for auction, closely watching the classified ads in the local
newspapers and visiting the county recorder’s office. Online services
such as RealtyTrac, which hosts the nation’s most
comprehensive database of pre-foreclosure and REO properties and sends
daily e-mail notifications when new properties arrive, make the process
much easier.
Know
who to contact – bank or agent.
Once
you find an REO property you would like to make an offer on, you should
contact the bank in possession of the property directly and ask for the
department or person who handles REOs. Some banks have REO or “asset
management” departments that handle the sales of these properties,
making the process much easier for potential buyers anxious to make an
offer.
Sometimes
you will hear that the sale of the property has been turned over to an
agent. If this is the case, the bank should be able to refer you to the
person handling the sale. Working with the bank’s agent is, in most
cases, a lot like working through any other real estate agent.
Hold
that offer! First find out what the property is really worth.
Prior
to making an offer on any property, you’ll want to do a bit of research
to obtain as much information as possible about the property. It’s wise
to obtain information about comparable sales in the area, either
through a buyer’s agent or from the agent responsible for selling the
property. You can also do this through online services like RealtyTrac,
which offers a complete set of property valuation reports on its site.
Inquire
whether any inspection reports are available, whether the property is
being sold “as is” or if the bank plans to pay for any repairs and how
offers should be presented to the bank for consideration. You’ll also
want to find out how long it takes for the bank to review and accept an
offer. In some cases, offer acceptance is subject to corporate approval
within five days – a much slower turnaround time than is expected with
traditional real estate transactions.
Lastly,
never underestimate the value of a professional inspection. Inspectors
are trained to find things you won’t even know to look for, so they are
well worth the investment if you are really serious about a property.
Consider
the bank’s bottom line
Banks
foreclose on property to recover a debt owed them by the property
owner. The amount of that debt – plus foreclosure-related expenses – is
the bottom line that banks need to recoup when they sell the property
to avoid a loss on their books. The more you know about the bank’s
bottom line, the more leverage you’ll have in negotiating a great
bargain.
The
debt amount is included in the public foreclosure documents filed by
the bank. You can sift through those documents at the county courthouse
or find the same information online with services like RealtyTrac, which maintains a daily updated
national database of REO properties.
Make
an offer, but be ready to play hard ball
Once
you’re ready to make an offer, who you present it to depends on who is
handling the sale. If you’re working through the bank’s agent, the
transactions will be quite similar to those with any traditional real
estate purchase. The only real difference it that you are likely to
have a bit more negotiating room, since the property is an REO that the
bank is motivated to unload, rather than a property a seller has lots
of personal attachment to.
If
you are dealing with the bank directly, you need to be prepared for the
process to take longer and be a bit more cumbersome than it might be
with the help of an agent. This is a strong incentive for you to be as
prepared as possible to at least move things along quickly on your end.
According
to real estate investment trainer and author T.J. Marrs, “when
presenting an offer to purchase an REO, one essentially needs to follow
the same procedure a realtor would follow. Of course this is done
without the benefit of having the realtor to help you complete the
paperwork.” Marrs suggests the following three strategies to improve
your chances of success when making direct offers to banks selling REO
properties.
Have
all your paperwork ready. Use a standard purchase
and sale agreement and have your earnest money ready. In fact, Marrs
suggests buyers have their earnest money already waiting in escrow, and
send a copy of their escrow receipt to the bank along with their
offer
Have
your loan approval ready and submit it with your offer or have
cash in escrow. The more you can prove you are a serious player, the
more likely your offer will be taken seriously.
Do
not EVER offer the asking price. “You can't offer too
little, but you can always offer too much,” says Marrs. “My rule of
thumb is, if they accept your first offer, you offered too much. You
can always negotiate a little but you can't go down in price once the
offer is accepted.”
Keep
in mind that the bank must attempt to get the highest possible amount
for the property and must demonstrate this to its shareholders and
auditors. Once you present an offer, don’t be surprised if the bank
submits a counteroffer that is much higher than your offer. The amount
listed in the bank’s counteroffer is rarely the lowest the bank would
consider. This is your cue to counter again.
The
key to countering a bank’s offer is the understanding that, while they
are certainly motivated to sell, bank representatives are also quite
well-versed in managing money. They know precisely how much they can
afford to sell the property for, but it’s your job to research what
that amount is. The trick is to be patient and chip away at the bank’s
price slowly in order to avoid paying over market value.
A
bit of advice to remember when engaging in multiple rounds of
counteroffers: try your best to separate your actions from your
emotions. If you keep a clear head, you might find that the time and
frustration spent countering with the bank has paid off, translating
into your owning a property for a lot less than you might have paid in
a traditional sale.
For
Marrs, a successful investment is one that is purchased well below
market value. “As an investor, you'll never survive unless you stick to
paying less than market value,” he advises. “When the market
calms down, the over-paying speculators will get killed, while the real
investors who work hard at buying below market value will win.”
