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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.”
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