Over the last year, I have worked almost exclusively in the REO market here in Charlotte. No, I haven't been one of those throwing themselves at the banks for gas money doing BPO's. Instead, I have been helping buyers and investors acquire these properties as their buyer's agent. What I've discovered is that there is A LOT of bad information out there concerning bank owned properties from agents and others who haven't a clue about this market. So here's the truth about the buying an REO home.
REO, Repo, Foreclosure, Short Sale, Bank-Owned, HUD
First of all, let's clear up the terminology. A short sale, otherwise known as a pre-foreclosure, is when the bank allows a seller in default to sell their property for less than what is owned on the mortgage. If this is unsuccessful, then foreclosure happens. Foreclosure is the legal process - not the state or ownership of a property. Here in North and South Carolina, the foreclosure most often results in an auction performed at the local court house. The bank represents their interest by bidding the balance owed on the mortgage. If no one outbids the bank or upsets the bank's bid, the bank ownsthe property. The term REO stands for Real Estate Owned and it refers to bank-owned property. HUD homes are homes that are owned by the government, specifically where the former owner had used an FHA mortgage to acquire the house.
Bank Owned Homes are in the MLS
When a bank buys back a property, the next step is to list it with a Realtor®. On rare occasion, the bank will hire an auction house for properties that maybe badly damaged or one that they may have had a hard time selling. The banks are very specific with their direction on how their agents should list the property. The rarely allow the term "Bank Owned" or similar in the public remarks because it may stigmatize the property. However, you can usually tell one if you're looking at pictures and you see a home that's winterized (stickers over the sinks) or if you see the term "Exempt from Disclosure" or "As-Is."
Don't pay any fee to view these properties!
HUD homes are also available in the local MLS. HUD also has a local contractor that oversees that management and sale of its properties. Here in the Charlotte area, it's HMBI and their site is http://www.hmbireo.com. To find the contractor in your state, visit http://www.HUD.gov.
The Homes are sold "AS-IS" but you still need inspections
These homes are sold as you see them that day. This means that if the home is missing a stove and your financing requires that you have a stove in the house, you need to either find a new house or another mortgage program. So just because the house is as-is, doesn't have running water, power, or gas does not mean that you shouldn't get an inspection. After acceptance of the contract, I always have all of the utilities turned on to make sure that the inspector can complete a thorough inspection. Often times, the mortgage was the last thing the seller stopped paying, meaning that there may be some latent defects in the house that need to be addressed. This could be plumbing leaks, bad roof, rotten trim, broken garage door opener, broken HVAC system, malfunctioning appliances, etc.
You Need Financing Appropriate for a Bank Owned Home
If you're planning to get a mortgage, it is crucial that you find a mortgage that is appropriate for a bank property. Typically, the banks will exclude offers with FHA financing because FHA mandates specific items must be in the house before closing. Therefore, talk with you lender and be up front with them about your plans to purchase a bank owned home. When you have found one that you want to make an offer on, make sure that you consult with them on the visually broken and missing items in the home.
Not Every Bank Owned Property is a Good Deal
Just because a property is bank owned, doesn't mean that the traditional rules of Location, Condition and Price don't apply. Most of these properties are listed at a discount and are reduced 5-10% every month until sold. However, if you are looking at one that needs work and you're not experienced, find someone who is and take them with you. I have shown bank-owned properties listed for $900,000 than eventually sold for $600,000 based mostly on condition. While the $900,000 may have appeared like a great deal on a home that sold a few years earlier for $1.8 Million, in reality, it needed a few hundred thousand dollars to return to its former glory.
The Banks Negotiate Price, Concessions and Closing...That's It!
Most standard state-issued real estate contracts are written to protect the buyer from the seller, their agent, and the listing agent. This doesn't jive with the banks all that well so you will be asked to sign an addendum that puts the ball back in their court. Abide by the rules and you'll be fine. Change anything and the contract is over. Ask yourself if the hoops that the bank is asking you to jump through worth the discount of the house? For most buyers, they'd do near anything to get a house at 25-50% below the market. However, if the hoops are just not for you, consider a traditional sale from an owner.
You Can Get Incentives For Buying Bank-Owned and HUD properties
A few years back, a buyer walk away from the closing with as much money in hand as the seller did. They were taking a second mortgage that exceeded the purchase price for repairs. This is MUCH harder to do these days. However, there are incentive programs that exist out there for buyers of bank owned properties.
HUD, through the Atlanta Homeownership Center, allows buyers of its homes, who utilize an FHA mortgage for financing, to only put $100 down for a down payment. FHA requires 3.5% down in normal circumstances. For buyers of HUD homes in North and South Carolina, this represents a substantial opportunity.
Freddie Mac has a program called HomeSteps. For the last few months, the HomeSteps program was paying up to 3.5% towards the buyer's closing costs. That promotion ends on 1/31/09 but others will sure to follow.
Fannie Mae has a similar program called HomePath. Homepath allows for incentives for purchasing Fannie Mae homes including:
- Low down payment and flexible mortgage terms (fixed-rate, adjustable-rate, or interest-only)
- You may qualify even if your credit is less than perfect
- Available to both owner occupiers and investors
- Down payment (at least 3 percent) can be funded by your own savings; a gift; a grant; or a loan from a nonprofit organization, state or local government, or employer
- No mortgage insurance
- No appraisal fees
In addition, HomePath also has a Renovation Mortgage that can help fund properties that need work to purchaser who intend on living in the properties.
This does not include the $7,500 First Time Homebuyer "Tax Credit" (no interest loan paid back $500 per year over 15 years) that is still available plus any other incentives offered by your local state or county government.
HUD Homes are a little different
A few months back, I wrote a post on Your Guide to Buying a HUD Home. Check it out as it contains information specific to purchasing a HUD owned property. HUD also has programs exclusively for first responders, teacher, police, and firemen called Good Neighbor Next Door. Lot's of rules apply so see the HUD website for more information.
Finally, Take Advantage of the Market
A few weeks back, a buyer called me to interview me and another broker to be his buyer's agent. The other agent he had spoken to had explicitly told him that the best prices in town for what he wanted were from a new construction builder. When we talked, he mentioned what the other agent recommended and I had to all I could to keep from leaping from the window of my office. While some builders are offering their products at a lower price, they're not going to sell a house for less than it cost to build it - and that's what you can get with many of these bank owned properties. I have been through some of the most stunning houses listed for less for less than the cost of the materials alone!
I can only think of three reasons why an agent would say that: 1. They've had a bad bank owned experience and are giving bad advice, 2. They're ignorant of the market, or 3. They're steering clients to the builders offering big bonus commissions.
So for all the bargain hunters out there (myself included) who can get appropriate financing, go bank owned first. First time Buyers, HUD homes first. I can assure you that you will be completely amazed what you will find for sale in the Bank Owned market. After all, opportunities to buy at this discount won't be around forever.
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