Finding Your Dream Foreclosure: What to Know When You’re Buying an REO Property
RiSMEDIA, October 5, 2009—Amy hoak (MarketWatch/MCT)—Buying a foreclosure often is appealing to buyers trying to stretch their dollars. It’s finding a good one can that can be a challenge.
“The vast majority of the banks don’t want us to advertise them as ‘bank-owned’ because it comes with a negative connotation,” said Ryan Melvin, co-owner of More Realty Group in Las Vegas.
That means no sign on the front lawn indicating the home is anything other than a traditional sale. A buyer probably won’t find a property advertised as a foreclosure on marketing materials, said Melvin, who specializes in real-estate owned properties, or REOs, those that have been reclaimed by a bank, typically after an unsuccessful foreclosure auction.
Plus, in some markets, including Las Vegas, foreclosure inventory is actually down compared with last year as government programs attempt to keep owners in their homes and banks aren’t putting as many homes on the market, Melvin said. That’s making it harder for buyers to snag a foreclosure, and those paying with cash often win a bid over someone who needs financing.
If you’re considering the purchase of a home that is now owned by a bank, it’s also important to know at the outset just how much work you’re in for — and how much it is going to cost you. Many foreclosures are in various states of disrepair; some of the fixes are cosmetic, but some can be extensive.
Those looking for the best deal probably shouldn’t rule out non-foreclosure properties, either, said Mark Goldman, a mortgage broker with Cobalt Financial Corp., and a real estate lecturer at San Diego State University. Sometimes, people set their sights on bank-owned properties “like the word ‘foreclosure’ equals ‘good deal,’” he said.
And that’s not always true.
One option for finding foreclosure listings: Go straight to the bank.
Lender Web sites, such as those operated by Bank of America, Chase and Citibank, will list the properties the financial institution has reclaimed when borrowers defaulted. To find a list, simply do a Web search for REOs and the name of the lender. Contact information for the property’s listing agents is usually provided for each entry.
For a fee, other sites will hunt down properties for you. RealtyTrac.com, which helps people find foreclosure and pre-foreclosure properties, charges $49.95 a month, after a free seven-day trial. The company also recently launched BankHomesDirect.com, which charges $19.95 per month and lets people search just for REOs.
Foreclosures.com charges $49.95 per month, after a free seven-day trial.
Otherwise, you might want to enlist the help of a realty agent. Someone who works regularly with REOs might be able to track down the properties more easily than a traditional agent. Melvin is a member of the National REO Brokers Association, nrba.com, which has a searchable database of brokers on its site. There’s also the REO Network, reonetwork.com, which connects buyers with those who specialize in selling REOs.
Lenders aren’t held to the same disclosure requirements as sellers who have lived in the home, mainly because the lender hasn’t occupied the home to notice leaks or other problems. For that reason, an inspection is crucial.
“If there are lessons out of the last couple of years, it’s certainly buyer beware,” said Dan Steward, president of the home inspection firm Pillar to Post, which has a U.S. headquarters in Tampa, Fla.
“We have all heard the stories of people ripping the copper pipe and wiring out … people have literally gone to the light switch, disconnected the wire from the switch box and have pulled the wire through the drywall,” Steward said. Some have ripped out toilets and kicked in walls or left water faucets running before they left the house, often out of anger.
You don’t need to be told the toilet is gone, but an inspector can tell if there is damage 20 feet down the water line because of the way that toilet was ripped out, he said.
Other issues could pop up due to the property being vacant. Large banks will often hire a field service to cut the grass, shovel the snow and winterize a home, yet when homes aren’t occupied it’s harder to catch small problems before they become big ones.
“When we live at home or drive the car, if something is off we notice it. We notice it and we deal with it,” Steward said. When a place is unoccupied, pests could become an issue. If you were living in a home, a nest of raccoons probably wouldn’t be able to find a home in your crawlspace—not for long, anyway.
A neighborhood environmental report might also be worthwhile, he said, which could reveal if the property was the site of a drug lab, for example. When a meth lab is operating in a home, air quality issues can arise; when a home was used for growing marijuana, there is a tendency for mold problems from the high humidity, Steward said.
The time it takes to complete the sale can vary from lender to lender. In some cases, the process goes smoothly, Goldman said. Other lenders are disorganized.
“It really depends on who you’re doing business with,” Goldman said.
But for your best chance at having an offer accepted and for a quick closing process, have everything in order before making the offer, said Duane Andrews, CEO of Clear Capital, a company that provides valuation products for the mortgage and lending industries. That includes having the financing firmed up and writing a clean offer — for example, asking for new oven racks as part of the deal could peg you as a demanding buyer who will be annoying to deal with, he said.
“What this tells the seller is this guy is going to be a pain and they don’t have time for this pain,” Andrews said.
In fact, most bank-owned properties are sold “as is,” so if there is something you want fixed, it’s best to just factor that into the price you’re offering, Melvin said.
But don’t expect to bargain the listing price way down, Melvin added.
Banks typically price their properties at a 20 percent to 30 percent discount anyway, he said. If the property has been on the market for a week or two, don’t expect the bank to drop the price; if the listing is older, you might have more power, he said.
Also, don’t be surprised if the bank that is selling the property asks you to get an approval from its mortgage operation; you often don’t have to take the loan from their company, but they may want to get a closer look at your finances to make sure you’re a solid buyer, Melvin said.
Above all, make sure to follow directions when submitting the offer, he said. That likely includes having an approval letter from the bank and the correct amount of earnest money.