So you want to buy a REO (Real Estate Owned asset belowing to a bank/lender after foreclosure). Well, it so happens that our MLS inventory of REOs is starting to rise and I suspect will continue to rise as we see more homeowners struggle with making rising payments in a climate of falling home values.
The problem is, banks are not good sellers. You would think they have a system of liquidating properties when they receive them but they really don't. Banks are unemotional, make decisions based on a spreadsheet and farm off the actual sale to default service providers(servicer) working under tight decision constraints.
So Rule #1: Have a lot of patience. The process of buying a REO demands this of you, both from a stategic as well as a mental survival standpoint. Banks list the properties based on a BPO(Broker Price Opinion) and an appraisal so when it first comes on the market, its pretty much at market price. They appear cheaper because they are generally in disrepair. After some time on the market, the listing agent and the servicer will reduce the price by some percentage. It keeps doing this every few weeks till an offer is made and accepted. The percentage and timing of price reductions and the "floor" price of what the bank will accept are predeterminded so lowballing from the outset generally receives an outright rejection. You just have to monitor the property price as it falls. If you don't mind rejection, just keep resubmiting the same offer until the bank's acceptance parameters comes down to you.
In one case, my client became aware that his neighbor was foreclosed on and wanted to make a bid on it shortly after it became an REO in 11/06. We knew what the loan balance was($490,000) and no one had picked it up at the court sale. So we thought we would make a nice offer, something higher than the loan balance but significantly less than market. After weeks on end of poking around with the bank and the default service company of who had the "file" and the authority to negotiate. I finally found out it was the listing agent and who he was. Unfortuantely, he said he was not prepared to receive an offer till an appraisal had been completed. 6 weeks later, the appraisal was done by which time my client had long lost interest. The property came on the market at $624,900 on 7/10/07, had a price reduction to $598,000 on 8/30 and another to $598,000 on 9/16. Its still on the market today and still overpriced.
Also if you do make an offer, don't expect to hear back in the standard 3 days. Response time can take days or even weeks. Meanwhile, another offer could slip in and now you are in a multiple offer situation. I had this happen to me on another offer. My clients were so put off with the lack of professional courtesy throughout the whole process, so much so it derailed their enthusiam to buy a house after. Whatever happened to "time is of the essence", a golden rule of real estate.
Rule #2: Do your due deligence up front. Before you determine the offer price, make sure you know you are buying the house "as is", i.e. don't expect any repairs to be performed by the bank or to come back and renegotiate price after inspections. Get a preliminary title report and check for outstanding liens on the property such as unpaid property taxes and homeowner dues. If the property is not vacant, insist that the bank remove/evicts the occupants prior to close. Be prepared to have the bank forgo the local standard cost sharing of escrow fees, transfer taxes and title. Perform your inspections thoroughly as the bank will generally complete very few disclosures. PRICE ACCORDINGLY.
Rule #3: Treat this as a business transaction and be emotionally detached as you can - after all the Seller is.
So here's the other looming problem with purchasing REOs. The bank's objective is to sell the property at the best possible price to minimize its loss. Unfortunately, many of the REOs today were upside down properties and 100% financed. That means the book value for the property may be much closer to market price making the banks even less flexible in negotiating. So for the many REOs out there, you still have to patient to score.
The irony of all this is that the bank also created the predicament they find themselves in. To increase loan activity and revenues, they lowered their lending standards and significantly increased the probability of defaults. Yet, their practices for liquidating REOs are tight, inflexible and outdated. I think they need to go back to the drawing board or we will see banks swim in a sea of non-performing assets and red ink.
tura Drive is in Concord, about 1.5 blocks from Concord library and walking distance to Santos Plaza. It is 1,600sft 3BR/2BA on a 0.2 acre lot. The house had some cosmetic challenges. Owner bought it in Mar 06 for $525,000, bank took it back on 1/15/08 for $368,000 and prompty put it on the market on 2/8/08 for an unbelievable price of $250,000. Of course, sold on the day I saw it, which was the first day on the market.
