Maybe a foreclosure or a REO?
Looking for a Deal? Looking to buy that cheap fixer upper?
What is a Real Estate Owned Property (REO)?
Real Estate Owned (REO) means a bank owns it. REO is property owned by a lender, usually a bank, after an unsuccessful sale at a foreclosure auction (Trustee Sale). The bank will then go through the process of trying to sell the property on its own. It will try to remove some of the liens and other
expenses on the home, and then try to sell it through the use of real estate agents.
Reality check: while foreclosures might be discounted massively from what the former owner paid or owed, their discounts are much more modest when compared to their value on today’s market and the prices of similar homes.
There are some additional problems and hurdles associated with buying a foreclosure that buyers need to consider. Homes that sit vacant can deteriorate much more quickly and the problems may not be noticeable at first and banks can make for very difficult sellers.
You may not think about it but people do a lot to help maintain a home. They keep the inside of the home a nice consistent temperature. They usually clean and they usually do at least minimum maintenance.
Foreclosed Homes are typically unoccupied, what does that mean?
Humidity: In the Florida area, the
humidity level is sufficiently high to make surface mold. When your air conditioner is running, the intake sucks in the air and cools it down below
the dew point. Moisture then condenses to water and drains out of that white plastic pipe you see hooked to your furnace. This drastically reduces the humidity level in your home.
Everything is shut off: When a home is foreclosed, normally the people move out. They turn off the electricity, water and gas. They secure the home and close and lock all the windows and doors. The insides of these homes can become like jungles in the summer.
House has been vacant for a LONG
time! Keep in mind that the average time it takes to foreclose on a home in Florida is 500-1000 days!!! That’s just the time it takes for a bank to get control of the home. It then takes time for the bank to process the home and list it for sale. It is not unusual for a home to sit vacant for four years in Florida. This is a lot of time for a home to be neglected.
Thieves and Vandalism: Vacant homes are huge targets for thieves and vandals. They drive neighborhoods looking for vacant homes.
Copper Lines? Take a good look at all of your water lines and anything that is made of copper; they can be pulled out and sold. Thieves also like to take air conditioning units and the heating coil out
of the furnace.
Plumbing: Many problems can develop with plumbing from a lack of use. The regular flow of water actually helps to
keep your pipes clear of debris and corrosives.
A thorough home inspection is extremely important when buying a
foreclosed home. Even an inspection won’t spot surface mold inside a wall
or many plumbing problems. It may behoove the home buyer to purchase a home warranty in the case of a foreclosure.
Negatives of REOs:
Normally the bank adds provisions that remove almost all of a buyer’s ability to enforce the contract. Most contracts outright say that
the bank can pull the deal at any time for any reason before the actual sale. It has happened where a bank got a better deal and it simply
canceled the contract and sold it to the other party. All of the original buyer’s time and expense was wasted and there was no recourse.
The bank that holds the mortgage is in charge of every aspect of the sale. From accepting the offer, to what’s required at closing, to the closing date. They can even change the terms on closing day.
If you as the buyer of a REO is making any moving plans, note that a closing delay could occur. The bank, as the seller, will set the pace of the transaction. This is especially true in the last days prior to closing.
In general, since the banks (sellers) have not lived in these properties, they are exempt from providing many disclosures, which are normally mandatory in a regular sale.
The home is sold ‘as-is’, the bank will make no repairs. It may be a problem even getting the utilities turned on for you. If the roof needs repair, there’s termite damage, or the appliances are worn out (or non-existent), you, the new owner, is the one who’ll be paying for repairs and replacement. And, of course, almost all foreclosures are as is.
Some properties may not qualify for a new loan if their conditions are poor and non-livable. (This is
especially important for FHA/VA approved buyers).
Making an Offer on a REO: When you are doing your searches online, when a short
sale or REO comes up within your price range, unfortunately, it DOES NOT
necessarily mean you can offer what they are asking and you will be able to
purchase the house! It doesn’t seem fair, why are these homes advertised at this price if someone cannot actually purchase it at this price? Simple answer: to attract attention, to attract potential buyers to start bidding. Many banks and their agents list the home with an attractive low price to get the bids started. When a buyer makes his offer for this price (often much lower than market value), it can (and often times is) rejected by the bank. There are times buyers’ offered thousands more than the listed price and it is STILL rejected.
Making an offer on a REO is a similar process as an offer on a short sale, there is very little (if any) negotiating room. It usually costs more for lenders to sell their REO properties. During the process of title transfer from the previous home owner to the lenders, there could be cost associated with evictions, liens on the property, insurance, property taxes that the lender normally would have to care of, before title transfer is completed. With that said – your first offer should be your best offer.
Buyers must be pre-approved prior to making offers, unless the offer is cash.
Don’t Make Your Offer Based on the Listing Price: If you really want the home, work with your agent to make a realistic offer, based on recent comparable sales in the neighborhood, not just on what you think you can get away with. You can waste a lot of time, spin a lot of wheels and lose out on a lot of properties making lowball offer after
lowball offer on distressed homes. Sit down with your agent, review the ‘comps’ and make a smart offer that reflects a good value for you, adjustments made for the property’s condition, is within your budget, and is not bizarrely out of the realm of the fair market value of the property. As stated
above: many banks list the home with an attractive low price. When a buyer makes his offer for this price, it can (and usually is) rejected.
Take Lowball Offer: Banks
owe their shareholders and investors a duty to get as much as they can for
these properties. Just because you see it’s on the market and listed as a short
sale or a foreclosure doesn’t mean they’re going to give it to you for a fraction of its worth. The bank’s goal is to get a purchase price as close as possible to the home’s fair market value, as determined by the recent sales prices of similar, nearby homes, with some adjustments made for the property’s
condition. Many banks would rather see the listing agent reduce the price by a
moderate amount, and wait to see what offers come in, than to accept an offer
30 percent below the asking price just because there are no other offers on the
STAY FLEXIBLE: Staying as flexible as possible with your moving plans as long as possible. Best practice is to plan
on some overlap between the time you can be in your last place and your scheduled move-in date.
The Bank is in Control, not You (the buyer), or the Agents: Even though the bank might take weeks or months to sign or handle its deliverables, the bank will insist that the buyer show up, sign or send a check quick and quick.
“It is what it is” – the price you pay to buy from the bank. Realize that working with the bank on the bank’s terms are unavoidable when you buy a distressed property. Expect the bank will drag its feet, despite expecting you to keep every deadline.
It’s NOT up to Your Agent or the Listing Agent: No amount of calling, pleading, prodding or nudging is
likely to get you much information on how your offer is being handled or what (if any) progress is being made.
Consider to keep House Hunting: Discuss with your Realtor about continuing your home search, until you have an answer back. Most of the torment in these situations arises when a buyer feels they passed on properties that would have really worked for them when they pinned their hopes on a distressed home.
As a home buyer, you’re on your way to being better prepared for getting a mortgage and buying your first or next home. Don’t take chances. Do your research and ask lots of questions. When you work with a team of your agent, lender, insurance agent, title, home inspector with solid understanding of real estate processes, your chance of success is greater. Feel free to
contact me for my recommendations or for a free consultation. My goal is to provide you with information that will help you in your decision making process.
If you want to jump ahead – go to my blog and start reading. 🙂
No Cash When Applying for a Mortgage: https://ddesousa.com/no-cash-when-applying-for-a-mortgage/
Closing Costs: https://ddesousa.com/closing-costs-what-are-they/
Credit & Buying a Home: https://ddesousa.com/credit-and-buying-a-home/
First Time Home Buyers: How to Purchase Part 1: https://ddesousa.com/part-1-first-time-home-buyers-florida/
Pet Friendly Lender / Free Pet Adoptions: https://ddesousa.com/why-pet-friendly-lender/