Bank Owned Properties - a Great Investment?
A lot of information, some good and some bad, is floating around about making money by investing in homes that have been foreclosured on.   Often the information offered is for sale, with the promise that you can make a lot of money with very little effort once you know “the secret to success”.  The truth is that there are no secrets, there are many risks, and to make money requires quite a bit of effort and intelligent investigation.

What’s an REO?
REO stands for “Real Estate Owned”.  These are properties that have gone through the foreclosure process, and are now owned by the bank or mortgage company.  These are not the same as properties that are up for sale at a foreclosure auction. 

When buying a property at a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accumulated during the foreclosure process.  You must also be prepared to pay with cash in hand. On top of all that, you’ll receive the property 100% “as is”. That could include existing liens (including mechanics and IRS liens) and possibly tenants that need to be evicted. 

By contrast, a bank-owned home is a much cleaner and less risky transaction.  An REO property is a property that was not sold during the foreclosure auction, and it is been returned to the bank that held the mortgage on it. By the time it comes back on the market as an REO, the bank has removed all liens, evicted any tenants if necessary, and generally prepared the home for issuance of a clean title to the buyer at closing.  The biggest risk to buyers is that REO’s are generally exempt from normal disclosure requirements.  In California, for example, banks are exempt from giving a Transfer Disclosure Statement, a document that normally requires sellers to tell you about any defects they are aware of. Banks may also require non-refundable deposits for their properties.

Is it a Bargain?
It’s commonly thought that an REO is always a bargain.  This just isn’t true.  You have to be very careful about buying an REO property if you intend to make money off of it.  Banks generally want to sell quickly, but they are also strongly motivated to get as much as they can for it.  When considering an REO for purchase, look closely at comparable sales in the neighborhood, and be sure to factor in the time and cost of any repairs or remodeling needed before you can resell the home. Remember - banks are not attached to these homes in the same way that homeowners are. Banks make sales decisions based simply on their own financial scenarios. Often banks will hold steady at close to fair market value for 3-6 months, and then decide to just get rid of the property and drop their price radically. Keep an eye on bank-owned properties and you may be the first buyer to make an offer when they suddenly become a deal.

Buying an REO
Most banks have an REO department that handles these kinds of sales.  Most REO departments will use a local listing agent to get their REO properties advertised in the local MLS.  Before making your offer, talk to either the listing agent or REO department and find out what they know about the condition of the property, and what their process is for receiving offers. 

Since banks usually sell REO properties “as is”, you’ll want to try and include an inspection contingency that gives you time to inspect for hidden damage and cancel the offer (keeping your deposit money) if you find anything worrisome. However many banks do not accept refundable deposits for any reason. In such cases, you might want to submit a very small deposit with your offer, and include a clause that increases the deposit when your inspections are complete. 

Your offer will be  much more attractive if you can include a pre-approval letter from a lender, and it will be more appealing yet if you take the time to get pre-qualified with the bank that owns the property.  After you’ve made your offer, you should expect the bank to make a counter offer.  Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer.  Be prepared to BE PATIENT - unlike an offer made on a standard home for sale by owner, you’ll be dealing with multiple bank employees, and they don’t work evenings or weekends.  It’s not unusual for the negotiation process to take days or even weeks.