How to Buy a Banked Owned Property

Glen Gallucci
August 4, 2008 — 1,885 views  
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Bank owned properties are more commonly known as REO's. That stands for "Real Estate Owned." I often get asked why they are called REO's and not BOP's or "Bank Owned Properties?" My answer is always the same..."Beats me!"

You have heard about bank owned properties from friends, relatives and business associates or perhaps your local real estate agent and how some investors are making a score from buying and selling these properties. In some cases this is very true, but it is critical to understand the process along with some common misunderstanding about buying bank owned properties.

The first common misunderstanding is that there is a difference between REO's and a foreclosure property. An REO is a property had been foreclosed and that went to sheriff sale (auction) and did not sell to any bidders. Now that property goes back to the lender which in most cases is the bank. This happens when the loan value on the property is very close or exceeds the value of the property. Investors are at the auctions to get a deal on a property, not to pay fair market value or worse, over the fair market value.

The Foreclosure Process

When a property is being foreclosed and sent to a sheriff sale or auction, the minimum bid usually includes all the money owed to the lender. These amounts are a total of the balance of the loan, attorney's fees along with any other costs which have be incurred during the foreclosure process.

When you bid at a sheriff sale for any properties, be prepared to have a bank check in the amount of 20% of your bid price. You also get the property in "as-is" condition. This may include getting the house with the old owners still living there!

It's the "as-is" part where many new investors can get hurt financially. Many times you cannot inspect the inside of the house. This can become a very risky investment as many times the inside of the house has had all the copper pipes removed, the toilets or waste line are clogged, the basement is full of mold, the inside foundation walls are cracked and unstable, the plywood on the roof is in need of replacing and a host of other problems. This type of investment is best left to the professional and experienced investors.

Since the amount of money that is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. This is the time that the property "reverts" back to the lender or the bank. It now becomes an REO, or "real estate owned" property.

REO Properties

After an unsuccessful sale, the bank now owns the property. The loan on the property now no longer exists on record. At this time the bank will take care of things such as evicting the prior owners, boarding up the house, winterizing the house, and usually maintaining the outside of the property.

When someone now purchases the bank owned property, they will receive a new deed with clear title. With bank owned properties, you may now inspect the house for any defects. You may also bring a home inspector or contractor with you to help you in this process.

Not all bank owned properties for sale are bargains. You must do your due diligence. You must figure the renovation costs and add that number to your purchase offer. Then calculate your holding costs and financing costs and add that to your purchase and renovation cost. Then subtract that from your potential selling price. This is your profit. And don't forget the real estate commission!

Buying a foreclosure or REO is only a bargain if you buy the property at the right price, and most times it's not the asking price from the bank!

When banks sell their REO's, they generally do it in the same manner. They initially try to get the best price for the property that they can. It is a myth that banks just dump their properties to the first qualified bidder. Although, many times you can get it at a bargain price if you have a little know how and patience.

Making your offer for these properties is quite simple. Most banks give their properties to real estate companies to sell for them. The real estate company usually gives the bank an idea of what the value of the property is before taking the listing. This is called getting a BPO or "brokers price opinion." And I must say it is usually higher than anyone would pay for the property.

When you are interested in making an offer on one of these properties, you make your offer through a real estate agent. It doesn't have to be the same agent who has the listing. REO's are put on the multiple listing service so all real estate agents have access to the same information. When you make an offer to the bank, expect to get a counter offer. The bank will try to get the best price and get you to come up on your offer. They also need to do this as part of their process as well.

Be prepared to offer your counter offer. Now the bank will send your counter offer to their real estate department for review. You may be notified of their decision within 48 to 72 hours depending on their work load.

Remember that the banks always sell their properties in "as-is" condition but will let you inspect the house at your expense. They want to sell the house with the least amount of participation as possible. This doesn't mean you can't try to get them to make repairs or fix any damage to the property. But I must tell you, this is usually the last thing they want to do. So making your offer subject to them making repairs may be a waste of time. Banks don't like a lot of contingencies in the offers that are submitted. So either make your offer giving the bank the opportunity to make the repairs, or give you a credit off your offer or as I like to do, make the offer based on the repairs you will be making to the property.

If you do make offers without inspecting the property, you may include an "inspection contingency" clause in the contract that allows you to cancel the contract if you discover unanticipated repairs that you are not willing to undertake. And this may include costly items such as any structural damages to the house.

When making offers on REO's you can have your real estate agent do some fact finding as well. Some things they can find out is there were any prior inspections done on the property for your review. Has the bank agreed to make any repairs on the property? What is the time period before the bank accepts or rejects offers. Are there any disclosures the bank may have for any potential buyers?

It is customary for all offers to be faxed to the bank by the listing real estate agent. Don't expect any answer or communication from the banks on weekends or holidays. They still keep "bankers hours" when it comes to REO's.

The best way to present your offer is to give a refundable deposit check along with a pre approval letter from your mortgage broker to show you can qualify to buy the property. What is the best way to get the attention of the bank concerning your offer? Put in an ALL CASH OFFER! Yep, cash talks even to the banks! If you make an all cash offer you must send proof that you do have the cash to buy the property. Either send them a bank statement showing you have enough to cover the purchase price, copy of a CD in your name, or from a lender that has the funds to provide to you at closing.

In summary, not all REO's are created equal. You must do your homework, present a strong offer and make sure there is plenty of profit for you if you intend to re-sell the property in the near future. If you are planning to live in the house, you can obviously pay more than an investor as you will be living in the home and you will have time on your side for the property value to increase. But you can still buy these properties below market value, fix them up and wind up with equity in the house when all is said and done.

Glen Gallucci

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Glen Gallucci, also known as "A Seasoned Investor" actively buys, rehabs and sells residential properties. He has invested, renovated and built numerous residential and commercial projects during his 30-year career. A well diversified businessman; Glen is also engaged in real estate education. From the trenches, and with his down to earth "tell it like it is" teaching style, makes Glen the "real deal" and a sought after speaker around the country as his business experience proves invaluable for the beginner as well as the seasoned investor regarding the successful structure of starting a wholesale or rehabbing business as well as securing private lenders when investing in "quick turn real estate."