5 Tips in Buying a Bank Owned REO
The new home sales index came out today and it reported that 46% of new home purchases in this market are foreclosures.
Construction is down 65%, building permits are at an all time low, and the deepening housing values are making it harder for homeowners to refinance to lower rates or pull cash out of their homes.
Is it all doom and gloom? Not for the first time home buyer or investor looking to make a profit on buying a foreclosure.
The following are ten tips that will ensure you a smooth process from loan application to closing and funding your first deal.
Foreclosures are at a record number right now, and each and every day, more and more of these properties are coming on the market, which means opportunity for you.
The buyer.
TIP #1 Get pre-qualified This is the first and most important step in the home buying process.
With the tightening of credit with all lending institutions, you need to be prepared on this step, and get with your mortgage broker and loan officer to find the right mortgage product for you.
Within minutes, a good loan officer, can tell you how much of a home you will qualify for, with the information you give them for your income and assets.
Normally Debt to Income Ratios will not exceed 45%, however, even in this market, we have seen automated loan approvals up to 65%.
Getting a pre-qualification letter from your loan officer is vital to the home buying process, and should be given to either your real estate agent, or the agent of the seller, to prove that you are fit to buy the home, and that you willing, able, and ready to be a buyer.
TIP#2 Receive Daily and Weekly MLS Lists Let's quickly define what a bank reo is.
It simply means that the property owner went into a foreclosure, and no one bought it for cash at the auction.
When this happens, the foreclosing bank, will hold onto the asset, which is (REO) Real Estate Owned, by the bank.
Each and every day that this property is not sold, the bank is losing money on this property and paying interest on it.
Normally, with many lending institutions, their fiscal year ends Dec 31st, so they are more willing to negotiate on better terms for you, the buyer, so they can finally get this asset off their books, post their 4th quarter loss, and move forward.
Once a property is bought back from the bank as an reo, it is normally listed with a selling agent assigned from the bank, to list the property on the MLS.
Multiple Listing Service.
A good way to get these lists emailed to your inbox, would be to first find a Real Estate Agent that you are comfortable working with, and who can accommodate your request to start receiving these reo lists.
You can even tailor it to equity position, zip code, square feet, seller contributions, etc.
TIP#3 Be Prepared To Make a Solid Offer Many potential buyers and investors get excited when they are sitting with their real estate agent, who is preparing to write an offer to the seller.
An offer is only binding when it is accepted by the seller, so many people take advantage of this.
A bad approach for putting an offer together would be to lowball the seller and offer way less then the property is worth.
Many investors will subscribe to this strategy in putting many offers in on properties daily, 40% to 50% below the asking price, in an attempt to hopefully get a really great deal on the property.
When putting your offer together, make sure that you have a solid offer.
What I mean by this is try to avoid having contingencies that might cause the seller to not accept your offer.
If you are trying to sell your home now, and take the profits from that sale to buy your new home, is an example of something being contingent on you being able to purchase the home.
A banks will look at all offers, and if there are multiple offers on a bank owned properties, they will usually see who will pay the most for the property.
Also, be aware that real estate investing is a career for many people, and they are here in Colorado in big numbers.
Hedge fund groups, private investors, wall street types, all have representatives here in Denver, waiting for properties to come on the market at a deep enough discount, so they can buy it for cash, and flip it for a profit.
It happens every day.
Usually the bank is willing to go with the investor on a multiple offer purchase, because the investor will pay cash, while you are financing the loan for up to 30 years.
Some banks have even commented on the type of loan you are getting and will go with the investor for that reason.
A recent example is of a lender who said FHA were not strong, and that worried the lender, with the tightening of credit.
The lender opted to go to the investor who was paying cash.
TIP#4 Be Aware Of Cash Investors As Property Drops On the Asking Price A perfect example of this was on a duplex for sale in the Denver, CO area.
The asking price was $165,000 and the comparables in the neighborhood had the property listed at a 10% discount.
This was in quarter 2 of 2008.
My client put his offer in at $155K, and it was denied or rejected.
In early November of this year, which is Quarter 4, which is the indication of the last quarter of fiscal year business for many banks and companies.
The property still did not sell, and the bank dropped the price to $130K.
That is another 10-20% drop in price, and my client offered the fill ask of $130K.
What happened at this point, was that the investors watching the property, knowing their profit points, entered on this deal in a cash only deal for $130K as well.
The bank reviewed both offers, however the deal went to the investor because they had cash to close in full for $130K right away.
You need to be aware that there are many great real estate deals out there, however the deeper the discount, the more eyes are on the property.
A smart thing to do would be to try and obtain property at least 10-15% below value, since many of these cash only investors are looking for equity positions on the purchase of 30%-40% below market value.
TIP#5 Have The Bank Pay All Closing Costs and Minor Fix-Ups On owner occupied properties, you can receive up to 6% seller concessions on your loan.
What that means is that the seller will agree to pay up to 6% closing costs, to induce you to buy the property.
A good example is of a VA loan I did for my clients last month, where they bought the property using their VA benefit for $315,000.
Under VA guidelines, the seller can pay up to 4% of the closing costs, which in this case was $12,600.
The entire loan was paid for by the bank, they bought down their interest rate to a lower 5.
5% rate, in addition to the bank fixing up the built in pool in the backyard, and putting in a new pool liner and cover.
Banks will do whatever is necessary to induce the buyer to move in, if they have a solid offer.
Construction is down 65%, building permits are at an all time low, and the deepening housing values are making it harder for homeowners to refinance to lower rates or pull cash out of their homes.
Is it all doom and gloom? Not for the first time home buyer or investor looking to make a profit on buying a foreclosure.
The following are ten tips that will ensure you a smooth process from loan application to closing and funding your first deal.
Foreclosures are at a record number right now, and each and every day, more and more of these properties are coming on the market, which means opportunity for you.
The buyer.
TIP #1 Get pre-qualified This is the first and most important step in the home buying process.
With the tightening of credit with all lending institutions, you need to be prepared on this step, and get with your mortgage broker and loan officer to find the right mortgage product for you.
Within minutes, a good loan officer, can tell you how much of a home you will qualify for, with the information you give them for your income and assets.
Normally Debt to Income Ratios will not exceed 45%, however, even in this market, we have seen automated loan approvals up to 65%.
Getting a pre-qualification letter from your loan officer is vital to the home buying process, and should be given to either your real estate agent, or the agent of the seller, to prove that you are fit to buy the home, and that you willing, able, and ready to be a buyer.
TIP#2 Receive Daily and Weekly MLS Lists Let's quickly define what a bank reo is.
It simply means that the property owner went into a foreclosure, and no one bought it for cash at the auction.
When this happens, the foreclosing bank, will hold onto the asset, which is (REO) Real Estate Owned, by the bank.
Each and every day that this property is not sold, the bank is losing money on this property and paying interest on it.
Normally, with many lending institutions, their fiscal year ends Dec 31st, so they are more willing to negotiate on better terms for you, the buyer, so they can finally get this asset off their books, post their 4th quarter loss, and move forward.
Once a property is bought back from the bank as an reo, it is normally listed with a selling agent assigned from the bank, to list the property on the MLS.
Multiple Listing Service.
A good way to get these lists emailed to your inbox, would be to first find a Real Estate Agent that you are comfortable working with, and who can accommodate your request to start receiving these reo lists.
You can even tailor it to equity position, zip code, square feet, seller contributions, etc.
TIP#3 Be Prepared To Make a Solid Offer Many potential buyers and investors get excited when they are sitting with their real estate agent, who is preparing to write an offer to the seller.
An offer is only binding when it is accepted by the seller, so many people take advantage of this.
A bad approach for putting an offer together would be to lowball the seller and offer way less then the property is worth.
Many investors will subscribe to this strategy in putting many offers in on properties daily, 40% to 50% below the asking price, in an attempt to hopefully get a really great deal on the property.
When putting your offer together, make sure that you have a solid offer.
What I mean by this is try to avoid having contingencies that might cause the seller to not accept your offer.
If you are trying to sell your home now, and take the profits from that sale to buy your new home, is an example of something being contingent on you being able to purchase the home.
A banks will look at all offers, and if there are multiple offers on a bank owned properties, they will usually see who will pay the most for the property.
Also, be aware that real estate investing is a career for many people, and they are here in Colorado in big numbers.
Hedge fund groups, private investors, wall street types, all have representatives here in Denver, waiting for properties to come on the market at a deep enough discount, so they can buy it for cash, and flip it for a profit.
It happens every day.
Usually the bank is willing to go with the investor on a multiple offer purchase, because the investor will pay cash, while you are financing the loan for up to 30 years.
Some banks have even commented on the type of loan you are getting and will go with the investor for that reason.
A recent example is of a lender who said FHA were not strong, and that worried the lender, with the tightening of credit.
The lender opted to go to the investor who was paying cash.
TIP#4 Be Aware Of Cash Investors As Property Drops On the Asking Price A perfect example of this was on a duplex for sale in the Denver, CO area.
The asking price was $165,000 and the comparables in the neighborhood had the property listed at a 10% discount.
This was in quarter 2 of 2008.
My client put his offer in at $155K, and it was denied or rejected.
In early November of this year, which is Quarter 4, which is the indication of the last quarter of fiscal year business for many banks and companies.
The property still did not sell, and the bank dropped the price to $130K.
That is another 10-20% drop in price, and my client offered the fill ask of $130K.
What happened at this point, was that the investors watching the property, knowing their profit points, entered on this deal in a cash only deal for $130K as well.
The bank reviewed both offers, however the deal went to the investor because they had cash to close in full for $130K right away.
You need to be aware that there are many great real estate deals out there, however the deeper the discount, the more eyes are on the property.
A smart thing to do would be to try and obtain property at least 10-15% below value, since many of these cash only investors are looking for equity positions on the purchase of 30%-40% below market value.
TIP#5 Have The Bank Pay All Closing Costs and Minor Fix-Ups On owner occupied properties, you can receive up to 6% seller concessions on your loan.
What that means is that the seller will agree to pay up to 6% closing costs, to induce you to buy the property.
A good example is of a VA loan I did for my clients last month, where they bought the property using their VA benefit for $315,000.
Under VA guidelines, the seller can pay up to 4% of the closing costs, which in this case was $12,600.
The entire loan was paid for by the bank, they bought down their interest rate to a lower 5.
5% rate, in addition to the bank fixing up the built in pool in the backyard, and putting in a new pool liner and cover.
Banks will do whatever is necessary to induce the buyer to move in, if they have a solid offer.
