Foreclosure or Bank Owned (REO) Property...
Know the Facts!
REO vs Foreclosure
A REO (Real Estate Owned) property is a property that is owned by the bank or mortgage company after an unsuccessful foreclosure auction. Most property owners sell the property and pay off the bank if they have enough equity. If they do not have enough equity and a short sale or deed in lieu of foreclosure is not possible, the property ends up at a foreclosure or trustee sale.
Foreclosure or Trustee Sales start with a minimum bid that includes the balance of the loan, any accrued interest, processing costs and attorney fees. At the auction, you must bring a cashier's check for the full amount of your bid. The successful bidder usually receives the property in "as is" condition including any other liens that may be on the property as well as tenants.
Usually the loan amount is more than what the property is worth on a Trustee Sale, thus few foreclosure auctions are successful. When this happens, the property reverts back to the bank and becomes a REO or "real estate owned" or bank owned property.
If you want to buy REO property, it can be risky, so do your homework! It is not always a bargain! Be sure to do comparables, analyze repair costs and any other possible costs you may incur. Obtain a Preliminary Title Report, Natural Hazards Report and property tax information. Know what the maximum price is you should pay to make it worthwhile before you make an offer. Your real estate professional will do all of these for you.
It is best to use a Realtor to represent you if you choose to make an offer. Your Realtor knows how to submit an effective offer along with your pre-qualification letter from your lender. Your Realtor also knows the right questions to ask before the offer is made such as, what work has the bank agreed to do, how long will the bank take to respond to your offer, has the bank done any inspections, how long are the contingency times, etc. Banks want their offers faxed or emailed and rarely meet with you personally to receive your offer.
The bank has different goals than you do. They want the best possible price and most have a separate department within their organization that handles their REO sales. When they receive your offer to purchase, they may counter your offer with a higher price or require you submit your best and final offer if there are multiple offers. Rarely will you get the chance to negotiate when multiple offers are submitted. If there are no multiple offers, you and your Realtor may be able to negotiate with more counter offers until you come to an agreed price and conditions. Banks are accountable to their shareholders and investors and do not just "dump" their real estate.
The bank will most likely sell the property in "as is" condition, meaning they will do no repairs or give credits for needed repairs. Although you are not required to purchase a professional property inspection, it is highly recommended you do. You have a contingency window to do inspections before the final purchase to be sure the property is not in need of some costly major repair. In these cases, the bank may re-negotiate the repairs rather than risk a failed escrow and have to put the property back on the market. Most of these repairs are health or safety issues and the bank usually gives a credit to the buyer at the close of escrow based on a licensed contractor's estimate.