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REO Workshop

So you'd like to buy a Banked Owned Property (REO)?

If you are interested in purchasing or want to be more educated in what is a bank owned real estate (REO) then here are some information that you should know.

Bank Owned Property (REO) vs. Foreclosure

A REO (Real Estate Owned) is a property that is reverted back to the mortgage company after an unsuccessful foreclosure auction. Most foreclosure auctions do not result in bids. If there was enough equity in the property to satisfy the loan, then the owner would have probably sold the property and repay the bank. That is why the property would end up at in foreclosure or a trustee sale.

Foreclosure sales or trustee sales begins with a minimum bid that includes the loan balance, any accrued interest, attorney fees, and/or any costs associated with the foreclosure process. In order to bid at for properties, you must have a cashier's check in your hand for the full about that you are bidding. If you won the bid, you would be purchasing the property in an "AS-IS" condition, which may include the property being still occupied. There may also be other items such as liens against that property.

Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. So then, the property reverts back to the bank. Then it becomes an REO, or "real estate owned" property."

REO Properties for Sale

Since now the bank owns the property, the mortgage loan that was owed no longer exists. The bank will handle the eviction (if the property is still occupied) and/or may do some repairs. They will negotiate with the IRS for removal of the tax liens and pay off any homeowner's insurance dues. As a purchaser of an REO, you the buyer will receive a title insurance policy and the opportunity to investigate the property.

At times, a bank owned property might not be a great bargain. Buyers are advised to do their own homework or locate an experienced agent before making an offer. Make sure that the price paid (if successful) is comparable to other homes in the neighborhood and consider the renovation cost to the property. Don't get caught up in a bidding war and pay over the market value.

How Banks Sell REO's

Each bank or lender has their own procedure, but they all have the same goal; to sell off their toxic assets. Of course, they want to get the best price possible and have no interest in selling the real estate at a sustainable low price. Generally, banks have an entire department set up to manage their REO inventory.

Once you make an offer to purchase an REO, banks generally might present a "counter offer" with a higher price than what you had to offer. They have to demonstrate to their investors, shareholders, and auditors that they attempted to get the highest price possible. Be ready to counter their counter offer until they accept your offer.

Property Condition

Most of the time the banks sell a property in an "AS-IS" condition. Most will provide a Section 1 pest certification, but now unless you include it in your offer and negotiate the point. They will allow you to get all the inspections you desire (at your own expense), but they may not agree to do any repairs. Your offer should also include an inspection contingency period that would allow you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct.

Even though you may agree to the "AS-IS" condition of the property, you may want to give the bank another opportunity to make repairs or give you credits after you've completed your inspection. Sometimes they would re-negotiate to save the transaction instead of putting the property back on the market and waste time.

Banks do not want to see a lot of proprietary disclosures. These disclosures are exempt from the California Seller's Transfer Disclosure Statement (TDS-14). If the transaction has a real estate agent involved, either representing the seller or you, the agent(s) are required to provide you their disclosure statement (scroll down the page for VS Realty & Loans, Inc. disclosure statement).

Most banks will not provide financing on their REO's, but you may want to ask, especially if the property is heavily damaged and the buyer is purchasing the property in "AS-IS" condition.

Making an Offer

Before making an offer, we will contact the listing agent (if we our company is the selling agent also, please disregard) and ask for the following information:

  • Are there any inspection reports?
  • What has the bank agreed to?
  • Are there any special "as-is" form?
  • How long does it take the bank to accept an offer?
  • How does your agent deliver the offer?

The listing agent needs your original documentations. There are no formal presentations and keep in mind that transactions may be delayed due to the seller (the bank) are closed during evening hours and weekends.

Since there's no face-to-face presentation to the bank, please provide the listing agent with a prequalification (please visit the Loan Preparation page of our website for more information).