The truth about bank owned properties
There is a lot of interest in buying bank owned properties these days. A lot of information, some good and some bad, is floating around about the subject.   Often the information offered is for sale, with the promise that you can make a lot of money with little effort once you know “the secret formula”.  The fact is that there are no secrets, and to make money does require effort.

What’s an REO?
REO stands for “Real Estate Owned”.  These are properties that have gone through foreclosure and are now owned by the bank or mortgage company.  This is not the same as a property up for foreclosure auction.  When buying a property during 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.  And on top of all that, you’ll receive the property 100% “as is”.  That could include existing liens and even current occupants that need to be evicted.  A REO, by contrast, is a much “cleaner” and attractive transaction.  The REO property did not find a buyer during foreclosure auction.  The bank now owns it.  The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing.  Do be aware that REO’s may be exempt from normal disclosure requirements.  In Arizona, for example, banks are exempt from providing a Seller Property Disclosure Statement(SPDS), a document that sellers normally provide buyers to inform them of any defects/repairs that they are aware of.

Is it a bargain?
It’s commonly assumed that any REO must be a bargain and an opportunity for easy money.  This simply isn’t true.  You have to be very careful about buying a REO if your intent is to make money off of it.  While it’s true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it.  When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale.  The bargains with money making potential exist, and many people do very well buying foreclosures.  But there are also many REO’s that are not good buys and not likely to turn a profit. 

Ready to make an offer?
Most banks have a REO department that we will work with in buying a REO property from them.  Typically the REO department will use a listing agent to get their REO properties listed on the local MLS.  Before making your offer, I will contact the listing agent and find out as much as I can about what they know about the condition of the property and what their process is for receiving offers.  Since banks almost always sell REO properties “as is”, we will be sure to include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it.  It is always prudent to hire a home inspector on any home purchase.  As with making any offer on real estate, you’ll make your offer more attractive if you include documentation of your ability to pay, such as a pre-approval letter from a lender, and most REO properties require one as a condition of the offer.  It is also not uncommon that the bank require a pre-approval letter from their institution as well to ensure your financial ability to purchase.  After you’ve made your offer, you can expect the bank to respond within 3-5 days.  If the bank counters your offer, as they often do, then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer.  Realize, you’ll be dealing with a process that probably involves multiple people at the bank, and they don’t work evenings or weekends and much of the process happens through email until a final agreement is struck.  Once that happens the bank will issue its own version of purchase contract for you to sign and it is considered executed at that point and the inspection period begins.   Be aware that it is not unusual for the process of offers and counter offers to take days or even weeks.  From this point on, the process runs quite like a typical purchase with the same time frames and due diligence.