Buying a Sacramento Bank Owned Home (REO)

If you are a buyer involved in the current market, chances are you have come across at least one REO property.  REO stands for Real estate Owned and it means that the property was acquired through foreclosure by the lienholder, and is now being sold in an effort to recover that lienholders losses.  While there can be some disadvantages of buying a bank owned home, one thing is for certain:  If you can handle the risk, there is a potential for some incredible deals. 

Our company has been on both sides of the transaction when it comes to bank owned homes.  We have represented many buyers, as well as had the experience of being on the listing side too.  As you know, bank owned homes continue to flood the nation’s real estate market, and if you are involved in enough if these types of transactions you start to learn the tricks to close the deal.  Below we will break down the necessary steps you need to take, as well as things you will need to consider when you decide to pursue REO’s.

Hire an experienced Real Estate Agent:

This is really important! In the last couple of years the offer process has seen many changes.  You will need an experienced agent who can educate you on what to expect, and what to include with your offer.  It is also important to hire an agent who is well connected, who has dealt with the listings agents in the past.  The more you know, the less surprised you will be with the process and this information should come
primarily from your agent.  Your agent should know how much to offer based on the current market value of the home.  Your agent should also know ways to make your offer stand out and communicate with the listing agent once your offer is submitted.  Communication is key!

Do Your Research

Make sure you physically inspect the property.  There are many investors out there who will offer on an REO sight unseen.  However the banks have gotten smarter, and have ways of verifying that you have actually seen the property.  Have your real estate agent determine the market value of the property based on recent sales, as well as the current condition of the home.  It is also a good idea to consider pending sales prices when determining value.  You don’t want to pay too much for a property, but you also don’t want to low ball either.  Foreclosure properties are usually considered “distressed”.  It is common that a bank owned property will need significant repairs due to deferred maintenance or poor care of the home.  This might seem like a huge drawback to buying a foreclosed property, but if you can purchase at the right price, the money saved can be used towards needed repairs.  Keep in mind that the bank will not make any repairs, but you may be able to negotiate a price reduction once you are under contract.  Of course you will need to justify a price reduction with contractor bids showing what it will cost to complete the repairs.

Bank Owned Homes are sold “as-is”

Since the bank acquired the property through foreclosure, there is no way for them to disclose any property defects that may be present.  The seller will be considered “exempt” from most statutory disclosures normally required when selling a home.  Furthermore, the bank will not make any repairs needed on the home.  Normally a buyer can conduct their inspections and ask the seller in writing to make itemized repairs.  This is not the case when you are dealing with a bank owned home.  If you are a buyer who wants work completed on the property once you are under contract, expect the seller to cancel your deal and move on to another buyer who will not make any of those requests.  Sometimes you can negotiate a price reduction if you can prove the costs.   Keep in mind that a lot of bank owned properties are severely distressed and they are already priced low to reflect their condition.  Just remember that if you are buying at the right price, the money you are saving is well worth it to make repairs.

Have your finances in order

If you are a cash buyer in the current market, you have an upper hand when submitting offers. Being a cash buyer gives you the ability to negotiate a better deal.  Banks will prefer to deal with cash buyer because they know the transaction will be quicker, and they will recover their money in a shorter amount of time.  As a cash buyer you will need to submit proof of funds with all of your offers.  A simple bank letter is not acceptable.  You will need to show funds with something like a bank statement that shows how much cash on hand you have.

If you are planning on obtaining financing for the purchase, it is important to have a pre-approval.  You will need to submit that with your offer as well.  It is also smart to get a pre-approval with the same bank that owns the subject property.  You are not obligated to use that lender; however, it makes you a stronger buyer in the seller’s eyes.  You will also want to consider a higher down payment.  It is better to have a pre-approval letter as opposed to a pre-qual letter.

Make your offer as soon as possible, and make a reasonable offer

If you find a property that you are interested in, don’t delay in making the offer.  You will need to keep a sense of urgency.  Especially in a seller’s market when inventory is low.  If you wait even a day too long, chances are another buyer will have already swooped in and offered before you.

Don’t waste your time sending in low ball offers.  REOs are already priced low and sometimes list price has little or no bearing on what the bank will take.   Keep in mind that it is not a good idea to ask for “the moon” so to speak in your offer.  Banks do not pay for repairs, home warranties, etc.  Usually they have a limit on what they will be paying in closing costs as well.  Your offer on a bank owned home should be as clean as possible, if you do decide to ask for some of these things be prepared that the bank will counter all of it out.  Normally this is an extra step that
the bank will not deal with, and they will more than likely pick a buyer that has a cleaner offer.

Make your offer stand out, show that you are a serious buyer

Above we were talking about submitting a “clean” offer when you decide to pursue a bank owned listing.  There are things that should not be included in the offer terms such as home warranties, etc.  However, there are a few things that should be included in your offer that will make you stand out.  You will want to consider a shorter escrow period.   If you have cash, you will not need the standard 30 day escrow required for financing.  You should indicate an escrow period of 21 days or less.  If you decide to have a home inspection (recommended), remember that the bank will not contribute anything towards repairs.  For this reason, your inspections should be for informational purposes only.  On your offer, consider shortening your 17 day inspection contingency period down to 10 days or less.  Banks like to see 7 days for inspections.  One of the other tricks has to do with your earnest money deposit (EMD).  It is always good to offer a higher EMD.  A standard EMD is 1% of the purchase price; however, by offering a hefty EMD you show that you are a serious buyer, especially if you are to obtain financing, this trick is very important.  Banks will always lean towards cash buyers, but cash buyers usually offer less than buyers who are obtaining financing.  Some banks will take a financed offer, but you will need to show that you have more skin in the game. You can do this with a high down payment and/or a high earnest money deposit.

One last thing relates to title and escrow.  Technically title and escrow is a mutual decision between the buyer and seller.  However, when you are dealing with banks you will see that they tend to go by their own rules.  If you want to pick where title is held, be prepared to pay ALL closing costs and title fees.  It is better not to rock the boat, so consider letting the bank choose title and escrow.  Even if you are ok with paying for all escrow and closing costs, there is a higher chance that your offer will not be chosen.  Unfortunate but true!

Expect Multiple Offers

Especially in a seller market when inventory is low.  Listings can receive 20 offers or more in some cases.  If the home is desirable and priced low, expect that many people are interested too.  Most of the homes in the Sacramento region that are listed are bank owned or “distressed” properties.  There is a potential for some great deals, but you need to develop a thick skin with your competition.  Once you make your offer, be prepared to learn that there are “multiple offers”.  This could mean that there is one other offer besides yours, or there could be 20.  There is no way to know for sure.  Sometimes your agent can get more information from the listing agent, but normally that information is not given out.  At this point you may be asked to submit your “highest and best”.  In this situation don’t waste your time trying to strategize, or figure out where the
other buyers are at.  Just offer a little more in purchase price.  We always advise our clients come up at least $1,000.  This is just to show you are willing to work with the bank.  It usually works, but sometimes there is someone else who is willing to overpay.  Don’t over pay!  If you absolutely
refuse to come up in price, then change some of your offer terms like your escrow period, or inspection timelines.  If you submit an unreasonably low offer, keep in mind that you may not even be asked for “highest and best”.  Sometimes the bank will choose a couple of strong offers in a multiple offer situation and throw out the rest.  It is important to come in strong from the beginning.

Be patient and don’t get discouraged

Being a buyer in the current market takes patience and a thick skin.  Be prepared to make several offers.  Remember, you are competing with
many other buyers/investors with deep pockets.  If you miss out on a property that was “the one”, make sure your real estate agent keeps in touch with the listing agent during the escrow.  Escrows fall out all the time, especially with distressed sales.  If you stay on top of things, you may be able to resubmit your offer again before the property goes back on the market. 

An Accepted Offer

When you have received word that the bank is accepting your offer you will need to act fast.  First the bank will send you what’s called a “counter addendum”.  It is basically a new purchase contract that supersedes the original that you submitted.  It will tell you how long you have to close, how much the seller will contribute to closing costs and how many days you have to conduct inspections, etc.  All of the banks terms will be on that addendum.   The counter addendum is usually at least 10 pages long or more.  Your real estate agent will go over everything with you and answer any questions.  Remember that you do not have an agreement with the bank until you sign and agree to the terms on that counter
addendum.  Until the bank receives it back from you signed and they have in turn signed the addendum, you don’t have a deal.  In this time period another buyer could make a stronger offer on the property, and the bank could decide to go with that buyer instead.  For this reason you will need to act quickly and sign the addendum if you want the property. 

After that, be patient….You may not receive title and escrow information for several days in some cases.  The transaction could go either way: really fast, or really slow.   Keep in mind that the listing agent is actually dealing with an asset manager.  The asset manager is the one who is dealing directly with the bank (seller).  Asset Managers are dealing with a backlog of properties, which can slow down the process significantly.   Just make sure you are diligent on your end and complete your tasks in an orderly fashion.  You do not want to be the party who is slowing down the process.