One of the great things about being a realtor is that the profession is always changing. Every year I try to figure out what is on the horizon for this world and how I can get involved in what is new. Despite the relatively few number of REO properties in my market area, they do exist and I have had clients interested in properties that are REO, banked owned and being sold through the multiple listing service. This has lead me into a world that is sometimes more bizarre than Wonderland and definitely harder to understand than astro-physics. But as I said, I love learning new things, and this past year has been nothing if not educational. So here is a summary of what I have learned.
1. Most new buyers have absolutely no idea how to go about buying a bank owned property and have the unsubstantiated notion that the bank will be so grateful to have any offer they will go 30% less than list price, regardless of how low the property is originally listed. Here is my version of the story: Banks generally list the properties 10-20% below similar properties in the neighborhood with the hopes of getting multiple offers. Most of the REO homes in the bay area sell between 5% under and 20% over list. Many of the properties that sell under list price have been purchased by all cash buyers even if there was a higher offer with a loan contingency.
2. Speaking of contingencies here is the order of preference from the bank for financing: cash, conventional loans, FHA, VA loans. No loan contingency will get the banks attention. I did manage to get my VA buyer an offer accepted but he lost out on a number of properties first because of cash offers. Also, the condition of the property requirements for FHA and VA loans are so stringent that many REO properties do not qualify. It is a little easier to get a condo or town home to get thru the condition contingency, but the owner occupancy rate and delinquency rates sometimes derail the process.
3. Inspection contingencies were always the norm because the banks provide no disclosures or reports. Unfortunately this lead to a very high percentage of transaction falling through. Banks definitely prefer no inspection contingencies, so a buyer who inspects before making an offer will have an advantage. This means if you find a home you really want that is bank owned it is a good idea to give the most generous offer you are comfortable with and inspect the house ahead of time. It cost some money, but it is important if you are in a multiple offer situation. I had clients beat out 12 other offers on a very rare bank owned property in Palo Alto by presenting an offer with not loan or property contingencies since they did their inspections before making the offer.
4. If you do need to get a loan many of the banks will ask you to get pre-qualified with their own bank or with a preferred lender. It is almost impossible to use a mortgage broker for your pre-approval letter so be sure to have a pre-approval from a direct lender and then get the pre-qual from the bank’s preferred lender. Some banks, like Bank of America or Chase will give the buyer some incentives if they use that bank to purchase the house. I had one client who was buying a foreclosure from Countrywide. They agreed to use Countrywide for their loan and when it came time for the appraisal, the appraiser said Countrywide could not lend on the house that they had just foreclosed on because it needed a new roof. I know it seems ridiculous, but I promise I am not making this up. The good news for my clients was that since they could not buy the house from Countrywide with a Countrywide loan without a new roof, Countrywide agreed to put a new roof on the house. Not only that, but the Countrywide appraiser said their house was worth less than my clients had offered and less than what the previous Countrywide appraiser said, so Countrywide agreed to lower the price. I am not convinced any of this would have gone my client’s way if they had used a different lender.
5. Patience is a virtue. You may hear something in a few days and it may be a few weeks after you submit an offer. If you do not get your offer accepted you may never hear back from the listing agent. It is unlikely there will be any phone calls unless your offer is accepted. E-mail is the best way to communicate with an REO listing agent. Some REO agents are using Twitter to update the status of a listing, but I have not found that to necessarily really be up to date. One Friday afternoon I got a call from a listing agent telling me my client’s offer had been received and he thought we would get an answer on Mon. This was a home that had received 13 offers, but I knew if he called me it meant we had a very competitive offer. If you do hear back the first contact may be a “counter” which is just a worksheet asking if you want to make your offer better. You can do that, or re-submit your original price and terms. After that, if your offer is “accepted” it just means they have accepted your offering price. You will get an addendum that negates most if not all of the terms you wrote into your offer and changes them to the terms the bank wants. You can accept the addendum or counter things out. If you are in a multiple offer situation and you counter out some of the terms in the addendum another offer may be considered, or they may stick it out with you.
6. Once in contract the listing office will generally stop treating you like Public Enemy Number 1 and the staff will take over. At this point it is in everyone’s best interest to get the deal closed so they tend to be pretty co-operative. The most important thing is to follow the timelines for contingency removals and closing. If closing is delayed the buyer will have to pay a per diem charge, usually $100-$150 a day. It is not worth fighting it, you won’t win, and the addendum will say the bank can cancel the contract at any time for any reason. I had a transaction where the title company delayed the close by 4 days because they could not get the HUD 1 statement right. This was a title company chosen by the bank, but my client had to pay for them so my client had to pay the 4 day late fee.
So if you still think an REO is for you I say go for it. You can get a house for less than market value in some neighborhoods, and in others REO’s may be one of the only options. Just go in with your eyes open, thick skin, and a lot of good humor and patience.
If you have any questions or just want to commiserate feel free to contact me.
Or go ahead and tell me what you think in the comments section of my blog, Silicon Valley Real Estate.