Here’s what you should consider:
Get Pre-Approved and Be Ready to Act
In the REO market, expect the competition to be fierce especially in areas like Santa Clara where investors or homebuyers like yourself are anxious to take advantage of these deals. It’s not uncommon for there to be multiple offers on bank-owned properties. Just as you are looking for a bargain, so are many other buyers. Santa Clara has its fair share of REO homes. Be aware that when listed at a competitive price you will likely encounter stiff competition when it comes to buying. To ensure your chances of buying an REO in Santa Clara. You should be financially prepared to make a down payment and you should have a pre-approval letter from a lender in place before making an offer.
Know Where and How to Look
In Santa Clara most if not all REOs are listed on the Multiple Listing Service and can be found on the majority of websites that feature properties for sale. There are also several websites that specialize in foreclosed properties. You can get a head start and see which properties are in the process of foreclosure on RealtyTrac.com or find homes that have already been foreclosed upon by checking sites like CaliforniaMoves.com, Trulia.com and Zillow.com. Many lenders also have their foreclosed properties listed directly on their websites.
Hope for the Best, Prepare for the Worst
In all likelihood, you will not be “wowed” when walking through the door of an REO. Most are sold “as is.” In the months leading up to foreclosure, the homeowner may have disregarded maintenance and let the condition of the home deteriorate. Do not be surprised if you see homes stripped of appliances, light fixtures and any other items that can be sold. In the worst case scenarios, homes can some times fall victim to vandals and transients who take advantage of a vacant property, however this isn’t very common in Santa Clara. It’s not always a pretty sight, but for buyers who are looking for a challenge, or who can afford the time and effort involved in buying an REO, these types of properties may be right for you.
It May Take Longer Than You Expect
Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible; they have no interest in “dumping” the real estate they own cheaply. Generally, banks have an entire department set up to manage their REO inventory, and in this current market, with the increased number of bank-owned properties those departments are often back-logged for days, if not weeks and thus cannot always respond quickly to offers or other inquiries. Typically banks or asset managment companies work with only a few brokers or agents who can have anywhere from 10 to 50 listings at a time. Sometimes getting a timely direct response from these agents is not always possible. Agent’s offices must be within a few miles of their REO listings. So this hasn’t been a big issue for Santa Clara REO’s but that may change.
Once an offer to purchase is made, banks generally present a “counteroffer.” It may be at a higher price than you expect because the bank has to be able to demonstrate to its investors, shareholders and auditors that they attempted to get the highest price possible. You are then free to accept, reject or counter the bank’s counter-offer.
Your offer or counter-offer will probably have to be reviewed and approved by several individuals and/or other companies. As such, this process may take several days to complete.
It is important when purchasing a bank-owned property that you understand that the timing can sometimes be longer and drawn-out than a typical resale. However, do not confuse an REO transaction with a short sale which can often take upt o 3 months to complete.
Understanding the Property Condition
Banks typically sell a property in “as is” condition. Some banks will agree to provide a Section 1 Pest Certification, but not unless that requirement is included in the final contract. Banks will usually allow you to get all the inspections you want (at your expense), but they probably will not agree to do any or all repairs. Offers to buy REO property may include an inspection contingency period that allows you to terminate the sale if the inspections reveal defects that the bank will not correct and that you might not want to accept. Be aware that some banks require use of their own contract forms which do not include the same types of provisions as standard Realtor forms. In those situations you should review the bank’s purchase contract documents with your own agent and understand the unique terms that the lenders are creating. Even if you have agreed to buy the property “as is,” you may request that the bank make repairs or give you a credit after you have completed the inspections. Some banks will re-negotiate to save the transaction instead of putting the property back on the market, but that possibility should not be taken for granted. Some banks may not provide financing on their REOs but it doesn’t hurt to ask.
Making the Offer
Before making an offer, have your Agent contact the Listing Agent and ask the following questions:
- Are there any inspection or repair reports? This answer is usually no. However if the home has been in contract before the previous buyer may have done inspections and they agent is obligated to disclose those inspections.
- What work has the bank performed and/or what work will the bank agree to perform? Usually no again.
- How long do you anticipate that it will take the bank to accept an offer? Typically in Santa Clara County I have come to expect the same day or up to 3 day lag times on responses.
Offers are usually faxed or uploaded to the bank. The Listing Agent needs your originals. There is generally no formal presentation. Keep in mind: nothing happens on evenings and weekends as banks are closed. The keys to remember are: You should have sufficient money available to put down a reasonable deposit; you need to be pre-approved by a reputable lender; your offer should contain reasonable, straight forward contingencies and the offer should specify a closing date that is within a reasonable amount of time. There should be no unique wording outside the parameters of a normal contract or your offer may be rejected. Remember “as is” and highest price, thats what the bank is looking for.
What are Some of the Pitfalls to Watch Out For with REOs?
Determine all fees associated with purchasing the property.
- There may be hidden fees like liens, unpaid taxes, penalties, etc. to contend with.
- How low will they go? Lenders may not be willing to negotiate the price down from market or close to market. This is especially true in areas where home values have fallen further than lenders want to acknowledge.
- Be prepared for a counter. Because the sale of bank-owned properties are becoming increasingly popular and therefore, competitive, we are seeing cases in which banks are countering at an amount that is above the original list price. These actions can discourage some buyers.
There Are No Guarantees in Buying REOs
On the surface, it might sound like a bank-owned property is a steal but if the bank wants to sell its inventory on the open market for the amount of money that was once owed to the bank, it may not be as good of a deal as one might think. Couple that with the fact that bankowned properties are not always left in the best condition; a great deal of work and money may be needed after escrow closes to improve the property.
When considering the purchase of an 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 that may be needed. In most cases, banks do not want to indefinitely hold on to their inventory as it isn’t in the bank’s best interest to let the property sit. Therefore, some banks have incentives to price a home for less than market value just to get rid of it. However, while it is true that banks are typically anxious to sell bank-owned property quickly, they are also strongly motivated to get as much as they can for it.
The bottom line is that although bargains with bank-owned properties exist, it is important to understand the pitfalls that may also exist in buying REO property. That is why it is imperative that when you do decide to explore the purchase of a bank-owned property that you do so with the aid of a professional, experienced Realtor, like myself, who will guide you through the intricacies of this type of transaction.
Last week I put in 4 offers for clients who are attempting to buy an REO property in Santa Clara and in Alum Rock, San Jose. Three properties were very well priced and offered a good value, the other required so much repair that it was sitting on the market for some weeks.
When offering on REO properties, you certainly need to make sure your Realtor has produced a good file for you. This is going to be reviewed by the bank and not anyone that your Realtor can try to persuade. You should make sure you are fully pre-approved with the typical underwriter conditions, provide sources for down payments, and write a clean and aggressive offer.
