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East Bay Real Estate Focus

Providing Definitive Information for the East Bay Area

By Carl Medford | Agent in Fremont, CA

  

How To Buy An REO – Top 17 Questions Answered

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Posted under: Home Buying in Fremont  |  April 8, 2009 9:04 PM  |  30,478 views  |  72 comments

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(Part 2 in a series on Purchasing An REO) Click here to see Part 1

As a local REO expert, I’ve help many successfully buy a foreclosed home. I’ve learned a few things long the way that I’d like to share with you. No matter what anyone says, the process is WAY different than buying a home through a “normal” sale.  I’m constantly bombarded with buyer questions about REOs (foreclosed bank owned properties), so I’ll try to answer the most common questions here.

1.    How do I locate an REO?

Finding an REO is as easy as asking your Realtor to send you a list of local foreclosed homes. Kind of. Most banks post their entire inventory on the local MLS, making it very easy for your Realtor to pull a comprehensive list and sift out the short sales.

There’s one issue, however, that you need to understand. In areas such as the San Francisco Bay Area, there are many local MLSs. Many of these currently do not share information with each other. As an example: if a listing agent based in San Jose (MLSListings MLS) gets an REO listing in Fremont, they may or may not post it on the MLS that services Fremont (BayEast MLS). They be might not want to pay the MLS fees for the Alameda County MLS and will simply post it in the Santa Clara County MLS instead. Strange, but true. Any search of the BayEast MLS is therefore not going to pull up Fremont listings posted in San Jose. Thinking that’s kinda dumb? Me too.

Anyway, since ALL local MLSs post to sites such as Trulia.com and Realtor.com, a quick search of sites such as these will locate any additional properties that won’t show up in a local search. Be aware, however, that many short sales will also show up, and may not be identified as such. That’s how your Realtor gets grey hair …

2.    Can I get an REO at an auction?

Yes, however … in this area, the REOs that make it auction are the ones that didn’t sell while on the MLS. We are talking used, abused, neglected and seriously distressed properties. Bring your contractor … and a big dog. Click here for more information on auctions.

3.    What can I expect to see when I view an REO?

Anything under the sun!! Conditions in REOs vary as much as the surface conditions of the planets in orbit around our sun … Click here for information about what you might see when visiting REOs.

4.    What will the bank do to fix up and/or repair the property?

How about ... nothing. Nada. Zip. Zilcho. Did I mention Niente, Rien and Nichts? Once it is on the market, what you see is what you get. You will be buying the property “AS-IS” with no exceptions. Broken windows? Trashed carpets? Holes in the walls? It’s on you. Section 1 clearance? You again. And here is where it gets a bit tricky. If you are planning on using an FHA loan to purchase the home, you need to make sure it is habitable before you write an offer. The FHA will not provide a loan for a property they categorize as uninhabitable or having substantive issues. If they discover Section 1 issues, leaky roofs, inoperative mechanical systems or other visible issues, they will want these items repaired PRIOR to closing. And that means by you, since the bank will not make any repairs. Y-O-U. Personal opinion: spending money to make repairs on a home you do not yet own is VERY risky and I don’t recommend it at all. 

5.    What about any existing liens against the property? What happens to them?

Banks will convey a clean title to you when you purchase the home. They have to – no lender will fund a loan on a property that has a clouded title. Existing mortgages, property taxes, outstanding HOA fees, IRS liens, mechanic’s liens – all will be cleared from the title before your purchase. You will start paying all the normal fees (taxes, HOA, etc.) from the actual day your transaction closes.  

6.    What about appliances or other personal property in the home?

If you see even a small number of REOs, you will begin to see a theme. Missing things. As in, the previous owners took some souvenirs with them as they departed. Some mementoes by which to remember their old digs. Like the fridge, dishwasher, washer and dryer and … the range. Think the nice bank will replace those for you? See #4 above. Lucky enough to pick a home with some of those things there? Don’t count on them being there when it closes … they may be and they may not be. Absolutely no guarantee. Reason is this: believe it or not, most appliances, since they are readily removable, are considered personal property. Banks cannot convey personal property. Appliances there when you carry your bride over the threshold? Wonderful! You win! Not there? Sorry.

7.    What do I need to provide to write an offer on an REO?

You will need to plan to submit the following items with offers – have all of these ready BEFORE you start looking for a home:

· Pre-Approval Letter: must be on a lender’s letterhead (don’t even try with a PreQual letter).

· FICO Scores: can be obtained from your lender (first two pages of the credit report will do).

· Verification of Funds: what % are you putting down? You’ll need verification that you actually already have the funds. Provide photocopies of the accounts where the down payment money is currently on deposit. Getting a gift? Have an official gift letter in hand. Make sure you understand the gift rules – ask your lender.

· Deposit Check: for 1% of the purchase price (Good Faith Deposit) made out to “Title Company”.

8.    Are the banks looking for anything special in an offer?

Banks are like water and electricity – they flow down the path of least resistance. They absolutely DON’T like FHA loans and will go out of their way to avoid dealing with someone who has one. Sorry … it’s true. They love a minimum of 10% down and conforming loans. If two offers come in at the same price – a conforming and an FHA deal – they will take the conforming offer EVERY TIME.

9.    Can I ask for help with closing costs?

Yes! Banks often provide help with closing costs. However, make sure that you understand that in a multiple offer situation, your net price to the seller must match other competing offer’s net prices.

10.   What does my Realtor need to know to write an offer?

Hopefully, you’ll be using a Realtor that has a lot of experience getting REO offers accepted by banks. However, just in case that’s not so, I’ve written a post that will help your Realtor write offers that banks and their asset management companies want to see. Click here to see that post.

11.   I understand that the bank will issue an Addendum or Counter Proposal to my offer. What can I expect?

Bottom line: the bank will remove anything in your favor and substitute language in their favor. Such as:

· They may ask for an increased deposit.

· They may try to shorten the close of escrow to 21 days. Don’t let them. They will include per diem charges that you will incur should you not close escrow on the agreed upon date. These “fines” can be as high as $150.00 a day. If it’s the fault of you or your lender that escrow closes late, you’ll pay. It it’s the bank’s fault, you’ll still pay. Don’t think it’s fair? Bummer. The bank has already taken a bath on the property: they want to make their pain go away by sharing some of the pain with you. It’s called an incentive to close on time.

· They may change your contingency time periods. Typical periods are 7-10 days for Inspections and 10-12 days for your loan and appraisal. They may even change your contingency removals from active to passive. MAKE SURE YOU AND YOUR AGENT KNOW THIS.

· They may counter out any requests for them to cover fees such as title and escrow, home warranties, County and City transfer taxes, HOA fees and so on.

· They will counter out any requests for personal property.

· They might counter out any liquidated damages or arbitration language.

· DON’T EVEN THINK ABOUT ASKING FOR REPAIRS. Their documents will contain “AS-IS” language.

· If there were tenants that were evicted who did not get their good faith deposit returned to them, the bank will make sure you know it is YOUR responsibility to deal with them.

12.   What kind of a price break can I expect to get because it’s an REO?

First of all, the days of lowball offers on REOs in the San Francisco Bay area are dead. Click here for more information, should you be so inclined to not believe me. It was fun while it lasted, now get over it. Secondly, REO listing agents have learned to price their listings VERY competitively and, if it’s a nice property in decent condition and in a good location, expect multiple offers. Over asking. However, if it’s been on the market over 60 days, all bets are off. Give it your best shot!

13.   Will the REO listing agent communicate effectively with my agent to discuss terms, any current offers, suggested offering price, etc.?

That comes under the category of, “Omigosh, you have got to be TOTALLY kidding …” Seriously, this is THE MOST FRUSTRATING aspect of buying an REO. The listing agents for REOs are without exception the most frustrating group of people to deal with I’ve ever encountered in my entire life. They do not communicate, will not tell your agent how many offers are currently in, will not give any information concerning prices of existing offers … will not even answer their phones in MOST cases. They prefer communication by email only and like one word answers. I could go on and on here … but I’ll save my diatribe for a group that actually cares.

Bottom line: in most cases you’ll need to write your offer totally blind.

Count on writing at the maximum price at which you are comfortable, throwing it into the mix and seeing if emerges a winner on the other end. And count on a few frustrations in the process:

· The listing agent may not actually verify to your agent that the offer has been received.

· The bank may take up to a week to respond to the offers.

· You may or MAY NOT get a response back from the listing agent that the offer has been rejected. When the MLS goes pending and your agent has not yet received a call or email, that’s a clue. That you didn’t get it. Strange but true.

14.   Once my offer has been accepted, will the process go smoothly and quickly?

Maybe. The bank may get the signed and ratified documents back to you within a day or so. If you’re lucky. Or not. We’ve had them take up to 10 days. That’s a whole week and a half before we can submit the docs to your bank to get things going on your loan. Need additional documents signed by the bank in the middle of the transaction? Count on more waits. And meantime, the per diem time clock is ticking away.

15.   What kind of disclosures can I expect to receive?

None. The banks cannot and will not disclose anything. They never lived there and have more than likely never seen the property in question. In fact, you know more than they do! They will fill out the mandatory state required disclosures, but they will not contain any information that will be helpful to you in any way. It is up to you to thoroughly investigate the property. I’ve even had the REO listing agent ask ME (as the buyer’s agent) to provide the disclosures. How tacky is that!!!? And silly.

16.   What kind of reports can I expect to get from the bank?

The bank WILL NOT purchase any inspections of any kind. We recommend that you, as the buyer, thoroughly inspect the property on your own dime. You can only expect to get the following reports from the seller:

· Natural and Environmental Hazards report

· Preliminary Title Report

· Any inspection reports that have surfaced from an earlier transaction.

17.   Can I choose my own title company?

No. It won’t happen – banks do hundreds of transactions and they want to talk to the same people for all their transactions. Makes sense for them. Don’t like it? Don’t write an offer. Think it might be a RESPA violation? Get over it.

However, you CAN ask for the bank to cover title and escrow fees. They just might do it. Then again, they might not. And you need to know that a Northern California transaction may end with a closing company in San Diego and a Title Company in northern California somewhere not close to you. Confusing? Absolutely. And it can cost you a day at closing as well.

Hope this helps! Great deals are out there and most of our current transactions are REOs. We have many VERY happy buyers in newly acquired foreclosed homes who’ve finally, because of low prices, been able to get their slice of the American Dream. It’s a small bit of consolation to emerge from the chaos and devastation that REOs have wreaked on the American Housing landscape.

As one of my buyers just said to his bride after receiving the keys to their REO, “Pinch me honey, I’m home!”