Buying bank owned properties There is a lot of interest in buying bank owned properties 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.
REO stands for “Real Estate Owned”.
These are properties that have gone through foreclosure and are 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 California, for example, banks are exempt from giving a Transfer Disclosure Statement, a document that normally requires sellers to tell you about any defects 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 you’ll 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, you’ll want to contact either the listing agent or REO department at the bank and find out as much as you 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”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it. As with making any offer on real estate, you’ll make your offer more attractive if you can include documentation of your ability to pay, such as a pre-approval letter from a lender.
After you’ve made your offer, you can expect the bank to make a counter offer. Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer. Your dealing with a process that probably involves multiple people at the bank, and they don’t work evenings or weekends. It’s not unusual for the process of offers and counter offers to take days or even weeks.
The foreclosure process isn’t as mysterious as it may seem. Due to federal and state laws, lenders must follow a specific process in order to foreclose on a property.
Understanding the process will help you find investment opportunities.
First, you’ll need to understand when a lender is allowed to foreclose. The process starts with the mortgage itself. A mortgage creates five covenants:
The homeowner promises to pay the principal mortgage debt
The homeowner will insure the building against fire or damage to help protect the bank’s interest in the property
The building or dwelling cannot be demolished or removed without the consent of the bank
The entire principal will become due in the event of default of payment of principal, interest, taxes, or assessments
The bank will consent to the appointment of a receiver in the event of foreclosure
The first three items are agreements the homeowner must adhere to. If those covenants are breached, the bank must pursue numbers 4 and 5. (Why the word “must”? Because banks are really “trust officers”: they aren’t loaning their own money, they’re loaning money that belongs to depositors. They don’t have the right to take risks with other people’s money, so they have to follow these covenants.)
The last two covenants give the bank the means to foreclose. One provides for the appointment of a receiver – typically a lawyer – who conducts the sale of the property. The other allows the bank to accelerate payments and ask for the entire balance. If the bank’s lawyers take a homeowner to court they want all of the money, and if it can’t be paid they want a judgment against the homeowner. Simply put: they want out of the deal because the homeowner has not lived up to his or her obligations.
It’s important to note that until a judgment has been obtained the homeowner is not truly under threat of foreclosure. Once the judgment is obtained the homeowner can be put out of the property immediately. After a judgment has been handed down against the homeowner, a time is set for the public sale of the property at auction. If the homeowner can’t come up with the entire amount of the judgment award before the sale… that’s it: no more delays, no more compromises ? the sale will be held. Often these sales are held at the courthouse, and in many cases are actually held on the courthouse steps.
The court then appoints a receiver – again, typically a lawyer – to conduct the sale of the homeowner’s property. Ordinarily, real property can’t be transferred without both parties in the purchase agreement signing the transfer deed. Since the homeowner is unlikely to voluntarily sign away his or her home, the receiver has the legal authority to sign a valid deed transferring the ownership to a new purchaser.
If you’ve missed a payment, you’re normally sent a letter documenting the missed payment and requesting immediate payment of the past-due amount. Once you’ve missed several payments, you’ll be sent a letter from the bank’s lawyer. Receiving a letter from the lawyer means you’re in trouble; you haven’t just committed an oversight the bank wants corrected but are now considered a serious “problem debtor.” When you hear from the lawyer, it means the bank has committed resources (time and money) to getting you to pay on time – so they’re serious.
If you can’t reach an agreement with the lawyer you’ll be served with a summons. (The lawyer has very little reason to negotiate, so normally the only “agreement” you’ll be able to reach is that you’ll make your loan payments on time… starting immediately.) After “service,” which is the process by which you’re physically presented with the summons, the attorney will also file papers with the county courthouse.
All other individuals with claims against the property ? they’re called “junior” obligations ? like second mortgages, judgments, or other liens, are served with papers so they have the right to try to protect their interests as well. (It’s important to note that if the foreclosing party is negligent in notifying junior lien holders, those creditors have a valid claim for repayment against the eventual new owner of the property. That’s why purchasing title insurance when buying foreclosure properties is absolutely essential: you protect yourself against subsequent claims you didn’t know about. After all, you don’t want to have to be responsible for a lack of attention to detail by the foreclosing party.)
To enforce money judgments you have to be served personally. That’s one reason foreclosure actions can take so long ? the homeowner(s) must be tracked down and physically handed the summons. Often the homeowners won’t want to be served and will do their best to avoid the server. Each jurisdiction has different laws and rules, but generally speaking if a person can’t be located and all reasonable efforts have been made to find them, a procedure for publication is put into place. This typically consists of a public notice printed in the classified section of the local newspaper.
Most jurisdictions also require public notice whether or not the homeowner has been served. This allows parties with a legitimate claim to come forward to protect their interests. After the publication process is complete the foreclosure action will proceed. If you can’t come to an agreement with the bank’s lawyer, and can’t come up with the funds to pay off the loan, your property will be sold at a foreclosure auction, and you’ll be evicted from the property ? if you haven’t already left. The foreclosure process is extremely painful for the homeowner. The legal proceedings can take months to complete. The homeowners are subjected to pressure from banks and lawyers, public notice that their home is in the foreclosure process, and the realization that they will soon lose their home
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There are 5 factors that effect the sale of your home:
You control 4 of these. Although location is the one factor you cannot control, the effects of a negative location can be compensated by price. For example, if you have two identical new homes, and one is near a railroad track, the problem of the railroad can be offset by a lower price.
Exposure refers to how you choose to present your property to the market. More specifically, which Real Estate Company are you going to select as a marketing agent?
Condition refers to how you get the property ready for sale-how clean the house is, is everything in good repair, and has the home been maintained properly.
The last factor, terms indicates some of the conditions under which you are willing to sell, such as paying part of the buyer's mortgage costs, or including all the kitchen appliances, or the date on which you are willing to give occupancy.
Pricing is a process, not an event. So many consumers figure out the price they want, and then tell their selling agent what they need to get for the property. That's backwards. Set price first, and then put your house on the market. Determining a fair market price is done by considering a number of factors: One of the most common methods used is called a CMA, or Certified Market Analysis. The jargon might be confusing, think of the market analysis as a report of activity, activity that is based on the law of supply and demand. The market report or CMA may use up to 4 categories of housing status to determine price. Homes in all 4 categories will be compared to yours using factors such as location, size, condition, style, number of rooms, and features. Let's look at the 4 categories.
1. Recent Sales 2. Current Listings 3. Pending Sales and 4. And houses that did not sell
Recent sales represent the prices buyers have actually been willing to pay. If possible, those sales should be less than 6 months old. If the market has changed, the use of old data will distort the results.
Current listings represent the prices of homes you will be competing with. These are the homes that buyers will look at and compare to yours. I have a question for you: When you bought your home, how did you determine what to pay for it? Well, if you are like most prospective buyers, you looked at several properties. And during that process, you became knowledgeable about the supply of housing stock and gained an understanding of values in the area. Well, buyers are still comparison shopping today. The average prospect looks at 18 homes before making a decision.
Using these numbers, that means they have to like your home more than 17 others. It is extremely important to be priced competitively among those on the market. The law of supply and demand will always work its magic. If you have time, consider looking at 2 or 3 houses on the market that are closest to yours in terms of size, style and neighborhood. Another important component of this status is the actual number of homes on the market. In other words, how many, in total, do you have to compete with? It could be 100, or it could be 5.
The third status, pending sale, means that a competing property has sold, but the transaction has not yet been settled, or closed. Although the selling price of these homes must be held in confidence until the settlement of the transaction, these amounts represent the listing prices that have recently attracted offers in today's market. They are an excellent indication of current activity. The last category are houses that did not sell, or, in industry jargon, they are called expired listings. These are the dreams of sellers, and they did not sell because of price , there are a few other concepts used in the process of pricing. They are:
Cost- Linkages with a residential site - Substitution - Price - Value - Market Value
Cost is the amount you paid for your home. In harsh reality, cost does not dictate value. If you and a neighbor both built similar homes in the same neighborhood, but you decided to add a swimming pool and upgrade every feature in the home at the highest possible level, you may never recover those costs if the buyer is not interested in those same features. Buyers continue to make decisions for their own reasons, not ours.
Linkages of services with a residential site can also affect the final selling price. A home that is a half mile from a shopping mall and also near one of the busiest streets in the community may be important to a buyer because teenage children could travel to their jobs easily on foot or with public transportation. However, other prospects would come through the home, look outside, and see the big blue lights of J.C. Penny down the street, and say-"I'm out of here!" The eventual buyer is likely to be one that needed services and amenities near by.
The principle of substitution means that buyers will be substituting the function of a feature when placing value on the home, and will not be concerned with cost. The classic example is that of wells. Using the new home model again, your neighbor may have reached water at 5000 feet, but you reached water at 10,000 feet. Guess what? No buyer will pay you more for your home because your well costs more-they will simply expect the property to have water.
Price means the listing price at which you enter the market. Value means what one buyer would pay. Look at the size of these three lots. If the one in the middle is worth $10,000, does that mean the other two are worth $5000 and $20,000 respectively. Not necessarily. A young family with small children might pay more for the lot on the right, but you would never get me to mow that lawn. I would prefer the smaller lot.
Market Value means the list Price that will get your property sold. Your objective is to find a range of value that will attract prospects to your home, not sell the houses around you. One common mistake sellers make is to recognize market value immediately, but try for more in the initial stages of selling. I've often heard sellers say "I would like to try it higher at first because we can always come down later", especially if they do not feel time urgency. Let me share with you why this pricing strategy is not beneficial.
Let us assume the market value for a home is 100,000, and the owners started at 130,000, and dropped the price in $10,000 increments each month. The vertical line represents price and the bottom, horizontal line represents months on the market. At the point the time the home becomes priced at market value, a long period of time has gone by. The property has become shopworn and buyers will be suspicious.
If you were a prospective buyer and went through a property that had been on the market long in excess of usual market conditions, say, 3 or 4 months, what would be the first thought that goes through your mind? You probably wondered what was wrong with it. This suspicion factor is so high, that I will share a story about a recent purchase of my own. I was looking for a lot to build on, and found a lovely wooded lot, on a cul-de-sac, there was nine acres of landlocked woods behind it for privacy, near a lake, near my favorite golf course, near a freeway entry ramp so I didn't have to drive forever to get somewhere, in an existing subdivision where all of the other homes were already built, which meant I wouldn't have to contend with construction activity-it was just what I was looking for. And I thought to myself, self, why is this lot still available? What's wrong with it. Is there a subsoil problem, a toxic dumpsite on the property, something I cannot see? There has got to be something wrong with it or it would not be still available. The sellers gave permission to the listing agent to disclose their motivation for selling, and it turned out that they had bought the lot years ago with the intention of building when they retired, but were now being transferred.
Even after many years of being in the real estate business, I was as worried as anybody. Now put yourself in the position of the seller: What would you do, if after 4 months of waiting, you finally got an offer. You would probably jump at it after that amount of time! This puts the seller in an extremely weak negotiating position, both mentally and financially! Often sellers end up taking anything, at a price under market value.
A house takes on a reputation surprisingly fast, so do not wear out your welcome on the market. Once sellers understand this pricing principal, I have often heard them say: "I understand the danger of waiting a long time to reduce price. Couldn't we try a higher price for just a couple of weeks? Couldn't we just test the market for a little while?" Well, you don't want to test the market, only to reduce the price two weeks later because your best, strongly motivated prospects come through during the first 2 or 3 weeks.
The vertical line represents activity on your home, or the number of showings. The horizontal line represents weeks on the market. Activity is going to look something like this. Suppose you and your agent are sitting at the kitchen table right now. As soon as he or she gets back to the office, your agent is going to put several marketing procedures into place. Property information will be entered into the Multiple Listing Service database. Your house will be toured by the marketing office of your real estate company. The first ads will be placed. Key brokers in the community will be called and perhaps, if it is appropriate, the first open house will be conducted.
In addition, every real estate agent in town is going to call current prospects that they working with and let them know about your home. This will generate the highest activity you are ever likely to see during your entire marketing time. Do not forget that these first prospects, if they have been looking for a while, are highly educated, and probably have a good feel for value. It does not make sense for you to have them see your home and then reduce the price after they have all gone through. Take advantage of the competitive feelings a new listing generates and price your house correctly right from the start. And this is assuming that those prospects even come through at all. You might be thinking to yourself, "Well they could always make an offer." However, the best prospects might not ever see the home, which would rule out that possibility.
Here's why. When you bought your home, how did you determine the price range that you started looking in? If you were like most buyers, your price range was probably determined by the amount you could afford to pay-you're maximum mortgage amount plus your down payment.
Let's assume a buyer has $10,000 to put down and will obtain a $90,000 mortgage, for a total purchase price of $100,000. Would they, realistically, look at $130,000 homes? Probably not-they could not afford them. 10,000 + 90,000 = 100,000
Another reason prospects might not "make an offer" is more subjective. Other than bargain hunters, human behavior dictates that they just do not. Buyer's will more than likely move on to another home instead. If homeowners have all of this information, why do they overprice? For several reasons:
Over-improvement of the home- Confusing maintenance with improvements ,
The personal need for more money
The original purchase price was higher, A need for more bargaining room, A lack of motivation, The use of an appraisal or tax bill
Regarding over-improvement of the home, one of the most common mistakes is installing swimming pools in northern climates. Another form of over improvement is putting in the best of everything. You may appreciate the most expensive carpeting available, but most buyers simply want to see well maintained, attractive flooring that is congruent with the style of the home. Some improvements can add value. A professionally updated kitchen, or an extra bath, for example often increases the final sales price. The question to ask yourself is: "If you had known you were going to be selling, would you have made those improvements?
A second reason is confusing maintenance with improvements. Often sellers have said, "I should get more for my home because I just put a new roof on." This is the principle of substitution that I mentioned earlier. Buyers will simply expect the property to have a functioning roof. Your home may sell faster or you may get part of the cost of the roof back in the selling price, but do not expect to get all of it.
A third reason sellers over price is the need to have more money for personal reasons. I call this "I gotta get" syndrome, I gotta get more because... A common example is when someone moves to a location where prices are much higher.
What if you were moving to a new location, and you found 3 homes that were very similar. One was priced at $150,000, another at $150,000, and a third at $175,000. You might say to yourself, hmmm, something is funny here. You received permission to talk to the seller whose house was listed for $175,000, and they told you that they were moving to a more expensive location, had 3 kids in college, and had run up their home equity loan. Would you help them by paying more for their home? That's an extreme example, but it demonstrates that supply and demand will take precedence over a personal need for a certain price.
Another reason for over pricing is that the sellers original purchase price was higher than current market value. They paid more than they can now sell it for. This can be a very distressing situation. However, it is not any different from buying stocks that decrease in value after the date of purchase. You could stand on floor of the New York Stock exchange waiving a ticket to sell IBM stock for $150 per share, but if it is only at $114, that is all you will get. If the market has reversed since you purchased your home, you have 3 options:
1. Stay in the property - 2. Rent the property.- 3. Sell it at the current market value
If you are selling a home in a down market, chances are you are buying in a down market, and will achieve a saving on the new purchase.
A fifth reason sellers overprice is because they feel that they need bargaining room. Bargaining room is a burden. You are better off turning down a low offer rather than never getting one at all. Another reason for overpricing is lack of motivation. Some people put their house on the market with the intention of only selling if they get that amount-they are not sellers. Two more common reasons for overpricing are either using an appraisal or a tax bill as a guide. Let's look at appraisals first. The following illustration demonstrates the different uses of an appraisal.
An appraisal conducted on behalf of an insurance company might be to protect the company from overpaying on a claim. An appraisal prepared for a lender is to protect them from giving too large of a mortgage relative to the value of the property. In other words, it the buyer defaulted, and the lender was left with possession of the property, the lender needs to be able to sell it for enough to recover losses. An appraisal to project the sales price is an excellent tool, but will not give you an exact figure, because it cannot reflect the motivation of the actual purchaser, as we have talked about earlier.
And finally, an appraisal for tax assessment purposes is to establish a guide for fair taxation. It has little to do with what any one buyer is willing to pay. Take caution if you hang your hat on solely one appraisal or a tax assessment. If a long period of time passes by and you either have lots of activity or no activity, but more importantly, no offers, than adjust your position on the market in terms of price.
The benefits of pricing correctly are strong!
You will get more prospects through your house. There will be more excitement generated for your home, causing competition among prospects. This results in a faster sale with less inconvenience, and, best of all, a higher sale price. As a final note on the subject of pricing, if you get an offer right away, it probably doesn't mean you were under priced, it means you took advantage of the best market out there and made good decisions for yourself.
1. You will lose the excitement that a new listing generates. Most activity on a listing comes within the first 30 days. An initial high price will discourage buyers, causing you to miss out on pent up demand.
2. You will lose the most qualified prospects! Buyers will not "just make an offer" because they probably will never see your property. They will view the properties that are priced within their purchase power range, knowing that they cannot afford anything above their price ceiling.
3. Overpricing helps sell other, more competitively price homes first. Your home may be used to demonstrate the good value of other properties. Your objective should be to enter the market in a position that will attract prospects, not drive them away.
4. Your home may become stale on the market. Prospects may wonder why it has been on the market too long or if something is wrong with the property, even after you lower your price. You may even have to settle for less than market value. A house takes on a reputation surprisingly fast, so do not wear out your welcome on the market.
5. If you do get an offer, the contract may fall through because of appraisal problems. The lender may not be able to justify the price as it relates to loan value, considering it a high risk and refusing to lend the buyer mortgage funds.
6. You lose a strong negotiating position when your home is on the market a long time, both financially and mentally! Prospects will not "rush" to make an offer on overpriced property and you may feel compelled to accept less when they finally do.
7. The agent you list your home with cannot set the sales price of your home any more than your stock broker dictates the price of a stock sale. The selling price is simply a function of supply and demand. Never let an agent bid for your listing. Most unsold listing that expire on the market are due to poor pricing, subjecting the owners to the risks discussed above. Select your agent on their ability to negotiate competency and ability to reach the market. Above all select someone you trust!
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