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Buying Bank Owned Properties (REO)
So you’d like to buy a bank owned property?
You’ve watched the late-night infomercials and you’re ready to do the bank “a favor” and take a problem off their hands. Plus, you expect to make “a killing” in the process. Sounds great and it might just happen. But first, you should look at some facts and get prepared!
REO vs. Foreclosure:
An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction or trustee sale. Most foreclosure auctions infrequently result in bids because of the amount owed on the property. If, for example, there was enough equity in the property to satisfy the loan and any existing liens, the owner would have probably sold the property and paid off the bank. Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney’s fees and any costs associated with the foreclosure process. In order to bid at a foreclosure auction, you must have a cashiers check in your possession for the full amount of your bid. If you are the successful bidder, you will receive the property in “as is” condition, which may include someone still living in the property. There may also be other liens against the property that will have to be satisfied. Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. The property then “reverts” back to the bank and becomes an REO, or “real estate owned” property.
REO Properties For Sale:
The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property.
A bank owned property may not always be a great bargain. Do your homework before making an offer! Make sure the price you pay (if you are successful) is comparable to other homes in the neighborhood. Consider the cost of renovation and deferred maintenance, including time to complete them. Don’t get caught up in a “bidding war” and pay over market value. It’s an old myth that “foreclosures” are a bargain.
How Banks Sell REO’s:
Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in “dumping” real estate cheaply. Generally, banks have an entire department setup to manage their REO inventory.
Once you make an offer to purchase, banks generally present a “counter-offer.” It may be at a higher price than expected, because they have to demonstrate to their investors, shareholders and auditors that tried to get the highest price possible. You should plan to counter the counter-offer.
Your counter-offer will probably have to be reviewed by several individuals and companies before it is approved. Once an offer is accepted, the bank may insert wording like “…subject to corporate approval with in 5 business days.”
Banks always want to sell a property in “as is” condition. Most will provide a Section 1 pest certification, but not unless you include it in your offer and negotiate the point. They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs. Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct. Even though you agreed to “as is,” always give the bank another opportunity to make repairs or give you credit after you have completed your inspections. Sometimes they will re-negotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted. Banks do not want to see a lot of proprietary disclosures; they are exempt from California Seller’s Transfer Disclosure Statement (TDS-14). If there are several real estate agents involved, either representing you or the bank, those agents are required to provide disclosure statements. Most banks will not provide financing on their REO’s, but it doesn’t hurt to ask.
Making an offer:
Before making an offer, have your agent contact the listing agent and ask for the following:
● Are there any inspection reports?
● What work has the bank agreed to?
● Is there a special “as is” form?
● How long does it take the bank to accept an offer?
● How does your agent deliver the offer?
Offers are usually FAXED to the bank. The listing agent needs your originals. There is no formal presentation. Since there is no face-to-face presentation to the bank, provide the listing agent with a pre-qualification or better yet a pre-approval letter and buyer biography. Make your offer easy to accept.
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