Many savvy home buyers want to hit the jackpot by buying a real estate owned (REO) foreclosure. REO foreclosures are homes that a bank has foreclosed on and now carries in its inventory. Some are great deals; some are not. As with anything in real estate, you need to understand what you are getting yourself into.
When banks price REO foreclosures under comparable sales, multiple offers often come in response. That means you could be up against stiff competition for that bank-owned home. It's not unusual for some REO foreclosures to receive several offers.
Here are tips to help you determine how much to offer on a bank-owned property.
- If you're looking to buy a real-estate-owned (REO) foreclosure, you could be up against some competition.
- Getting the property history, finding comparable sales, analyzing the listing agent's REO closed sales, and asking about the number of offers can help.
- You can also submit a pre-approval letter, decline to negotiate repairs, shorten the inspection period, offer to split the fees, and keep the appraisal in mind.
Get the Property History
Ask your buyer's agent to find out the bank's purchase price. Compare that price to the price the bank is asking.
Also look at the value of the loans that were once secured to the property. The amount that the bank will accept is often somewhere between the original mortgage balance(s) and the foreclosure sale price.
Determine Comparable Sales for the Property
In many cases, the list price has little bearing on the value of the home. The market value carries the most weight. If you are up against one or more competing offers, other buyers will offer more than the list price. There are a few things you can do to see what you're up against:
- Look at the last three months of comparable sales: Try to use only those homes that most closely match the REO in its square footage, the number of bedrooms, baths, amenities, and condition.
- Check out the pending sales: Ask your agent to call the listing agents of those pending sales to try to find out the accepted offer price. Some listing agents will share that information, and some will not.
- Look at active listings: Those are most likely the listings that other buyers will use to formulate a price.
Analyze the Listing Agent's REO Closed Sales
Most REO agents work for just one or two banks. Some listing agents are exclusive listing agents for REOs, and they do not list any other type of property. Since REO agents deal in volume, they typically apply the same pricing principles to all of their REO listings.
Ask your agent to look up the listing agent in the multiple listing service (MLS). Run a search using that listing agent's name to find the last three to six months of that agent's listings.
Pull the history of those listings to determine the list-price-to-sales-price ratio. If most of those listings sell for 5% over list price, you may need to offer 6% over list price to stand out.
Ask About the Number of Offers Received
If there are no offers on the REO home, you can probably offer less than list price and get your offer accepted. However, if there are more than two offers, you will most likely need to offer above the asking price.
If there are 20-plus offers, bear in mind that some of those may be all-cash offers. If you are obtaining financing, then you may need to increase the price of your offer to be considered.
Submit a Pre-approval Letter
To have the most clout with the bank, you do not just want a pre-qualification letter. Instead, be sure you have a pre-approval letter, which shows that the lender has done a more thorough check of your ability to qualify for a mortgage.
Consider getting pre-approved by the lender who owns the property. You don't have to use this lender for your loan, but it could strengthen your offer, as banks tend to trust their own departments over other lenders' pre-approvals.
Don't Ask the REO Bank to Pay for Repairs
Sometimes, banks will pay for repairs, but they typically will not agree to do so at the offer stage. If there are problems found during a home inspection, renegotiate after your offer has been accepted. At that point, you may have some leeway for repairing big-ticket items such as an inoperable furnace or hot water heater. Smaller items and the things that were obvious when you made your offer are yours to deal with, though.
Most REO foreclosures are sold as-is, which means you won't have much room for negotiating repairs.
Shorten the Inspection Period
Shortening the inspection period can also sweeten your offer. For example, if other buyers ask for 17 days to conduct inspections, and you ask for 10, you might be deemed the more serious buyer. An inspection is typically only for the buyer's information anyway. Don't rush so much that you ignore serious issues, though. For instance, mold can occur in abandoned homes after they've been sitting vacant for a long period of time.
Offer to Split Fees With the REO Bank
Go the extra mile and offer to share any fees with the bank. Some banks will not pay transfer fees, for example. If the buyer offers to split those fees, the bank will feel more amenable to accepting the offer. The same thing is true for escrow fees. Many banks also negotiate discount fees for title insurance.
Consider the Appraisal Consequences
Before you make your offer, it's important to keep the appraisal in mind. If you offer over list price, bear in mind that the appraisal will need to substantiate that price. If you find yourself dealing with a low appraisal, you have options, so don't despair. Remember, the bank will most likely run into this problem with the next buyer who obtains financing.
The Bottom Line
A bank-owned property can help you get more house for your money. An agent who is experienced with these properties can help you make a competitive offer. Be aware of the pitfalls of an REO home, such as being sold as-is, and factor those into your offer as well.
Frequently Asked Questions (FAQs)
How do you find a bank-owned property for sale?
Working with a real estate agent who is familiar with the region is a great way to find foreclosures and other distressed homes for sale. You can also drive around a neighborhood you like and keep an eye out for any signs advertising a foreclosure. Another way to keep tabs on foreclosures is to check directly online with banks, government organizations, and auction houses. These types of organizations will usually include foreclosures somewhere on the site.
What is the difference between an REO foreclosure and other types of foreclosures?
An REO foreclosure concerns a home that has already been seized by the lender. Other types of foreclosures are conducted to try to prevent the home from winding up in the lender's possession. If those efforts fail, then the home is added to the lender's assets, and it becomes an REO foreclosure.