8 Tips for Winning REO Foreclosure Offers

A "For Sale" sign with a notice of it being bank owned in front of a house.

Justin Sullivan / Getty Images

Many savvy home buyers want to hit the jackpot by buying an REO foreclosure, some of which are often under-priced. REO foreclosures (which stands for Real Estate Owned) are homes that the bank has foreclosed upon and who now carries it in its inventory. Some are great deals; some are not, like with anything in real estate you need to understand what you are getting yourself in to.

When banks price REO foreclosures under the comparable sales, multiple offers are often the response. This means you could be up against stiff competition for that bank-owned home. Or not. Look for homes with longer days on the market if you want to negotiate lower prices.

It's not unusual for some REO foreclosures in Sacramento, for instance where I sell, to receive 15 or 20 offers. Sometimes the bank will throw out all but a handful of these offers and then ask the selected buyers to resubmit what is called "Highest and Best" offer. Sometimes, the bank simply accepts the best offer at inception.

If you're wondering how you can make your REO offer shine above all the rest and be the winning offer, here are a few tips to help you select the right price and terms:

1. Get the Property History of that REO Foreclosure

Ask your buyer's agent to find out the bank's purchase price on the Trustee's Deed or Sheriff's Deed. Generally, it is noted on the document itself, which you can get from the tax rolls or a title company. Compare that price to the price the bank is asking. Sometimes banks want to foreclosure and will set a bid price so high that no investors will buy the home at auction.

Look at the value of the loans that were once secured to the property. Somewhere between the original mortgage balance(s) and the foreclosure sale price is the amount the bank will accept if the home is under-priced.

2. Determine Comparable Sales for the REO Foreclosure

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 many competing offers, other buyers will offer more than list price.

Look at the last three months of comparable sales, a mini CMA, for that neighborhood to determine how much this REO foreclosure is worth. 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 the active listings. Those are most likely the listings other buyers will use to formulate a price because they are the only homes those buyers actually tour.

 3. Analyze 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 buyer's agent to look up the listing agent in 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 are selling for, say, 5% over list price, then you may need to offer 6% over list price, and vice versa.

4. Ask About Number of Offers Received for that REO Foreclosure

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+ offers, bear in mind that some of those offers might be all cash. Banks like all-cash offers. If you are obtaining financing, then you may need to increase the price of your offer to be considered.

5. Submit A Pre-approval Letter

It goes without saying that you do not want merely a "prequalification" letter. Instead, you want a pre-approval letter. Be sure to get pre-approved from your choice of a lender in advance.

Moreover, get pre-approved by the lender who owns the property. Do not expect to use this lender for your loan, but submit the pre-approval letter from this lender, along with the letter from your own lender. Banks don't always trust other lender pre-approvals but tend to trust their own departments. If you're buying an REO from Wells Fargo, you might get an edge if your pre-approval is from Wells Fargo, is all I'm saying.

6. Don't Ask the REO Bank to Pay for Repairs / Inspections

Sometimes banks will pay for repairs but 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. I have in the past been able to negotiate reductions for large ticket items such as an inoperable furnace or hot water heater. But the stuff you can see with your own eyes and smaller items are yours to deal with due to the AS IS clause inherent in most REO foreclosure sales. 

7. Shorten the Inspection Period

If other buyers ask for 17 days, for example, 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 edification anyway. The bank is very unlikely to respond to any repair requests. Don't make the mistake of thinking you can come in high and renegotiate later.

Pay special attention to suspected mold that can occur in abandoned homes after they've been sitting vacant for a long period of time. 

8. Offer to Split Fees wit the REO 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. Same thing for escrow fees.

Many banks negotiate discount fees for title insurance. If the bank will pay for the owner's policy, the ALTA policy might cost a bit more. But it's still a good idea to let the bank choose the title if you want your offer accepted. 

Consider the Appraisal Consequences

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.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.