| In recent years, most new buyers wanted to buy a | | | | Banks will often ask that you buy the property "as |
| new home from a homebuilder. Today, nearly every | | | | is." You probably assume this means none of those |
| buyer I pre-qualify today says the same thing. "I | | | | items will be fixed should you decide to buy the |
| want to buy a bank-owned property." | | | | home. However, Dan says that isn't always the case. |
| In some counties around the country, foreclosures | | | | On occasion, you may be able to negotiate to get |
| are at all-time highs. As a result, in today's market, | | | | some minor repairs done. |
| the best deal for homebuyers is quite often the | | | | Dan recommends that once again, before you make |
| bank-owned property. | | | | your offer, you analyze the repairs that are |
| While many real estate professionals claim their | | | | necessary. Get with the lender and his appraiser and |
| business is off by as much as 60%, agents who | | | | find out which repairs will be absolutely necessary for |
| concentrate on bank-owned properties are | | | | the loan to happen. Put together a price for these, |
| experiencing the second coming of the gold rush. | | | | let's say $3500. |
| In the Las Vegas, the bank-owned real estate | | | | When you make your offer, ask for $3500 in |
| market is somewhat of an unknown. For many | | | | "appraisal-condition repairs" or "lender-required repairs." |
| years, someone who was on the verge of | | | | Use those exact terms. Dan says he may be able to |
| foreclosure simply listed their home for sale and | | | | sell these to the bank. If you just say "$3500 for |
| found a willing buyer to step in and save the day. As | | | | miscellaneous repairs," you dramatically reduce your |
| a result, many experienced real estate professionals | | | | chance of acceptance. |
| and homebuyers are not as familiar with the process | | | | However, let's say you did your initial inspection of |
| of buying a bank-owned property. Hopefully, this | | | | the house, you didn't see a lot of problems and you |
| newsletter will help. | | | | make your offer. During the formal inspection with |
| A bank-owned property or REO for "Real Estate | | | | the home inspector, you learn the home has $10,000 |
| Owned" is any property where the lender or bank | | | | in roof damage. Your lender tells you the roof needs |
| has taken back ownership through a foreclosure, | | | | to be repaired before you close escrow. The bank |
| short sale, or other related act. | | | | refuses to pay for it as it wasn't in the original offer. |
| In the Las Vegas market today our inventory has | | | | Don't plan on the bank giving you access to the |
| swelled with this product. Many pundits believe this is | | | | home during escrow to fix this, Dan says. The liability |
| the very tip of the iceberg and many, many more | | | | and the risk are too high for the bank. |
| are coming. | | | | #3) SLOWER PROCESSING OF YOUR OFFER |
| It's important to understand there is a difference | | | | You will make your initial offer in writing. Unless it's a |
| between a foreclosure and an REO. The REO is what | | | | full list offer with no additional concessions, the offer |
| happens after the act of foreclosure and after an | | | | may require the listing agent to go back to the seller, |
| unsuccessful foreclosure auction. | | | | the bank, for approval. The bank may be in a |
| This newsletter will help you understand the process | | | | different time zone. Banks are closed on weekends. |
| of buying a property that is owned by the bank. This | | | | Also, always remember, that banks are in the money |
| is not about buying a home in foreclosure or in | | | | business, not the real estate business. Your |
| pre-foreclosure. | | | | transaction is secondary to their day-to-day business |
| There are far more benefits, far less stress, and it's | | | | and may be treated as such. |
| much easier to buy an REO property than a | | | | If they have a dedicated department that handles |
| pre-foreclosure. Let's walk through it. | | | | REO properties for them, and many do, they may |
| So Joe Smith bought a house in 2005 for $350,000. | | | | have 3-4 people who have to review it first. |
| He did 100% financing, interest only, and he recently | | | | I have heard stories of banks taking 30-45 days to |
| lost his job. Joe couldn't make his mortgage | | | | answer counter offers. In this time, they may get an |
| payments so he called a real estate agent to sell the | | | | offer better than yours and you are out. If you really |
| house. The agent regretfully advises him his house is | | | | love the house and think it's a great deal, you will |
| worth $340,000 today and by the time he pays | | | | want to be very careful about your counter offers. |
| commissions, closing costs and late payments to the | | | | I recently heard a story about a bank that took |
| mortgage company, he will have to write a check to | | | | nearly 50 days to answer a counter offer that was |
| close his house for $30,000. | | | | only 3% off of list. The buyer got angry on the 45th |
| Joe can't afford to do that so when he fails to make | | | | day and walked. Five days later when the bank called |
| his mortgage payments, he is eventually foreclosed | | | | to say they accepted the offer, the buyer had |
| on by his bank, and evicted from his home. | | | | moved on. There is little sense of urgency from |
| Now, the bank has a foreclosure sale or auction. | | | | banks today if the offer is not clean and near full |
| They require a minimum bid of $378,000 for the | | | | price. |
| property. This minimum bid includes the balance of | | | | Dan says if you want this to happen quickly, make a |
| the loan, accrued interest, the attorney's fees for the | | | | clean offer, with a higher net to the bank, and get |
| legal action to get to this point, and all of the other | | | | your due diligence done in 10 days or less. If you are |
| money associated with this foreclosure. | | | | an agent and you want 2 additional points, make a |
| At the foreclosure auction, the bank requires that | | | | higher offer. The bank doesn't care what you make, |
| any bidder have their $378,000 money ready that | | | | they have a net figure in mind. And don't ask for the |
| day in the form of a cashier's check for the full | | | | appraisal to be paid by the bank. They rarely will |
| amount of their bid. They also let the bidders know | | | | accept that. |
| that they will get the house "as is," with no repair | | | | When you make your offer feel free to ask for |
| allowance, and with all other liens that are on it. | | | | what you want, like closing costs, repairs, and more. |
| Since Mr. Smith didn't have much equity, neither does | | | | However, the more you ask for, the longer you will |
| the bank, and when they add all of these fees to | | | | want to plan on waiting for the answer. |
| the auction price, the minimum bid becomes a price | | | | Its also very important that you or your real estate |
| at or well above market value, like in this case | | | | agent find out how much the bank has on the books |
| $378,000. That means it rarely ends up getting bid | | | | for the loan on the property. If they have $350,000 |
| on. | | | | on the books and they are listing it for $310,000, |
| This means the property ends up back in the hands | | | | they will not be too excited about an offer for |
| of the bank and now you have an REO. | | | | $290,000 where you are asking for closing costs. |
| The bank now owns the property, and it gets | | | | If they have $280,000 on the books and they are |
| recorded on their books as a sellable asset. Banks are | | | | listing it for $310,000, your offer for $290,000 plus |
| in the business of loaning money and maximizing their | | | | closing costs may be a winner. |
| value through strong business practices like checking, | | | | In a declining market it's very important to know the |
| savings, lending, and making money for their | | | | actual market value of the property. I am doing a |
| shareholders. | | | | loan for a client who saw an REO that was listed for |
| They are not usually in the business of owning real | | | | $465,000. His agent advised him the property was |
| estate. | | | | only worth $420,000. However, the bank had taken |
| They want to turn this asset into cash, so they put | | | | it back with a loan on it for $510,000. He offered |
| the home on the market with the goal of selling it as | | | | $400,000 and got it. |
| quickly as possible. | | | | Dan says banks decide how much to list their |
| To accomplish this they will usually reduce the price | | | | properties by studying the recent comps, not by |
| of all of the costs they had at the foreclosure | | | | what they have in the deal. They want to net as |
| auction like the legal fees and such. They will list it | | | | much as possible and that may mean they are selling |
| and market the property with an experience REO | | | | it a big profit, not a loss. |
| real estate agent who can advertise it and put it on | | | | #4) HIGHER EARNEST MONEY DEPOSITS |
| lock box for easy access. They will get rid of all of | | | | In today's market with 23,000 houses, many sellers |
| the liens. | | | | will let you make an offer with a deposit of $1000 or |
| They will put the property in the very best position | | | | less. With bank-owned properties this number will |
| possible to move. So in this case, you would expect | | | | usually be much higher. Plan on $5000-$20,000 or |
| the house to go back on the market for somewhere | | | | 3%-5% of the asking price. I recently saw $15,000 |
| around the market value of $340,000. | | | | of earnest required on a $300,000 home. |
| But don't read too much into this. Just because they | | | | #5) PREQUALIFYING WITH THEIR BANK |
| want to sell it fast doesn't necessarily mean that | | | | The bank that owns the property may ask you to |
| they will dramatically reduce the price further below | | | | get pre-qualified with their bank before making your |
| market value. In some cases they will, but in others | | | | offer. You don't have to use them. You can choose |
| they won't. It's a sell-able asset and they want to | | | | whatever bank you want for your loan but they |
| make as much as possible. | | | | want to make sure you are a real candidate. They |
| This is where you come in. | | | | also want to try and make some more money on |
| First, you will want to contact a lender to make sure | | | | the home by being your lender. |
| you are qualified to buy a home, the home is qualified | | | | I recently pre-qualified a low credit score buyer who |
| for the lender, and how much you are qualified to | | | | was putting down 30% on an REO property that |
| buy. | | | | was held by a major bank who recently reduced |
| Next, and equally as important, you want to contact | | | | their subprime guidelines. He couldn't qualify with them |
| a real estate agent and let them know you are | | | | but I demonstrated that I had him approved. They |
| interested in purchasing an REO. | | | | still turned him down. |
| Not all REO properties are a bargain. Its important | | | | On the flip side, if you end up in that spot, I highly |
| that you hire a real estate professional who can let | | | | recommend that you have your lender contact the |
| you know if you are getting a deal or not. Ask your | | | | listing agent to walk him through the strengths of |
| agent to do a "CMA" or "comparative market | | | | your loan. |
| analysis" on the property and find out what its worth | | | | I have another loan currently where the property |
| in today's market. | | | | was the REO of another large bank, the borrower |
| Do your research before making an offer. Buying a | | | | went through their pre-qualification process, and his |
| bank-owned property is often a great opportunity | | | | offer was declined. I spoke with the listing agent, |
| but is also has its challenges. | | | | went over the entire loan with him and its strengths, |
| I spoke with Dan Humeston, with Century 21 | | | | presented him a detailed approval letter from my |
| Moneyworld, who is considered one of Las Vegas' | | | | in-house underwriter, as well as a two-week close of |
| top REO agents. No one in this market today is | | | | escrow, and we got the deal. |
| busier than Dan. | | | | Dan says these loan requests usually come from a |
| A recent report listed Dan as the number one | | | | different department at the bank that sees this as |
| producing real estate agent in Las Vegas so far in | | | | an opportunity to generate revenue. The REO |
| 2007 and by a far margin. I understand he is currently | | | | departments simply want these homes off their |
| #3 nationwide for all Century 21 agents. | | | | books and don't care who does the loan. However |
| I asked Dan, who is a long-time expert in REO, what | | | | they have a right to make sure your lender is not a |
| you can do to make sure your offers are accepted | | | | flake and the pre-qualification letter is real. Asking you |
| and also what you can expect when making an offer | | | | to pre-qualify through them just to test your |
| on a bank-owned property. | | | | worthiness is not an outrageous request. |
| Dan says agents and their clients have to understand | | | | #6) THE HOME INSPECTION IS MORE IMPORTANT |
| what they are getting into before moving forward. | | | | THAN EVER |
| Here is what you need to know. | | | | Make sure you hire a very reputable home inspector |
| #1) KNOW THE HOUSE AND HOW THE LOAN | | | | and that he inspects the home very carefully. A lot |
| APPROVAL PROCESS WORKS ON BANK-OWNED | | | | of damage could have been done by the previous |
| PROPERTIES | | | | owners and a lot of it unseen by just walking |
| Banks are exempt from providing you with a real | | | | through. As we discussed earlier, before making your |
| property disclosure. Therefore, before you even | | | | offer you want to be sure to factor in the costs of |
| think about making an offer you have to do an initial | | | | the repairs you will have to do. However, you may |
| inspection of the house. You want to understand | | | | want to make sure your offer is contingent on |
| what damage has been done to the home and what | | | | termination if the damages are far greater than |
| your lender says about it. Some of this damage may | | | | originally disclosed and expected. |
| not make it through the lending process and you | | | | If your home inspector turns up additional damage |
| need to be aware of that before making your offer. | | | | like this, this could be an opportunity. If you are still |
| Items like a damaged roof, broken windows, AC and | | | | willing to go forward, contact the bank and |
| heating problems, exposed wiring, or missing flooring | | | | renegotiate the deal with the new information. They |
| can make it so your lender cannot loan on that home. | | | | may be willing to lower the price and you may get a |
| Before making an offer, make a list of the repairs | | | | well-earned and valuable price break. However, you |
| that you see that need to be done. Go over this list | | | | don't want to plan on this. |
| with the lender and the appraiser then decide | | | | A client of mine, who specializes in fixer-uppers, has |
| whether or not to move forward. | | | | had some success renegotiating on bank-owned |
| Dan says this is the number one problem he faces | | | | properties by presenting a detailed list of the damage |
| today on offers. The client makes an offer but has | | | | he sees to the bank before he makes an offer. |
| no idea how the repairs necessary will affect his loan. | | | | After the formal inspection, he does a new list. |
| The bank knows what damage will not make it | | | | He gets a professional contractor to prepare a cost |
| through the lending process and may reject the offer | | | | analysis to fix the damage after he gets the report |
| simply because you haven't done your research. | | | | from the inspector and then presents this to the |
| Knowing if the home is able to get a loan on it is | | | | bank. Once again, this won't always work on "as is" |
| something that needs to be done before you make | | | | but can be very effective as it gives the bank the |
| an offer. The house has to qualify just like the | | | | opportunity to see a real list of the damage with |
| borrower's do. | | | | details of the costs that it will take to repair. |
| #2) DEALING WITH REPAIRS | | | | The bottom line to buying a bank-owned property is |
| A quick tour of REO properties and you soon | | | | get pre-qualified as a borrower, get the house's |
| discover that people going into foreclosure rarely | | | | damage pre-qualified with your lender to review the |
| take care of the home at the end. It can take four | | | | possible challenges in the loan before making your |
| to eight months for a person to be foreclosed on. | | | | offer, don't plan on the bank's willingness to "give the |
| They sometimes get angry and knowing they are | | | | house" away, and be patient for answers. |
| losing the home anyway, they fail to maintain it in a | | | | If you are preparing to make an offer on a |
| satisfactory condition. It is not uncommon during your | | | | bank-owned property, you want some advice, or |
| tour to find dead landscaping, broken windows, holes | | | | you simply want more information on bank-owned |
| in walls, stained carpet, broken fixtures, missing | | | | properties, and you want to reach Dan Humeston, |
| appliances, and much worse. | | | | you can do so at . |