Dangers of Buying REO’s Just Out of Foreclosure
By Thomas` | October 14, 2008
Banks and lending institutions that own real estate that was
acquired through foreclosure call these properties real
estate owned or REO's. REO's represent a liability to
lenders because of the required accounting that literally
"sucks" away assets of the lenders by the requirement they
have substantial cash reserves to offset any potential loss
when the properties are sold. This cash requirement
substantially depletes the leveraged lending ability of that
specific institution so REO's are not what any lender wants.
In addition, the lender faces capital loss due to a
declining real estate market.
REO's are a fact-of-life for lenders, so much so that they
have extensive infra-structure to deal with these properties
and have developed ways to sell them that whips investors
into a buying frenzy. As always the REO is placed on the
Multiple Listing Service (MLS) at what is assumed to be
fair market value (FMV) and allowed to stay at this price
for 30 – 60 days. The price is next reduced by about
10% and the results are carefully watched. If there is no
action, the price will be reduced at least once more by
roughly 15% - 20%. Because of the data sorting capabilities
of the MLS every time the price is reduced, investors and
realtors see the price changes and look more carefully at
the property.
After two price reductions, if no firm acceptable offers
have been tendered, the lender will "free-fall" the price as
much as 30% - 40% below what it was originally offered. This
pricing will almost always get plenty of interest and
contracts. However, the lender and his agent stall taking an
offer and tell perspective buyers to "Give us your best and
final offer". The reality is the lender is trying to play
each investor/buyer against the next to get the highest bid
possible. In many cases the final sales price is well over
what the lender would have taken without the bidding
process.
The lender will give priority to cash offers because of the
speed in closing the sale, but often they will accept
conventional financing if the buyer looks good credit wise
and has a substantial down payment. If there is a cash offer
versus a financing offer and there is less than $5,000
difference, the lender will take the cash offer. What an
investor needs to know, to get his offer accepted, is to
only deal directly with the listing broker. If a buyer's
agent is used representing the investor, the commission will
be split between the lender's agent and the investor's
agent. I have personally made higher offers through a
buyer's agent who originally showed me the property and had
them declined for a lower offer that was submitted directly
to the lender's agent. Simple mathematics, the lender's
agent got twice the commission taking the direct offer.
Don't let this happen to you, go t o the REO agent to begin
and pay your agent separate if he brings you the deal.
Another huge issue not often mentioned in REO sales is
illegal structures added without permitting. These are not
title issues because they are not covered by title insurance
unless the code violations are open and in the public
record. So a buyer of an REO can get title insurance, but
actually purchase an illegally added bedroom, bathroom, etc.
and have problems when he resells the property. Some
counties and cities required a "re-inspection" before title
can be transferred, and these issues would become apparent
to a buyer. However, the vast majority do not require
re-occupancy inspections and the problem may be passed on to
the buyer. Lenders do not give a warranty deed but offer a
buyer a limited warranty deed which only covers the period
when the lender actually owned the property – further
reducing the lender's liability for deficiencies in the
property.
Buying REO's is truly the best example of "buyer beware" and
the solution is to have a certified inspector look for
structural problems, permit issues and illegal additions. If
the buyer does his homework and is willing to assume the
risks of the unknown, unseen problems, REO's can be
rewarding purchases. The best way to acquire the properties
is to decide on the highest bid you are willing to pay and
not to exceed this offer despite what the "friendly" agent
is telling you. Even more importantly, the actual price the
lender is offering is always negotiable. If the lender says
"No" to your offer, just say "What will you take?" and you
will almost always save yourself thousands of dollars!
About Author:
Dave Dinkel has over 33 years experience in real estate
investing which has given him a unique perspective into the
real estate market. Dave is the author of the best-selling
e-courses http://www.FSBOAutoPilot.com ,
http://www.StopMyForeclosureMess.com , and
http://ExcelRESoftware.com and many other e-courses for
investors and homeowners.
Topics: Investing |
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