When submitting an REO foreclosure offer, there are a couple of important tips that can save you tons of money. Being an informed consumer will make the difference between a happy home buying experience and a miserable one. After years in the REO business, I have compiled a list of REO home buying tips specifically tailored for the first time home buyer.
1. Get a pre-approval. Before you even start looking for a home to purchase, you will want to get pre-approved The pre-approval will serve two purposes. It will help you decide how much home you can afford and also let the seller of the home know that you are able to purchase the home. With REO, the seller is a financial institution. They will require you to get a pre-approval prior to considering an offer to purchase one of their homes.Because this is a requirement of the seller, agents will often want to confirm that you are pre-approved prior to showing you the property.
2. While it is a common belief that one can purchase REO homes for pennies on the dollar, this is not the case. The lender owner is looking to recoup fair market value for the property. They arrive at their list price by consulting with at least to real estate agents that are local to the property. The agents perform a broker price opinion and the lender owner uses the broker price opinions to arrive at a list price for the property. The broker price opinion compares three recently sold and three currently listed properties. Price adjustments are made for the condition of the property and any necessary repairs. Submitting an offer that is very low could result in no response from the bank. While one would like to believe the bank will respond to ANY offer, that is not the case. Each lender has several hundred to several thousand properties that they are handling and do not have time to waste on offers. The offer that you submit should reflect the absolute maximum you are willing to pay for the home. REO properties typically go quickly and it is important that you put your best foot forward.
3. Set the closing date out at least 45 days. Before selling the property, the lender must clear the title as well as work with a closing agent local to the property to get the required documents signed. This can take some time. On the other side, your lender will require some time to order an appraisal and get the loan through underwriting. This can also take some time, especially if you are financing the home with an FHA loan. Setting the closing date out 45 days will ensure that no extensions are necessary.
4. When making your offer, be sure to make the offer contingent on a satisfactory home inspection. Because the seller has never occupied the property, they do not know anything about the condition of the property. They do not know the age of the heating system, when it was last serviced, or how it is running. They do not know the age of the roof, age of the septic system, or age of the well. A home inspection will take away all of these unknowns and will be the best $300-$500 you ever spent! DO NOT purchase an REO without having a qualified individual inspect the home!
5. Be sure the make the offer contingent on having all systems up and running for your inspection. This includes electricity, heat, water, and sewer. Unless this is requested, the lender will typically expect the buyer to have the property de-winterized at their own expense. This can cost as much as $250, sometimes even more. Not having all systems up and running for your inspections can be a very costly mistake. The lender owner typically discusses their expections in the area within their bank addendum,
6. Read the bank addendum VERY carefully. Each lender has a bank addendum that they require the buyer to sign. Within this addendum, the typically express the fact that they have never occupied the property and the property is being sold as-is. They will set forth their expectations for home inspections, closing, who will hold your deposit, and what will happen if you back out of the contract. It is important that you consult and attorney of there is any pat of the document that you do not fully understand. The bank’s addendum is a standard document used on all of their properties, however for your own peace of mind it is important to seek out answers to any questions that you have. Your real estate agent is not an attorney and is not qualified to explain this document beyond the basics.
7. Ask the bank to credit you money for closing costs and pre-paids. This is commonly refered to as a seller concession and is very common in the world of REO. It is common to request three percent of the sales price for closing cost and pre-paids. This needs to be written into the purchase and sales agreement. Getting the extra three percent to cover closing costs and pre-paids will limit the amount of money you have to bring to the closing.
Following the tips will make your REO experience a very happy one! Happy house hunting!