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What To Know About Bank-Owned Properties Before You Make an Offer
REO stands for “real estate owned,” as in owned by a lender, and buying an REO property can be very different from typical “arms length” real estate transactions and conditions. While it is true that some excellent bargains can be had by purchasing bank REO property, there are also a number of questions to be answered before a casual buyer becomes involved. Here are a few of those questions:
What is the current condition of the REO property?
Should you consider buying a house at foreclosure, before it becomes a bank REO property? Then this question is critical. If you’re thinking about another REO property, one that has already been foreclosed on, you still need to know its condition. Most REOs need major TLC to improve their condition and many may need extensive and expensive repairs (heating systems, roof, termite removal, new appliances). Former owners were unable to afford the mortgage payments. It is understandable that most were even less financially able to perform required maintenance, repairs or needed improvements. Your perceived “bargain” many become anything but a good deal.
What is the current status of the REO property title?
Like the above noted concern, former homeowners unable to afford mortgage payments may also have liens that cannot be eliminated through foreclosure, such as IRS tax liens. Even serious problems with the “chain of title” sometimes occur, making it difficult to obtain a “clear” title without spending large dollars. Whether you’re considering using a bank REO property for your primary residence or to rehab and resell it to another for a healthy profit, you’ll need to have an unencumbered title to enjoy true property ownership.
What is the REO property worth “as is”?
Having a good idea of a property’s fair market value, or FMV, “as is” is critical to your interest in making a purchase offer. Trying to estimate the value of a bank REO property “as is” may prove challenging. Compiling some asking or recent selling prices of similar homes in the same neighborhood will probably not give you useful information. These homes are being sold as “arms length” transactions (the amount a willing, informed buyer will pay for a property). Buying a foreclosed or REO property can be very different because of deficient physical condition or title problems. Seek the advice of a real estate agent before you move ahead.Foreclosures for sale are always available, regardless of the state of the economy. Buying a foreclosure may or may not be a wise action plan. Here are some questions to consider before taking the leap into foreclosure home acquisition.
Should you buy at a foreclosure or wait until after the bank or mortgage company has completed the process?
Typically you will pay a bit less if you make your purchase at the foreclosure. However, you are truly buying the property “as is” with few, if any, guarantees. Making an offer after a home becomes an REO (real estate owned) of the lender may cost you a little more, but the owner/lender has probably spent some money in repairing deficiencies or giving the home a little TLC to make it more saleable.
Is the property truly a bargain?
Many people mistakenly believe that all foreclosures equal a bargain purchase. Just think about this belief for a moment. First, most foreclosures take place on property where little equity exists. For example, people owning a home worth $200,000, but having only a $75,000 first mortgage will typically never allow the property to be subject to foreclosure. They may be throwing away $125,000 in equity. Contrast that example with another $200,000 home with a first mortgage balance of $196,000. If you could not afford that home, you are much more likely to let it go to foreclosure since you are losing little money. You, as the buyer, would have to pay close to fair market value of $200,000, even if it were a foreclosed property.
Are there expensive repairs that must be completed before you could resell or live in the home?
The nature of mortgage loans makes it much easier to purchase a home in perfect condition for a higher price than to request “rehab” or repair dollars to be added to your loan. Often, you’ll be required to fund major repairs out of your own pocket.
To get an idea of the market value of the home you’re considering, search real estate listings for similar homes for sale in the same neighborhood as the foreclosure home. Is the price of the foreclosure substantially less than prices for similar homes? If the prices are similar, you are probably wiser to buy a home from an owner or real estate professional. Should the price for the foreclosure be substantially less than typical fair market value for the neighborhood, you might have a true bargain.Looking for foreclosures in the Pinehurst, NC, Southern Pines and Moore County area?
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Pros And Cons of Buying a Foreclosure
What is a Foreclosure? Simply, foreclosure is the process by which a homeowner’s rights to a property are forfeited because of failure to pay the mortgage. If the owner cannot pay off the outstanding debt or sell it via short sale, the property then goes to a foreclosure auction. If the property does not sell at auction, it becomes the property of the lending institution.
It helps to remember that the word “homeowner” in this case is actually a misnomer – they are actually borrowers. When someone buys a home, they sign a thick packet of papers – one of which is the mortgage, or deed of trust. This document puts a lien on the purchased property, making the loan a “secured loan.”
When a lender loans you money without any collateral (credit card debt, for instance), it can take you to court for failure to pay, but it can be very hard to collect money from you. Lenders often sell this sort of debt to outside collection agencies for pennies on the dollar and write off the loss. This is considered an “unsecured loan.”A secured loan is different because, although the lender may take a loss on the loan if you default, it will recover a larger portion of the debt by seizing and selling your property.
Here are the five stages of foreclosure:
Stage 1: Missed payments
Foreclosure is a lengthy process, with specifics varying from state to state, but it all starts when a borrower fails to make timely mortgage payments. This is usually due to hardships such as unemployment, divorce, death or medical challenges. Other times, a borrower may decide to stop paying the mortgage intentionally because the property might be underwater (mortgage exceeds the value of the home) or because he’s tired of managing the property. For whatever reason, he can’t or won’t meet the terms of his loan.
Stage 2: Public notice
After three to six months of missed payments, the lender records a public notice with the County Recorder’s Office, indicating the borrower has defaulted on his mortgage. In some states, this is called a Notice of Default (NOD); in others, it’s a lis pendens -- Latin for “suit pending.” Depending on state law, the lender might be required to post the notice on the front door of the property. This official notice is intended to make the borrower aware he is in danger of losing all rights to the property and may be evicted from the premises.Stage 3: Pre-foreclosureAfter receiving Notice of Default from the lender, the borrower enters a grace period known as “pre-foreclosure.” During this time – anywhere from 30-120 days, depending on location – the borrower can work out an arrangement with the lender via a short sale or pay the outstanding amount owed. If the borrower pays off the default during this phase, foreclosure ends and the borrower avoids home eviction and sale. If the default is not paid off, foreclosure continues.Stage 4: AuctionIf the default is not remedied by the prescribed deadline, the lender or its representative (referred to as the trustee) sets a date for the home to be sold at a foreclosure auction (sometimes referred to as a Trustee Sale). The Notice of Trustee Sale (NTS) is recorded with the County Recorder's Office with notifications delivered to the borrower, posted on the property and printed in the newspaper. Auctions can be held on the steps of the county courthouse, in the trustee’s office, at a convention center across the country, and even at the property in foreclosure.In many states, the borrower has the “right of redemption” (he can come up with the outstanding cash and stop the foreclosure process) up to the moment the home will be auctioned off.At the auction, the home is sold to the highest bidder for cash payment. Because the pool of buyers who can afford to pay cash on the spot for a house is limited, many lenders make an agreement with the borrower (called a “deed in lieu of foreclosure”) to take the property back. Or, the bank buys it back at the auction.Stage 5: Post-ForeclosureIf a third party does not purchase the property at the foreclosure auction, the lender takes ownership of it and it becomes what is known as a bank-owned property or REO (real estate owned).Bank-owned properties are sold in one of two ways. Most often, they are listed with a local real estate agent for sale on the open market. Zillow lists bank-owned properties for sale. Also, some lenders prefer to sell their bank-owned properties at a liquidation auction, often held in auction houses or at convention centers.What is a Foreclosure? Simply, foreclosure is the process by which a homeowner’s rights to a property are forfeited because of failure to pay the mortgage. If the owner cannot pay off the outstanding debt or sell it via short sale, the property then goes to a foreclosure auction. If the property does not sell at auction, it becomes the property of the lending institution.
It helps to remember that the word “homeowner” in this case is actually a misnomer – they are actually borrowers. When someone buys a home, they sign a thick packet of papers – one of which is the mortgage, or deed of trust. This document puts a lien on the purchased property, making the loan a “secured loan.”