BANK FORECLOSURES

REO vs. Foreclosure
An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction.  You see, most foreclosure auctions do not even result in bids.  After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank.  That is why the property ends up at a foreclosure or trustee sale. If you want to see an auction in person, go down to the Oakland County, MI Courthouse Tuesday mornings and see for yourself!

Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs association with the foreclosure process.  In order to bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid.  If you are the successful bidder, you receive the property in "as is" condition, which may include someone still living in the property (did the courses tell you about that one!).  There may also be other liens against the property.

Since what is owed to the bank is almost always more than what the property is worth,  very few foreclosure auctions result in a successful sale.  Then the property "reverts" to the bank.  It becomes an REO, or "real estate owned" property. In Michigan, the banks get them back after the 6 month redemption period expires (6 months to the day after the sheriff’s sale.)

Now it’s a Bank-Owned Property
The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. Realtors like me who work with banks sometimes get assigned to go talk to the formers owners to help with the eviction, possible repairs and eventually the listing of the home. The bank will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property (usually a 7 day inspection after accepted offer but even before the offer most foreclosure buyers have already had a chance to view the property once or twice). 

A bank owned property might not be a great bargain. Do your homework before making an offer. Make sure that the price you pay (if you’re successful) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a ‘bidding war’ and pay over market value. It’s an old myth that “foreclosures” are a bargain. REMEMBER: the bank is now the owner of the property and will want to get the most they can for it. The big difference is they don’t want it for long and they have the financial resources to take a hit if it sells low, unlike most homeowners.

How Banks Sell REO's
Each bank/lender works a little differently, but they all have similar goals.  I work with many. They want to get the best price possible and have no interest in "dumping" real estate cheaply.  Generally, banks have an entire department set up to manage their REO inventory. If they do not have a department, they outsource the selling process to REO Servicing companies. If you’ve ever made an offer on a bank property and it takes days and weeks to get a response, many times you are working through realtor who send the offer to an REO Servicer, who sends it to the bank (who may even have an investor they need to get approval from). It gets pretty complicated.

Once you make an offer to purchase, banks generally present a "counter-offer."  It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible.  You should plan to counter the counter-offer.

Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies.  Even once an offer is accepted, the bank may insert wording like “..subject to corporate approval with 5 days."

You’re Buying As-Is
Banks always want to sell a property in "as is" condition.  They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs.

Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct.

Even though you agreed to “as is," always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted.

Banks do not want to see a lot of proprietary disclosures. If there are real estate agents involved, either representing you or the bank, those agents are required to provide you their disclosure statements.

Most banks will not provide financing on their REOs but it doesn’t hurt to ask. Especially if the property has extensive damage and you are purchasing it "as is." In Michigan, the Winter can beat up homes pretty bad so try to understand what you’re getting into.

Making the Offer
Before making an offer, have here are some things to ask:

• Are there any new inspection reports that came out after the property went REO?
• Are there any addendums to sign to accompany the offer?
• How quickly does the bank get back on offers?
• How does your agent deliver the offer?

Offers are usually FAXED to the bank though today there is an early transition to online offer submission from the listing Realtor to the bank. The listing agent needs your originals. There is no formal presentation.  If you make an offer on Friday, don’t expect an answer until at least Monday. Nothing happens evenings and weekends (banks are closed).

Since there is no face-to-face presentation to the bank, provide the listing agent with a pre-approval letter and/or a source of funds if it is a cash offer. A buyer biography can be helpful, too.  Make your offer easy to accept. Hopefully these tips will manage your expectations.  Remember that sometimes there are deals and sometimes you’ll be paying pretty close to full price -- so buying bank homes is not a guarantee of instant equity!

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