For most homebuyers, bank owned properties, or REO’s (short for “real estate owned”) are the bargain of a lifetime. Most buyers see more opportunities than they have a chance to actually purchase, as these properties are very competitive and require a strategy appropriate with this market.
Searching REO’s: There are many websites touting the ability to search bank owned properties, yet buyers are often more confused afterwards than before. The simple answer is the vast majority of properties available to non-cash buyers are on the Multiple Listing Service (MLS) and those not listed almost always are not really for sale. I have lists of homes for sale from virtually every major lender, and every single listing is in the MLS. I also work with most of the most successful agents that specialize in representing banks, and often they will provide a heads up to a property coming online, but very rarely. So many websites claim to offer access to foreclosed homes, but really all they do is subscribe to RealtyTrac. And almost all of these are in the process of foreclosure where a buyer cannot get to the property. Worse, I have found the data on RealtyTrac to be dated and inaccurate. RealtyTrac offers a tease of data for free, but the actual information has never led me to a property that was really still for sale.
REOs are priced to sell: One large company determined that REOs were 17% cheaper per square foot than non-REOs. Remember, however, that banks usually will not negotiate any credits for repairs, often do not clear termites from the properties, the properties are often in rougher condition, and the terms of the contract are much stricter. At the end , a buyer can expect to save significantly.
When to offer more than list price: Banks typically set competitive prices to move their inventory, so often the price is at, close to, or even below the market price, causing a lot of competition to purchase. If a home is in good condition and priced correctly, expect many offers and a competitive situation. In several situations I have been one of 8 or more offers, and I have a colleague who claims to have had 105 offers on one property! Banks rank their offers Good-Better-Best. Best is an all-cash offer. Better is a 10% or more down payment conventional offer. Good is an FHA offer, so typically an FHA offer has to be fast and at full price or needs to wait for the property to be on the market 30 days or so.
When to negotiate: In the Westside of Los Angeles, bank owned properties sell for an average of 98% of their list price and average 60 days on the market. That is an average, and includes all the tough properties next to the freeway, burned out homes, etc. Properties in desirable areas and in decent condition go for their asking price. However, each bank and each listing agent they use have different pricing strategies. I have developed a system to track a particular seller to see their track record on pricing which is a good indicator of what the price should be to win the bid.
Preparing your offer: Most banks require a buyer to be pre-qualified with one of their loan officers even if the buyer is already prequalified with another reputable bank. Buyers, therefore, need to have all their documents ready to resend to that lender to get preapproved as quickly as possible. I also recommend that buyers initially get prequalified with Chase, Wells Fargo, or BofA/Countrywide initially as odds are one of them will be the owner of the property you will want to purchase.
The contract: Most banks will counter with their own contracts. The intial challenge is the form may be new to the buyer, the selling agent, even the listing agent, so it needs to be reviewed both thoroughly and quickly. The standard California Association of Realtors form for bank owned properties recommends buyers to retain legal counsel for review. Our company has every bank addendum reviewed by our legal department, but that is mostly for legal compliance issues. Typically, the addendums provide for the property to be purchased “as is,” causing increased risk for the buyer. Additionally, the banks will almost always counter with short periods for inspections and loan approval, often with ambiguous language or unrealistically short time periods. All of these need to be reviewed with your agent for your strategy. Finally, since the bank has not lived in the property, they typically cannot disclose defects, so an thorough inspection is critical.
Conclusion: While bank owned properties include substantially more risks, these are all risks that can be negotiated with a professional agent that is familiar with this market. Please let me know if I can help in ANY way.