How To Buy An REO â€“ Top 17 Questions Answered
Have you ever seen how sausage is made?
All kidding aside, "true foreclosures" are not for the faint of heart, nor those without cash and the ability to take risks with their funds.
First and foremost, if you have not already done so, you absolutely should obtain a "True Pre-Approval" as defined at http://www.Steven-Anthony.com/GettingStarted before you seriously start looking to buy as this up-front investment of financial vetting places you above most buyers (cash Buyers withstanding) whom have not taken this step to reduce Buyer/Seller risk of the transaction falling apart over a financing issue.
Additionally, this will lower your exposure to unnecessarily wasting money on property inspections and the Appraisal only to find out later financing has not been approved, right. Be aware where you obtain your "True Pre-Approvalâ€ is also important!: "Retail Banks vs. Mortgage Broker/Bankers" http://tinyurl.com/6qln6nd
Moving on to your primary question:
Many Buyers start with a strategic property search misstep; this being only focusing on distressed property due to a belief they are cheaper and less difficult to buy than non-distressed property which is simply is not the case.
Personally, as a new future homeowner, I would avoid the Auction option and instead opt for a safer path to home ownership. Basically, there are four types of "distressed/foreclosure" property. Here's a quick relative risk/difficulty scale for distressed property (1 being the most risky):
1) Trustee Sale-
You personally go to the County court house and bid on a home you probably have never seen the inside of, nor will have the opportunity to fully investigate. Seasoned investors need only apply. Cash/Cashiers check only, no financing. You may be interested in this video from Foreclosure Radar entitled â€œForeclosure Auction Guideâ€ http://www.youtube.com/watch?v=1CanJbhGdJM
2) Auction Company Sale-
A little better, at least you have a seat in a packed room where the auctioneerâ€™s primary job is to get the highest offer from a much larger group than #1 above has. You are buying â€œAS-ISâ€. Do you have the ability to gauge cost of repairs you might see? This option is best for those who can walk a home and calculate refurbishment costs on the fly IF an investigative period has been allowed. If you are â€œgung hoâ€ about an auction of this sort perhaps you should go through the steps to vet the property yourself and consider attending an event to see â€œhow the sausage is madeâ€ and how comfortable you would be if you went this route.
When a property does not sell via #1 or #2 above you eventually see it come on market via a RealtorÂ® MLS. You will still needs the skills to evaluate property condition and the good news is your RealtorÂ® will be helping you to do so along with professional property inspectors you hire. The downside of an REO is the Bank typically only sells "AS IS" (meaning, the Bank will not typically make repairs even if you identify an issue) and the Seller's property disclosures are limited to what is statutorily required by law.
Before moving on to 4, 1 thru 3 above have a higher probability for issues with Title, referred to as "Title Defect" or "Cloud on Title", which means you would not have clean/clear ownership - not a comforting thought.
Some examples of situations affecting Title are:
-Outstanding future interests of others in the property
-Easements on the property
-Variations in the names of grantors and grantees
-Variations in the chain of title
-Outstanding dower interests.
-Adverse possession claims
-Existing violations of equitable servitudes or covenants
-Zoning restriction violations
Hereâ€™s another video from the auction trenches: "Wells Fargo auctions off house they don't own" http://www.youtube.com/watch?v=yV6NeHoq1wA and hereâ€™s an interesting situation I have run into:
4) Short Sale-
While there is nothing chronologically short about this option (plan on 60-90+ days before a Lender approval) it nonetheless is the closest relative to the non-distressed sale (where the Seller is selling â€œAS ISâ€/no Seller credits or repairs). The only real risk with these transactions is the underwhelming boredom and the overwhelming mystery of why it takes so long to obtain Lender Approval(s)!
If you enjoy the â€œthrill of the dealâ€ proceed with options 1 thru 2. If you like to know what you are getting for your money stick with 3 or 4 and non-distressed property.
Aside from Wall St. Portfolio Hedge Fund sales, most actual foreclosures are sold via their corresponding Local MLS!
Eventually they LIST it with a Realtor and appears on the local MLS.
You must have a Realtor representing you; the Banks require it, to avoid all the probelms.
Choose your Realtor and have them send you Listings that meet your criteria.
Be sure to do your Inspections, and I recommend having Contingencies for the Inspections, Loan and Appraisal.
Have your Realtor do a CMA to determine Market Value for obvious reasons.
Good luck and may God bless
If you have cash you could go to the courthouse auctions and bid on them. This is not recommended if you are new to buying foreclosures, as you are generally buying as-is with a minimal inspection period. There's a lot of competition at auctions - many seasoned investors & contractors bid on properties regularly to flip, so it's getting harder to find deals. I would recommend working with an agent that handles short sales and REO's (real estate owned), also known as foreclosures / bank owned, has many contacts in different areas for pocket listings. If I can be of assistance, please let me know.
Gina Landers, Broker, CDPE
DRE # 178500375 License # 01388614