Caveat Emptor

It is common knowledge that REO and foreclosure properties are selling like hotcakes, and that new home sales are lower than they’ve been since 1995. That’s all well and good, but how are we supposed to get a cut of the action? Those of you who are interested in buying decent properties at highly discounted rates: step into my office.

So what can you do to ensure that your next REO-aimed offer yields a deal? A number of things. First off, Get Approved. That’s right, it’s finance time. It will inevitably be brought to a head at some point throughout the transaction, so you might as well sidestep the land mine before it’s an issue and get pre-approved ASAP. Being pre-approved allows you to be move quickly as far as the transaction goes, quickness being a major factor in who wins and who loses. It’s also a good idea to keep your bank’s approval letter handy at all times, as it will serve well to soak up your tears of joy at the time of closing.

Some may think their offer will have a better chance of being accepted if they seek to be approved from the same bank that owns the sought-after property. Others may think that the listing bank prefers financing only from another bank, as opposed to a mortgage broker or private lender. These points of view are simply untrue. The listing bank could care less from where in the ‘lend-o-sphere’ you received your funding, just so long as you’re funded. To a bank in this scenario, cash is cash, and a buyer with cash is as welcome as Christmas morning.

Another sure-fire way to put some muscle behind your offer is to do a bit of research. When a bank acquires a property, the executive cadre immediately hosts a picnic, complete with fire pit, skewered pig, and seed-spitting contests. After the last raffle prize is given away, they then seek out a ‘Lost Mitigation Company’. The mitigation personnel provide several services to the bank, and are a main reason for the snail’s pace most REO deals move at. Lost Mitigation personnel (hereafter referred to as L.M. personnel) will immediately enter the home in question and do what they call ‘securing the residence’. This includes winterizing the home, cleaning anything that warrants a scrub, taking out the trash, and generally all the chores the former owner neglected but still must be performed in order to make the home saleable. L.M. personnel will then hire a broker to list and, hopefully, offload the property. In order to accurately price the home, banks realize the importance of discerning the property’s current comparative value; because of this, L.M. people will normally contact a few agents in the immediate area to get independent opinions of the ‘comp value’. This is called a Broker Price Opinion, or BPO, and each BPO scenario is taken into account when the bank lists an REO.

This is the point where a lot of people fail to help themselves. It is always important to do just as much, if not more, research than the listing bank has already done, and you can start at seeking out the comp value of your target home. A good rule of thumb is to make an initial offer that is roughly 88% of the current comp value. But keep in mind, comparative values are constantly changing. When offers on an REO are received, banks re-task their L.M. personnel to once again analyze the comp value. Because of the fluid nature of comp values, it is important to stay up to date so your offer doesn’t run the risk of becoming too low, thus defunct. Know this: low-ball offers for REO properties are unproductive. Period.

While you still have your research cap on, go ahead and contact a title company so you can acquire the title record of the property in question. This will give you a good financial history of the property (liens, back taxes, final amount owed at time of foreclosure), which may or may not illuminate how much the bank has invested in the property, but either way will help you to put together the optimum offer.

Caveat Emptor…”Let the Buyer Beware”…Perhaps the most important thing to remember is that when buying REO properties, you are buying at your own risk. Dealing with the remnants of a low-income household isn’t always the best experience, but alas, ‘tis the nature of the beast. Most foreclosed-upon tenants delight in leaving their refuse behind when they vacate, so be prepared to factor some repair costs into your initial offer. The bank doesn’t care about the quality of the home, so beyond whatever cleanup they sponsor through L.M. people, don’t expect to get much in the way of restoration reimbursement. An REO buyer buys as-is, so it’s not a bad idea to dust off your nail bags when considering an REO. Another thing to remember is that most REO transactions take a loooong time. There are many people involved, but they are spread out amongst several organizations. Because of this disjointed sort of ‘assembly line’, it is imperative that you as the buyer remain patient. To stress the importance of being patient, I will restate myself. It is imperative that you as the buyer remain patient.

Step up to the net and implement the above best practices next time you serve up an REO offer. Game, set, and match; enjoy your new home.