Foreclosures

What is an REO?

REO stands for Real Estate Owned.  It means that the bank foreclosed on a certain property and was unsuccessful in selling the property at auction.  Now they’re stuck having to sell the property on the open market.

Negotiating a foreclosure

When offering on a foreclosure, the process is very different from negotiating with a standard seller.  Banks typically are slow to respond yet hate drawn out negotiations.  Instead, banks prefer to under-price their listings, collect multiple offers, and then request a highest and best bid from each buyer.  Instead of issuing counter offers, they prefer to take the highest bid and move forward.  If there are multiple bidders on an REO, as is often the case, decide what you’re comfortable paying for the property and bid accordingly.  If you lowball, your bid is likely to be ignored.

The Addendum

If your offer is accepted, the bank will require that you sign their addendum.  If you fail to sign the addendum immediately, or if you modify it in any way, they’ll simply reject your offer and move on to the next bidder.  Simply put, these addendums can be soul-crushing.  They can modify your contingency periods, closing date, closing costs, and they effectively remove any and all liability from the bank.  Before looking at REOs, have a look at the attached Fannie Mae addendum and see if you’re ready to handle the reality of purchasing a foreclosure.  Click here to see a blank version of the Fannie Mae Addendum.

Unique elements of a foreclosure

1. Foreclosures usually employ loss-leader pricing.
2. Banks will take anywhere from 3 – 21 days to respond to your offer.
3. Even though the banks often take weeks to respond, when they do respond you’ll be given less than 24 hours to make a decision and return the required paperwork.
4. If your offer is rejected, you likely will not be notified.
5. If your offer is accepted, the addendum will modify most of the deal points you negotiated into the contract.
6. Foreclosures are “as-is” sales.  Do not expect termite work, a home warranty, repairs, and sometimes major appliances.

The myth about foreclosures

Many buyers think they can buy a foreclosure for pennies on the dollar.  That’s simply not the case.  The ridiculous deals you may have heard about occur when the property goes up for auction.  At auction, you’ll be bidding sight-unseen.  There are no inspections, no contingency periods, and no refunds.  In addition, you will be required to pay immediately in cash.  If you need financing, you cannot buy a foreclosure in this manner.  Properties that fail to sell at auction hit the open market.  Because financing, contingencies, inspections, appraisals, etc. are allowed, and because you’re competing with every other buyer in the market, these listings usually sell for close to full market value.

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