from Estate Properties
Marla McWilliams-Lopez of Estate Properties specializes in selling bank owned properties. Buying a bank REO is truly rewarding as a buyer can purchase a property at lower than current market value. More difficult is the negotiation and escrow, as it can be frustrating due to delays that are simply the nature of REO's and out of everyone's control.
REO stands for “Real Estate Owned”, an industry name established by banks regarding a property that a bank/lender has acquired through the foreclosure process. An REO and a foreclosure are the same thing, it simply means the previous lien holder now owns the house.
When a homeowner is late on their mortgage, the bank sends them an Notice of Default (NOD), and starts the process of foreclosure. The NOD gives the owner several months (usually six) to bring the loan current. The NOD is listed several times with the local newspaper and sent to the homeowner, as well as any other lien holders on the property. If the property owner is unable or unwilling to bring the loan current, after six months, the bank sets a sale date and again notifies all owners and other lien holders.
The property is offered for sale at an auction called a Trustee Sale, held at either a title company, courthouse steps or an attorneys office, dependent upon the Deed of Trust. This auction is open to the public, and the property can ONLY be purchased with CASH. The starting bid for this property is generally the total amount due on the 1st TD, plus any late fees & attorney fees, (and in our current market, that is generally much higher than the property value). Hence, most properties do not sell at the Trustee Sale, as who would buy a property for more than current value for CASH?
Many people confuse the “Trustee Sale” with a marketing-type real estate auction. The difference is the “Trustee Sale” is simply the vehicle in which the bank takes the property back in the foreclosure process, as explained above. A marketing auction is one where any Seller offers their property for sale via the “auction process”. Marla Lopez of Estate Properties can represent you in purchasing a home at any real estate marketing auction. Most of the time, a Buyer can, indeed, get a loan through this type of auction.
Just to confuse things a bit more, often times when a bank isn't successful in selling the REO within a few months, they will hire a real estate marketing auction crew to sell via a marketing auction, and at this juncture, a Buyer can usually get a loan on the property, just as it is possible in buying a REO listed on the MLS. Again, Marla Lopez of Estate Properties can represent you in purchasing a home at any marketing auction, and a buyer can purchase the REO with a loan just as they could with an REO listed on the MLS.
The biggest difference in dealing with the Seller of a bank repo vs. the Seller of a typical property is with a typical sale, you have ONE Seller (possibly 2 or 3), and they are highly motivated to sell the property, and will listen to a buyer's needs and concerns during negotiations.
A bank on the other hand is holding thousands and thousands of REO properties and they have hundred's of “asset managers” that handle these sales. The asset manager has specific protocol regarding acceptance of offers and price reductions. Each of the 100's of asset managers that work in the bank REO departments have an average of 250 properties at any one time. Also, understand this asset manager has NEVER seen the property, and never will. Chances are they've never, ever stepped foot in Idaho. This property is nothing more than a manilla file/efile to the asset manager.
Remember, in the last four years (2009, 2010, 2011 & 2012) there have been five million REO's in the United States, hence, the banks are simply overwhelmed!
Once the house is taken back, the bank is no longer concerned with what the previous owner paid for the house, owed on the house or the beginning bid at the Trustee Sale. They are now concerned with setting a price that will sell the house within 30 days.
To establish a market price, the bank sends out a real estate Broker to do a Broker Price Opinion (BPO). Estate Properties has done several bank requested BPO's. This is similar to an appraisal, and requires indepth research regarding market conditions, neighborhood rental ratios, comparable sales, etc. The bank will establish their asking price after receiving the BPO. They generally price the property at a price that will create tremendous interest, and generally won't accept much less than $1,000 below asking price, if not full price. The bank will reduce the price on the property by a set percentage every 30 days.
Once a Buyer presents an offer to the bank, it is “uploaded” into a computer program that eventually makes it to the “asset manager” on the other end of the computer. Remember, he/she is juggling 250 files, therefore, has 100's of emails each day regarding 100's of negotiations.
The buyer will need to provide an Earnest Money check of approximately 1% of the sales price will to be written to the escrow company of Buyers choice. The check is to be held by the Buyer's Broker until there is an accepted offer. Most of the time, after acceptance the Seller (bank) changes the title company. If a buyer prefers to use the title & escrow company of their choice, they can do it, and the Buyer will have to bare the entire cost of the escrow, possibly causing additional delays. Therefore, most buyers choose to go with the escrow company chosen by the Seller (bank). Apparently, the banks have contracts with various escrow companies. The hassle here is that the check being held by the Buyer's Broker often has to be re-written to the new title company, or crossed off and initialed by Buyer.
Buyer's generally give the bank 3 to 4 days to respond to their offer. With an REO, they respond as soon as they can, however, the offer is somewhere in the 250 files on the computer specific to that asset manager. On the other hand, a typical Seller would definitely respond within that period.
When the bank counters or accepts the offer, there is always a 15 to 20 page “bank addendum” that clarifies that the home is sold “AS IS” and pretty much indemnifies them from any potential litigation,
during and after the close of escrow. Banks are NOT in the business of selling real estate, therefore, when liquidating an “asset” they've obtained through foreclosure, they simply sell it with a bottom line price, quickly and without obligation regarding condition of the property in any way, shape or form.
At this point, if the Buyer decides to sign the banks addendum, they are still NOT in an accepted offer situation, as the paperwork must be (again) sent back to the bank for their review and signature. This is backwards from a non-REO sale, as when an offer is presented to a typical Seller, and they counter, the Buyer is given a Seller signed counter, if the buyer signs, then (BOOM!) they are in an accepted offer situation. With the bank REO, even if they accept your full price offer, you are presented with their bank addendum to sign and return to them for signature (the entire time, still not in an accepted offer situation).
This can be a time of great tension for a Buyer, as the banks expect a 24 hour turn around from the Buyer on the paperwork, and due to their “overwhelmed capacity”, they then take 24 to 72 hours to return paperwork, and in busy times, even greater delays. Sadly, we joke about rule #1 with bank REO's....delays on their part DO constitute an emergency on the part of the buyer to respond! Ugh....the price a buyer pays to get a 'screamin' deal'!
The banks are clearly overwhelmed and have a difficult time handling all the REO's, and unfortunately, a Buyer is at their mercy. If this Buyer doesn't buy it, another one will come along, as they have priced it accordingly.
Once the Buyer's offer is accepted, it's important they get to their lender immediately, and get the loan process started.
Once the Buyer receives the bank addendum and the original agreement signed by the bank, the Buyer has an accepted offer. The inspection period begins at this time.
Even though bank REO's are sold “as is”, inspections are still an important part of the process. A major problem could be discovered with the property that would make it a “deal killer” for a buyer, and they can walk at this point. Also, this report becomes a comprehensive 'punch list' for the Buyer to repair/fix once they own the property. Some findings are minor repairs that, if, left unattended could become major problems. Good information for a buyer.
Another common area of contention during the winter is that the banks must dewinterize the house in order for the Buyer to perform their inspections. Also, we often get very little notice as to when the house is ready, causing your inspector to have to “jump” within 24 hours.
The problem is the bank won't order the “vendor” to do the inspection until there is a “fully executed contract” (commonly referred to as a 'signed around' agreement/accepted offer). When the bank sends out a plumber, due to the fact they are located in another state, they send a request to an online central vendor locator who contacts a local vendor in the area of the property. Once the request is made by the bank to their central vendor locator, it can be several days before the dewinterization is completed. The bank will usually extend the inspection period due to the delay of the vendor, at no fault to the Buyer.
Buyer's, in frustration have wanted to hire their own plumbers to dewinterize and rewinterize. Banks won't allow this, as they are still own the property. More importantly, there have been occasions when the bank's vendor dewinterizes and finds serious plumbing problems. In many cases, they will repair these as part of the dewinterization process. Although another delay, this is beneficial to the buyer.
Another frustration for a buyer at this juncture is during times of potential interest rate increases, as this can become a problem in regards to locking an interest rate.
There will always be several negative findings in the property inspection report, many that would likely be addressed with a typical Seller, but banks are selling “as is”. On rare occasions, there are major problems uncovered, such as MOLD or extensive foundation issues. In these cases, we have often been successful in re-negotiating the price, due to the fact we've now exposed a major structural problem (key word here is major) that will have to be disclosed to any potential buyer and hinder the banks ability to sell the property.
Once the inspection is completed, and the Buyer does decide the property is right for them “as is”, we move on towards closing.
The lender continues to work the loan process, sending out the appraiser, etc.
The buyer's lender should pull loan documents a few days before close for Buyer's signature. Here is yet another potential delay due to the ONAM factor (Overwhelmed Nature of Asset Managers).
There are two additional delays at this point. On a normal transaction, when the buyer's lender prepares the final 'loan docs', they are submitted to the escrow company for the escrow officer to package together for Buyers signature. The escrow company can generally have this compiled within a few hours from receipt of documents. On an REO, however, once compiled, the HUD1 (settlement statement – a financial synopsis of the transaction) must be submitted to the Seller (bank) for their sign off. These delays the Buyer's closing (recording) by 24 to 48 hours. The buyer has signed, given their funds to the escrow company, but must wait 24 to 48 hours to “close” the deal due to the “double checking” the bank requires in the 11th hour.
The second delay, can come once the buyer signs their loan docs, as the bank needs to sign the closing documents. Because the Warranty Deed (document that shows ownership and transfers title) must be signed in just the right place for Idaho standards, and notarized as so. This (unfortunately) is often signed inappropriately by the bank “signees”. One would ask why doesn't someone just give adequate instructions as to the proper way in which to sign. The title companies DO give proper, detailed written instructions, it just somehow goes unread or is lost in the cyberspace (ONAM factor).
This particular delay occurs on approximately 20% to 25% of the closings, and usually only delays the closing process by a day or so. In rare cases, I've seen it take up to 2 weeks.
Hopefully, this knowledge up front will make the potential delays that one may incur easier to handle. Nothing good in life is easy, and the incredibly reduced price of a bank REO comes with some frustration, however, most Buyer's find that the value of their new asset far exceeds the bumps in the road of the escrow.
For any additional questions regarding the process of purchasing a bank REO, please contact Marla via email at firstname.lastname@example.org, text or call 208 676 8933.
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