Buying bank owned properties
There is a lot of interest in buying bank owned properties these days. A lot of information, some good and some bad, is floating around about the subject.   Often the information offered is for sale, with the promise that you can make a lot of money with little effort once you know “the secret formula”.  The fact is that there are no secrets, and to make money does require effort.

What’s an REO?
REO stands for “Real Estate Owned”.  These are properties that have gone through foreclosure and are now owned by the bank or mortgage company.  This is not the same as a property up for foreclosure auction.  A REO, by contrast, is a much “cleaner” and attractive transaction.  The REO property did not find a buyer during foreclosure auction.  The bank now owns it.  The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing.  Do be aware that REO’s may be exempt from normal disclosure requirements.  In many areas, for example, banks are exempt from giving a Seller's Disclosure Statement, a document that normally requires sellers to tell you about any defects they are aware of. In most cases, you can expect the property to be sold "as is" which can be a concern if the property has not been properly maintained or has been sitting vacant without power for an extended period of time. At first glance the sales price of the property may seem attractive but great care must be taken to determine the expense involved in the needed repairs and improvements.

Is it a bargain?
It’s commonly assumed that any REO must be a bargain and an opportunity for easy money.  This simply isn’t true.  You have to be very careful about buying a REO if your intent is to make money off of it.  While it’s true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it.  When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale.  The bargains with money making potential exist, and many people do very well buying foreclosures.  But there are also many REO’s that are not good buys and not likely to turn a profit. 

What is a Short Sale? We are hearing a lot about short sales in the current market, but what are they? A short sale quite simply is when the property's sales price is not enough to pay off the mortgage, liens and expense of the sale at closing. The easy solution to this is for the seller to bring a check to closing to cover the additional amount due. Unfortunately, the reality, in many cases, is the seller does not have the ability to do this. If this is the case, the Bank must agree to write off the unsatisified balance of the loan. This creates a situation where there are three parties to the sales agreement, the buyer, the seller and the Bank. Often the Bank will not be motivated to take a loss on the loan unless the seller is in the late stages of foreclosure. Unless the property is being marketed that the sales price has been approved by the bank it would be safe to assume the negotiating process with the Bank would take place after the offer on the property is tendered. You can usually expect your offer will "sit on the table" while the bank accumulates additional offers and works their way through the negotiation process. Because of this a short sale can be a very long process.

Ready to make an offer?
Most banks have a REO department that you’ll work with in buying a REO property from them.  Typically the REO department will use a listing agent to get their REO properties listed on the local MLS.  Before making your offer, you’ll want to contact either the listing agent or REO department at the bank and find out as much as you can about what they know about the condition of the property and what their process is for receiving offers.  Since banks almost always sell REO properties “as is”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it.  As with making any offer on real estate, you’ll make your offer more attractive if you can include documentation of your ability to pay, such as a pre-approval letter from a lender.  After you’ve made your offer, you can expect the bank to make a counter offer.  Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer.  Realize, you’ll be dealing with a process that probably involves multiple people at the bank, and they don’t work evenings or weekends.  It’s not unusual for the process of offers and counter offers to take days or even weeks.