Offer Guide to REO/Bank Owned Properties
Bank owned properties (also called REO, Real Estate Owned) are normally those that have gone all the way through the foreclosure process and have had their ownership transfered to the bank by the courts. I say normally because there can be other reasons that the new owner has gotten possession and the new owner is not always a bank. Do note that Trulia’s and Zillow’s data mining programs call a lot of transactions “sales” when in fact no money has changed hands. I frequently get asked, “the internet says this was sold two months ago, what’s up?” a transfer reported as a sale is always what’s up.
There are three main owners of REO/bank owned properties:
1) The mortgage market clearing houses: Fannie Mae, Freddie Mac, and HUD. (HUD, the US Department of Housing and Urban Development is not a mortgage market, but we’ll lump them with the other two as they use similiar rules.)
2) The lenders: BoA/Countrywide, JP Morgan Chase, Wells Fargo, SunTrust, and the list goes on and on and on.
3) Others: wholesalers, professional flippers, etc.
If you are an investor the first thing to remember is that your bid on a Fannie Mae, Freddie Mac, or HUD property will NOT be consider for the first 3 weeks. The first 3 weeks is strictly for owner occupants. Cash is not King with Fannie, Freddie, and HUD. Getting owner occupants is King with them. Even after the 3 weeks, a financed owner occupant offer will get priority over an investor’s cash offer. So, if you want to live here time is of the essence.
The lenders and others all have their own rules and of course no two are the same. They will usually take a bid from anybody after a few days and CASH IS KING with these guys. I have certainly had investors win the bidding with cash offers that were lower than financed offers.
How much to offer? All REO sellers operate a “Dutch Auction”. The asset manager starts with the price they want to get and then lowers the price (usually every 30 days) until they get an acceptable offer. Investors are unlikely to get much if any discount from list price in the first 30 days. If it is an attractive property or any property in a hot area like LakeNona comes on the market, then the real question is how much OVER asking are you willing to bid. These kinds of properties can attract upwards of 30 bids within a few days of coming on the market. (In theLakeNona area, 58 of the 113 bank sales in 2012 went for list or more. 9 went for more than 110% of list.)
Of course, you want to take a look at the comparable sales to determine what a reasonable price to pay would be, but in the first 30 days if your conclusion as to what it is worth is less than say 95 to 97% of the initial list price then do not assume that the asset manager will care about your conclusions. They won’t. If it is NOT a hot area or it’s been on the market over a month, then I suggest an offer of say 92 to 94% of list to see if you can get a counter with their best price at the time. Do not expect that they will counter again. It’s just business to them, so don’t take it personal, but they really don’t care what you think.
If you want to bargain on a bank property, then look for fixer uppers or properties that have been on the market more than 60 or 90 days or look in areas that are not “Hot”. The other thing to look for is mistakes by the asset manager where the initial price is below what the neighborhood is selling for.
Finally, the focus of this is what to bid and not contract terms. When it comes to Fannie, Freddie, and the banks there is no negotiation on contract terms. They all have contract addendums that override the local sales contract and those addendums must be accepted without change. They will of course be in the banks favor. If you are not comfortable with this, they will not care. They will just wait for the next offer (or choose another of the many they probably already have). Again, it’s just business to them.
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