Buyer’s Guide

Low prices, low interest rates and lots of foreclosed properties on the market! It’s close to a perfect storm if you’ve ever considered buying a foreclosure property for your private residence, as a rental or for resale.  And during economic downturns like we’re experiencing now, high-end homes as well as lower priced ones also go into foreclosure, so there’s a wide range of properties to choose from.   However, buying a Foreclosure Property is different in a number of important ways from buying a home from a normal Seller.

There are 3 ways to buy a foreclosure property.

This is pretty straightforward.  You can buy a pre-foreclosure property from a property owner who is in trouble before the home goes to auction, you can buy at the foreclosure auction, or if the property does not sell at the auction you can buy from the Bank after the foreclosure sale. Foreclosure properties listed for sale by a Bank are also known as REOs (real estate owned), bank-owned, or Repos (repossessions).

The riskiest way to buy a foreclosure property is at auction, usually occurring at or near the local courthouse steps or at the office of a trustee.

• Very few foreclosure auctions result in a successful sale, since the minimum bid (what is owed to the bank) is almost always more than what the property is worth.
• At the auction you have no real estate agent to lead you through the process.
• You get no escrow, no title report and no title insurance.
• In Southern Oregon, foreclosure auctions are generally all cash sales.
• The successful bidder may not receive a WARRANTY of any kind. There could be other liens or loans on the property.
• You will not get professional inspections prior to bidding.
• You will not get any disclosures from the Bank as to the condition of the building or what is happening in the neighborhood.
• Usually you will not get to see inside the house. You will know nothing about the electrical system, the plumbing, the heating, or air conditioning.
• If you buy an occupied property, you may have to evict the occupants. The occupants may vandalize the property before leaving or steal appliances or fixtures.
• If you get a very good deal at a foreclosure auction, the former owner could file a lawsuit to attempt to overturn the sale.

The next riskiest foreclosure purchase is the pre-foreclosure. The owner generally has received a notice of default on the financing, and is at risk of losing the home. Many pre-foreclosure sales are sold as “short-sales”, which means the owner’s Bank must agree to accept less than what is owed on the home.  It is possible to get a good bargain if you purchase a short sale, but it takes patience. These types of sales typically take at least two months to close, and over half never sell before foreclosure, or before the loan is restructured or before declaration of bankruptcy by the owner.

If you buy a Pre-Foreclosure  Home directly from the Owner however, you risk the following:

• The owner forgetting to mention other Liens, such as outstanding property taxes, or unpaid utility bills
• There could be another person on Title who did not sign your Deed
• If the contracts and the sale are not done according to the law, the Seller has the right to rescind the sale.
• If the Seller has declared Bankruptcy, the Bankruptcy Court will need to approve the sale. You could still be at risk even if the Seller files for Bankruptcy after you buy the property.

REOs are the least risky way to buy foreclosures. You may have more risk than you would in a regular real estate transaction, but there are no delinquent taxes, no liens and no tenants to evict! Because REOs are somewhat similar to regular sales they can be pretty safe, however . . .

. . . there are at least 12 important differences in buying an REO, compared to regular sales:

1. Buyer Risks (that you probably would not have with a regular purchase)

• You will not get a seller’s disclosure. The Bank has never lived in the home, and is not held responsible for knowing about problems with the home.
• If the Bank accepts your offer, you may have to wait several days or even weeks for the Bank to sign the contract.  Your lender may not start working on your loan until it receives a signed contract.
• The Bank may require you to perform your inspections quickly, giving you only a short amount of time to evaluate the property.

• The Bank may only give you 30 to 45 days to close the transaction, but if you are late they may charge you a penalty fee of $50 up to $200 a day or more until you close.

2. REO Seller Motivation

• Banks are not in the business of owning homes, and are usually motivated to sell them off as quickly as possible.
• The sale of Foreclosure properties by Banks is subject to Federal Regulations.  Banks can be penalized by current accounting requirements for holding foreclosure properties on their books.
• Banks with too many assets in real estate are also penalized by credit rating agencies, making it difficult for them to raise capital.

3. REO Property Condition

• Foreclosed homes often have not received needed repairs or general maintenance for a while. This may include roof leaks, tree limbs in front yards, broken appliances and windows, and dirty carpets, floors and walls.

• In some cases foreclosed homes may have holes in doors or walls, may be missing fixtures or appliances, or may have even been vandalized.
• Houses in poor condition may sell at a discount, but it’s important to factor in estimated costs of repairs in order to understand how much of a good deal you’re really getting.

4. REO Financing Concerns

• Banks want to sell their REO properties “as-is”, and this is often stated in the Bank’s Addendum to the Contract.  However, many REO properties will not pass an FHA or VA appraisal, and may not even meet the standards for conventional financing appraisals.
• A property may have problems that make it un-financeable, such as no heat, or a roof that needs replacing, or a non-functioning septic system. These properties must be purchased by  investors who can pay all cash or find private money lenders or other unconventional sources of financing.
• In some cases a foreclosed property may qualify for a Rehab loan, which will include the costs of repairs in the amount financed, but there are restrictions and added costs, so it’s important to discuss this ahead of time with your Lender.
• The Bank may require a Buyer to get pre-qualified for a mortgage through them, before they will consider your offer.  This is typical with Wells Fargo and Bank of America.  Also if you are trying to purchase a Fannie Mae REO, you may be required to get pre-qualified for the HomePath Program. However, you are not required to actually use these lenders or programs for your loan.

5. REO Pricing

• It’s possible to buy foreclosures for as cheap as 30% or 40% below market value in Southern Oregon, but it’s difficult to save that much on higher quality properties, because of competition from other Buyers. Generally you may expect to see a savings of 5% to 20%, depending on the competition for the property.

• Banks usually list their REO properties with a real estate agent.  When they are first listed the price tends to be slightly below market value.  If the property doesn’t sell within a few weeks at that price, the Bank will typically reduce the price every few weeks until it sells.
• When an REO property first comes on the market, the Bank generally will not consider low offers.
• If the REO property has been on the market for a few weeks, Banks are more likely to accept lower offers.

6. Competition from other Buyers

• Because REOs are generally priced below market value, they attract many potential Buyers.
• It is common to see multiple offers on higher quality and low-priced REO properties.
• Your competition will often include Buyers who are looking for a steal and are making low-ball offers.
• Your competition may also include Buyers who are not aware of the market value of the property and offer too much over the list price.
• If you know you’re competing with other Buyers, see Buyer Strategies below . . .

7. Bank Strategies in Accepting an Offer

• If an REO property is new to the market, the Bank may not make a decision on any offers for at least 5 days, in order to give the property fair exposure and allow time for other offers to come in.
• If there are multiple offers, many Banks will counter with a request for the Buyers’ “best and final” offers.
• From all of the “best and final” offers that are submitted to the Bank, it will choose the one that has the best combination of price and terms.
• The Bank may respond to the “best and final” offer with its own counter-offer, for price or terms changes or both.
• If the first offer cannot be successfully negotiated, then the Bank may counter the next best offer.

8. How to Get Your REO Offer Accepted:

Banks look for offers that are close to asking price and have a high probability of closing. In short, that means the Buyer should have secure financing and not ask for too many conditions to be met by the Bank for acceptance of the offer.  Following are some guidelines for making a strong offer, regardless of whether there are other offers on the property.

• Work with an Agent who is experienced with Foreclosure Sales
• Figure out how much the Property is worth in today’s market. Just because it’s a foreclosure doesn’t mean it’s a good deal. Also, if you’re competing against other Buyers, you don’t want to get caught up in the competition and offer more than the home is worth.  Ask your agent to perform a comparative market analysis (CMA) of the property.  Then estimate the cost of repairs or renovations you will need to do and add that to the asking price.
• If there are no other offers on the REO home, you can probably offer less than list price and get your offer accepted. However, if there are more than two offers, you will most likely need to offer above the asking price.
• Get a preapproval letter from your lender in advance of making an offer, not a prequal letter. Banks prefer preapproval from banks over mortgage brokers. You might also consider getting preapproved by the lender who owns the property. You will not be required to use that lender, but the Bank will give more weight to a preapproval from one of its own departments.
• Don’t Ask for Repairs Up Front. Sometimes banks will pay for repairs, but typically will not agree to do so at the offer stage. If there are problems found during a home inspection, you can try to renegotiate after your offer has been accepted.
• Shorten the Inspection Period. If other buyers ask for 17 days, for example, to conduct inspections, and you ask for 10, you will be viewed as a more serious buyer. If you are having a well tested however, be sure to allow enough time to get test results back within the inspection contingency period.
• Let the bank choose the Title Company.
• Consider the Appraisal Consequences. If you offer over the list price, don’t forget that your lender’s appraisal will need to agree with that price. If your appraisal does come in low, don’t despair. At that point your Realtor may be able to negotiate a lower price, since the Bank will probably have the same problem with any other buyer who needs financing.
• Whatever you ask the seller to pay for should have the exact dollar amount specified. The net value of your offer is what the Bank needs to see before accepting it.

Banks will not accept offers that are contingent on the sale of another property. In general, the fewer contingencies or demands you write into your offer, the better the Bank will like it. 

9. The Bank’s Addendum

After the Bank gives a verbal acceptance of your offer, it  will generate its own “Addendum” that over-rides your purchase agreement. Read through it carefully.  It will contain lots of language pertaining to the property being sold AS-IS in its current condition, and that the bank is to be “held harmless”, or not be liable for any unknown or pre-existing condition.

Agents that are members of the Oregon Association of Realtors use a standard 8-page contract that was painstakingly created by lawyers and a contracts committee. They tried to design it to be as fair as possible, only requiring you to “fill in the blanks.” Oregon Real Estate Brokers are given hours of training on these contracts. While it’s always a good idea to have the contract reviewed by a lawyer, there is some comfort in knowing that it everyone uses the same contract and that it was written by lawyers with a neutral bias.  When you buy a Bank owned property however, you start with a standard contract, but then the Bank sends its Addendum, which is generally non-negotiable. It might appear innocent, but it is not. It’s written 100% FOR the Bank and since every Bank has a separate bank addendum, there is currently no standard training for REALTORS to be familiar with everything the different Banks put in them that could put a Buyer at risk.

Here are a FEW of the things you should know about Bank Addendums:

1. The Bank’s Addendum takes precedence over any of the same things covered in the Standard Contract. So if your main contract says you get a walk through, but the addendum says “As-is,” the addendum wins.
2. Some bank addendums are written nationwide and ignore local laws. Local laws DO supersede these contracts, so sometimes there are points in them that are not enforceable.
3. The addendum could include hidden fees.
4. The addendum may shorten the time you have to get approved for a loan.
5. Many Addendums allow the Bank to cancel the contract up to the sale date. If they get a higher offer, or whatever, they can break the contract. I have never seen this happen, but you need to know that it COULD happen.
6. Pest and dry rot provisions. In a normal sale, the seller may pay if there is pest or dry rot damage. The Bank’s addendum usually puts that risk on the buyer.

If you’re wondering whether you can change or counter any of the terms of the Bank’s Addendum, the answer is “no”. If you want to buy the property, you have to agree to the terms as they are.  If you don’t like the terms, you don’t have to sign, just back-out and look for another property.   If you still want the property though, your best assurance is that the Bank really does want to sell you the property, and they’re not intentionally setting a trap for you with their addendum. Their lawyers are just being lawyers, and trying to protect the Bank’s interests above all else.

It’s important for you to have a Buyer’s agent who knows what he or she is doing.  You should know exactly what is in the Bank’s Addendum, and not be surprised by any requirements that are different than what you thought you asked for in the original contract.

10. Getting the Bank’s Signatures on an Accepted Offer

• If the Bank accepts your offer, it will either return an unsigned counter offer worksheet to you, or have the listing agent provide a verbal acceptance.
• If you accept the Bank’s counter offer, you will do so by signing the Bank’s Addendum.
• In a normal sale, the Seller would also sign all documents and addenda within one or two days after your acceptance. With an REO, your agent may get a verbal acceptance from the Bank’s listing agent, but no signatures by the bank.

• That means that the contract is not “executed” yet, and is not binding by law until you get signatures from the Bank.

The Bank wants to sell the home to you, so the risk is low that they will not sign, but your Lender may not be able to start your loan processing until it has an executed (signed) contract. That adds risk to you, since there may be other costs involved if the delay means you cannot close on time, such as interest rate locks for your mortgage loan or per diem penalties by the Bank.

11. Negotiating with the Bank to Fix Problems

• Banks try to sell REOs “as is” and may refuse to make repairs or give credits. You can always submit a written request for repairs, but the Bank may not agree to your request.

• If you can’t get financing because of a property condition however, the bank may be willing to take care of it.
• If the bank does not work with you and the property condition is worse than what you want to take on, it’s time to let go and move on to another property.

12. Per Diem Charges for Late Closing

• Many Banks will charge you a daily penalty fee if you don’t close escrow by the agreed upon date.  I have seen this be anywhere from $50/day to hundreds per day.
• The per diem charges are there because the bank wants to close the transaction as quickly as possible. If the bank is slow in responding to repair requests or other items out of your control threaten to push out the closing date, your Realtor should request an extension of the closing date from the Bank, and there is a good chance the Bank will agree, and not enforce the per diem charges.