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Perhaps
the easiest way to buy foreclosed property is buying REOs ("real estate
owned"). An REO occurs when the lender takes back the property and
becomes the outright owner. The lender, however, does not normally
want the property and is usually motivated to move the property quickly.
However, the fact that they don't want to be carrying these
properties does not mean that they will make things easy for us by
selling cheap.
If a bank has a large portfolio of bad loans
and they do not want to carry them on their books they sell the loans as a portfolio
at a discounted price to companies like Fairbanks
Capital Corp. If they have taken a property back and now own it, good business
practice and responsibility to stockholders requires that they get as much as
they can for it as quickly as they can get it.
Purchasing directly from the lender is the most popular way to buy foreclosures. It's fairly easy, and less of a headache than other investing methods because it involves less complications and risks.
REO buyers should use following ten steps:
- Make friends with every banker you can, but particularly loan officers and whoever is
in charge of foreclosures in your local banks.
- Make friends with appraisers. The government uses a select few appraisers in every market to evaluate VA, FHA
and HUD properties that they take back. Those appraisers are a foreclosure
investor's most valuable asset.
- Register for HUD foreclosure mailing list.
- Register for the VA foreclosure list
- Contact the broker. A few real estate brokers in every market specialize in representing lenders with foreclosed properties. Locate and befriend them.
- Research the properties that are for sale on your own. Contact
the local assessor and ask for a copy of the assessor's work sheet
for preliminary information on each property. Check with the municipal
building inspection department for any complaints or other records.
- Inspect the property.
- Predict the profit. Determine the property's fix-up costs, potential rent and/or resale price and profits
- Negotiate the best possible purchase price and buy.
- Repair and resell or rent it as quickly as possible.
- Sometimes it's what you know.
-
If you have been paying attention to foreclosure sales, perhaps even attended auctions, you know
of some lenders who have properties to sell. You may even already know enough about the property and the lender's position to make an early, intelligent offer.
You can also learn of lender or government owned properties in the newspapers, by researching them at the
county courthouse and on Internet sites. Drive through neighborhoods looking
for vacant property. If there is no sign on it, stop and ask a neighbor. Chances
are it is a foreclosure.
- More often, it's who you know
-
You will always have a much better chance of finding foreclosure bargains
through who you know. A sad fact of life is that you will not likely
learn about any real deals through the normal channels until after
the fact. I'm sorry, but that is the real world truth.
Very few investors have access to all of the information about what properties are, or will become
available. If you want to be one of them, you must know the right people.
- Everybody knows somebody who knows somebody. Make sure that all of of your friends, neighbors and relatives know you are looking for foreclosures to buy.
- Bankers talk to other bankers. They know more about what loans are going bad than anyone else in town.
Make sure you talk to bankers. They belong to the golf club, the Rotary, serve on the United Way Board and work out at the YMCA. Some of them go to church and lead scout troops.
- The government uses a select few appraisers in every market to evaluate VA, FHA and HUD owned properties. Those appraisers are
a foreclosure investor's most valuable asset. Each appraiser has some friends who will know about REOs before anyone else does.
- There is a real estate broker who specialize in bank and government owned property will likely market those properties
in your area, and present your offer to the lender or their agent. The broker's relationship with a buyer may determine how soon the
investor will know about new listings and how hard the broker will work to sell a low priced offer to the lender.
- Buying blind is dumb
-
Once you learn of a property that meets your criteria
for location, price range, size and style, determine if the property
is a bargain compared to similar properties in the immediate area. If
you are buying through a broker they will be able to provide the market
data value for you, with a list of the comparable properties they used
to reach their BPO (Brokers Price Opinion). If there is not a broker
involved, you will need to be able to access the data to do the market
analysis yourself. Remember, investors need to buy right if they are
to make a profit in the short term.
If you can't buy the property 15% to 20% under market value, it may not
be a good investment; unless the market values in the area are
undergoing rapid appreciation.
When you meet the lender or broker at the property, be prepared to do a
thorough inspection right then and there. If the property is a bargain
it won't last long and you may not have another opportunity. Use
a good property inspection checklist so that you can quickly determine
repair estimates to factor into your decision on its value to you.
Remember to include all of the expenses associated with buying; repairing,
borrowing, holding and then reselling into your cost in the property.
Have you completed the CSU e-course on Valuing Income Property? Those lessons are important here.
Whenever possible, negotiate around the four discount factors: price, down payment,
interest rate and closing costs. Since you will be buying from a lender
you may be able to negotiate all four of them.
However, some lenders will do not want to finance
their own foreclosed property again. Something about being burned once. When
that happens you can usually counter with a lower price.
When you like the bottom-line numbers, the terms
and the property, proceed with a written offer containing the following:
- A statement indicating your intent to purchase the real estate, including any appurtenances and personal property in or on the property.
- The complete physical address of the property.
- The legal description of the property. If you don't have access to the legal description make sure you include a request to review it as a contingency. Don't be unpleasantly surprised to find that the neighbor own the driveway.
- Your price.
- Your down payment and financing terms.
- The date you would like to close on the purchase.
- Any contingencies. (Environmental, attorney review, 1031 exchange.)
- Your deposit or a statement of when and how it will be provided.
- Your name, address and phone number.
- A statement of your financial ability to complete the purchase as agreed.
- Low-ball loses all
-
Unrealistic offers will be rejected quickly and you will likely poison the well
for future opportunities. The broker will have to present facts that
can be taken to the bank to explain why your offer should be accepted.
The seller's agent will have to justify their recommendation to a boss
or a board.
Try to work honestly and realistically with the
broker and lender's agent. Remember, however, nothing is ever really cast in
stone. You should be able to negotiate interest rates, price, down payment, amortization,
just about anything as long as you stay within reasonable bounds. If you can't
get your terms try to get your price. Professionals will understand that investors
need to make money as long as they don't see you as too greedy.
Some lenders sell thousands of REO's every year.
Those that do become experts who learn how to sell their properties at or near
market price. However, not all lenders are marketing experts or work in the same
way. Try to locate those that are more flexible in their property disposition
policies.
- Time kills all deals
-
When the lender, or any seller accepts your offer,
close as quickly as possible. Avoid delays and complications from nitpicking
every detail. If a better offer shows up before closing, the seller may well
call their lawyer and start looking for a loophole in your agreement. Remember
the axiom; time kills all deals.
- And now . . .
-
The good: The foreclosing lender
is almost always the senior lien holder, thereby wiping out all
other liens and judgments, with the exception
of government liens, at the auction. This means an REO property
will have a clear title. That saves a lot of time, expense and
worries when buying foreclosures. If necessary,
the lender will have taken whatever legal action necessary to
quiet title and perfect the deed so
that they can sell with a Warranty Deed.. Most
likely, the lender will also have evicted any
occupants and paid any property taxes in arrears. The lender
may either repair the property to acceptable standards or allow
a discount to the buyer to accomplish the repairs.
The bad: Rewards relate
to the risk in any investment. Buying
a REO property is a low risk investing method and so the profits can
be on the low side as well. If you are not able
to make an offer before the lender has renovated the property to
prepare for sale you may have to pay near market value, negating
the reasons to buy foreclosures.
The ugly: Once the lender takes ownership they will market the property for the
highest price they can get and retain all profits. There is not
any standard that lenders use for either price or disposition of
foreclosure property. Some lenders market their inventory
of REO's as widely as they can, while others practically hide them. Some
lenders advertise foreclosures in newspapers or list their
properties with real estate brokers, while others may
require that you maintain an account with them or
even have an inside connection to get their list of properties.
Some other lenders now charge substantial fees just to see a list
of their foreclosures and still try to sell them at market values.
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