We’ve talked about Equity Deals and Attending Foreclosure Auctions. But what happens if no one bids on a property at auction and how can you benefit? If you’re unfamiliar with the process, listen up! This alternative property acquiring technique is not only a viable option (especially to those without cash to purchase homes), but thousands of people just like yourself obtain properties this way every year.
What happens to an unsold house?
When an auction house has not sold, ownership of the property transfers to the foreclosing lien holder. When the principal owed, interest accrued, foreclosure fees, and other expenses total more than the value of the property, there is no equity to attract third party bidders. So, the property reverts to the lender for the opening bid amount. At this point, the bank now owns the property and the mortgage that was in default no longer exists.
This property is now referred to as a REO or Real Estate Owned property.
What bank does to it?
Most of the time, the bank handles the eviction of any tenants or homeowners lingering in the property. This saves you a tremendous amount of time and energy. They’ll usually take care of some needed repairs—anything that poses an immediate danger or threat to the property’s condition such as missing exterior doors, unsafe wiring, or winterizing the property should to stay vacant. They’re not going to sink any more money into a house than needed. And why would they? They’re likely taking a loss on the property.
The house is now sold “as is,” with the condition of the property already in mind.
With the bank expunging any second or third liens on the property by this time, you’re looking at a clearly cheaper piece of property than if you’d worked directly with the owner.
Another upside to buying REOs is the ability to look at the property before purchasing it; a luxury not often awarded when buying at auction. You’ll also be able to have the property fully inspected to determine the estimated cost of repairs to bring the house up to full market value.
Not only are you paying below market value for one of these properties, there never seems to be a shortage of inventory.
REOs are not always made available to the public. Banks generally like to make these properties available to investors. Although they prefer to bundle them and unload a big batch at a time to million-dollar investors, you can take advantage on a single property basis.
As an added benefit, you can often save money by using the same title company that the lender used during foreclosure.
Where to Find Them
First the obvious; pick up the phone and call the bank. Because banks don’t want the properties (they want the money), they normally have entire departments that handle foreclosures and REOs. You can contact the REO or Asset Management department of the bank or mortgage company for information on available properties.
Network with real estate professionals. (How many networking events have you attended this month? Was it at least 4?)
Contact a local real estate agent, preferably one with experience working with REOs who can supply you with a list of primary lenders. If you need help finding an agent, check out my guide HERE.
When in doubt, go online. Any search engine will produce a multitude of leads for you to wade through. Type in “foreclosures” or “bank owned properties” with your target town and state. Just set aside some time; you may have to do a little digging.
Another way to find REOs is to track a property you’re interested in from the day the first. You can contact the individual conducting the sale to follow up on the status of the property. It can be more profitable for you to purchase a property after it goes unpurchased at a foreclosure auction, especially with consideration to any other liens, interest, or fees the bank has now cleared.
How to make an offer
Some buyers misunderstand the bank’s motives, thinking that banks are in a hurry to sell these properties, but that isn’t true. The bank has the money, they’re not paying interest on the property and don’t have holding costs associated with it. They aren’t in a rush, so never assume they are motivated when you make an offer.
Still, make sure to run proper inspections to understand what you’re offering on. Check all major factors: the condition of the roof, foundation, plumbing, electric, insect problems. Like any property you purchase, you’re not only offering on the property, you’re inheriting all its problems. Although the bank is not likely to discount the property greatly—understanding they are selling it “as is”—you can still factor these into your offer.
Your offer should include inspection contingency time frames that allow you to cancel the offer if your inspections uncover unacceptable damages.
Once you make an offer, they are likely to counter. Often, they do this to show their shareholders and auditors that they’re doing their part to get the best possible price. Don’t be afraid to counter back.
With your offer, always include a pre-approval letter from your lender to make your offer as attractive as possible. Don’t have a pre-approval letter? No problem. We can help you with that. In fact, if you attend a Funding Tour we will give you a pre-approval letter for up to $250,000. Not a bad deal considering the valuable education you’ll receive and the valuable, hands-on experience we’ll pass to you! For details, visit fundingtour.com or call us at 800-533-1622 to secure your spot.
Be patient and consistent!
To Your Success;
Lee A. Arnold
The Lee Arnold System of Real Estate Investing