How to Buy a Foreclosed House or REO from a Bank

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By Wasatch
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Buy a Foreclosed House or REO from a Bank

There are more foreclosed homes on the market than ever before. There is also a lot of bad information out there. Should you buy a foreclosure and will you get a huge discount?

Difficulty: Moderate

Instructions

Step 1

State foreclosure laws differ. If you are buying from a sheriff's auction, or in my state a court house step auction, it is different than buying a few weeks later from the bank the took it back. Know what to expect if you are bidding. In my state if bidding on the court house steps you need a $5,000 cashiers check and the FULL balance payed the next day by noon. You need cash or a "hard money" loan. You are bidding against the bank that is foreclosing and will usually bid enough to cover the loan amount if there is any equity.
Step 2

If you are buying from the bank after the auction it is called an REO. The bank has it in the real estate owned department. It may not be there until a few weeks or a month after the foreclosure took place. The bank will pay an agent to do a BPO or brokers price opinion. They will then sell it to an investor, often in a package of homes in an area, or they will list it for sale with an agent.
Step 3

The easiest way to buy is when an agent has it listed and priced. Don't be afraid to offer low. But be realistic. The bank knows how fast homes sell. They were able to clear other liens and the second mortgage with foreclosure so they can sell cheaply. Typically I try 80% of what they are asking if the home is worth buying. I offer lower than the already low list price even if the home is a bit under market anyway. The bank has insurance to cover some of the loss. I have financing for me or my buyer in place before offering. This gives you the best chance to get a low offer accepted. Most banks have a minimum below which they do not even look at a low offer. One bank I had inside knowledge of would not review or counter any offer below 62% of what they asked. They knew the market and a 50% offer would not even get reviewed.
Step 4

Now for the good news for an investor. A bank with a foreclosed home on the books are held up in lending about 7 times that amount by banking rules. So if they have a bad loan of $100,000 they cannot lend $700,000 that they would be able to if they sold the loan off of their books. So they are motivated to deal. They may make more money on new loan fees than long term low interest rates. They still want the highest price possible in a short time to help their shareholders, but the longer a home sits the better the deal.
Step 5

When buying a foreclosure remember that the bank looks at the market for that area, year built, and square footage of home. They may look at condition also, but may not know all problems with a home. They never lived there. The last owner may have taken fixtures or damaged the home when leaving. When you write an offer have the right to do a full inspection and back out if you find problems that are too expensive to deal with. Plumbing can leak and it may be hard to tell with water and power shut off. The longer a home is vacant the more potential for problems.
Step 6

After all the warnings I want to say that my best buys for my investors and also for people buying to live in themselves have been foreclosed homes. Do you homework and you should be able to buy one at between 60% and 80% of current value. It is instant equity for you. This is especially true when home sales are slow in the area. When the market was red hot a few years ago I saw people buying foreclosed homes without looking closely at condition. They got 60 thousand off on a home that needed 80 thousand of work. They just paid $20,000 more than buying the same house at full market price, but well kept from a caring owner. Do your homework and use a Realtor that knows the local market and has a few years of experience.