How to Buy REO Foreclosures
REO foreclosures are houses that have been taken back by various lending institutions and have not sold at a foreclosure auction. Contrary to popular beliefs, REO foreclosures typically sell close to their market value. Since you will be dealing with a large lender instead of an individual person during your contract negotiations, it is important to understand the process of how to buy a REO foreclosure.
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Things You'll Need
- Pre-approval from a lender
- Proof of funds
- Computer
- Telephone
- Realtor with REO knowledge
- Earnest money in the amount of 1 percent of purchase price
Instructions
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Get pre-approved for a loan. Getting pre-approved will help make your purchasing process move smoother. Typically a bank will give you 30 to 45 days to find a home that you wish to purchase, at which time you can lock in a rate. Getting pre-approved will help the owner of the property see that you are serious and could help them move your contract along quicker.
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Get proof of funds for your estimated down payment. Many banks require that you provide this along with your offer.
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Find a REO home that you would like to purchase. Some banks have properties listed on their Web site. Others simply list their REO portfolio through a realtor in the area. Don't forget to check listings on Fannie Mae and Freddie Mac's Web sites. Links are included in the "Resource" section.
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Find a realtor who is familiar with REO foreclosures. You can perform this step before finding a home, and allow a realtor to provide you with listings. However, searching for foreclosures on your own will give you a better idea of what is really available.
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Have your real estate agent find out details about the home, such as if there are any "as-is" reports, inspection reports, what repairs the bank has already agreed to make, how the offer needs to be delivered and how long it takes to approve an offer.
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Make an offer. Include a clause that allows you to back out of your offer should an inspection showcase an unanticipated, yet costly, repair. Get copies of your offer for your personal records. Your real estate agent will keep the originals.
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Make out a check to your Realtor's company for 1 percent of the purchase price of the home. This is your good-faith deposit (earnest money), and will be required should the lender accept your offer. If your offer is not accepted, the check will be returned to you.
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If it takes longer to receive an approval on an offer than you have left on your pre-approval, contact your lender and let them know of the situation.
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The bank will either accept or deny your offer, or they will give you a counter-offer. If they accept, you have purchased a REO foreclosure. If they deny your offer, you can go back through the process and give a new offer. If they counter, you can either accept or send them back another offer.
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Tips & Warnings
Locate a couple of REO foreclosures you are interested in and prepare your offers--but don't send them out. That way, if one deal falls through you are ready with a back-up plan.
Many REO foreclosures are sold as-is. Make sure you have some savings set aside to cover unanticipated repairs that pop-up after closing.
