Q: What is an REO?
A: "REO" stands for real estate owned. This is a term primarily used by the default servicing industry for property that has been taken back by a lender, or financial institution, due to a default on a mortgage. The only remedy for the lender to cure this default is to take possession of the property and resell to another buyer, often times at a loss. Lenders are in the business of making loans, not selling properties, so they must liquidate these properties to obtain more capital for lending purposes. Because of this, lenders hire asset management companies, whom are responsible for preserving and selling properties. The asset managers work with local real estate agents whom are proficient in property preservation and valuation.
Q: What's the difference between buying an REO vs buying from a Private Seller?
A: First, banks are exempt from Maryland's disclosure/disclaimer statement. They will not be held liable for any faults or defects with any property they sell. Secondly, all asset management companies and REO sellers utilize a special addendum on every transaction. These addenda are written by legal counsel of the servicing companies and are there to protect them from liability as well as ensure that they have maximum control over a sale. This translates into streamlined transactions with a higher probability of closing. The servicing companies must sell as many properties as possible at the best price possible, and have very litte margin of error when dealing with liquidating these assets. Therefore, when buying an REO, bank addenda super-cede all buyer submitted contractual terms and will take precedent in the event that either are in question.
Q: So why put-up with buying an REO?
A: Simple: Great Deals! While servicing companies do try to mitigate as much loss as possible, they do realize that they will have to price their assets at attractive values relative to competing listings on the market to achieve a sale at the quickest yet highest price possible. This is especially true when the asset in question is an investment, or probably an all cash sale. However, often times there are great deals for prospective homeowners as well, whether 1st time or move-up buyers. Cash offers and offers closing in under 15 days often will yield a better discount than financed offers. Financed offers on homebuyer ready homes will often give max closing contribution for a qualified buyer.
Q: What is the normal closing time frame for an REO?
A: This varies with each individual home marketed. Most homes being marketed are usually ready or almost ready to be closed on by a prospective buyer, and will give a buyer up to 30 days to settle. Rarely, settlements can be slightly delayed, as the title provider may be waiting for ratification of the foreclosure sale with the local juridiction. At times,courts have had a difficult time keeping up with the myriad of foreclosures throughout the region. If you need to purchase an asset immediately, such as to satisfy the requirements of a 1031 exchange, ask the listing agent if the forclosure has ratified.
Q: Why do sellers of REOs have their own title company?
A: Institutional sellers utilize their own foreclosure attorneys when dealing with foreclosures due to the complicated nature of the transaction. Sellers are responsible for providing the buyer with a Quitclaim or Special Warranty Deed. Sellers must utilize attorneys whom are well versed with local foreclosure proceedings and rely upon them to give the buyer a legally viable title of ownership. In the state of Maryland, a buyer is not obligated to use a seller's title attorney. However, many REO sellers offer benefits or discounts for using their settlement provider. If you are using your settlement provider of choice, be sure that they are well versed in prefecting title on foreclosed properties. The best way to find out is to simply ask them before electing to use them an REO purchase. For a list of REO saavy title companies whom provider settlement services for buyers, please contact us.
Q: So what do I need to offer on an REO?
A: As a homebuyer, you will need a pre-qualification from a direct endorsement lender. A direct lender has complete control over its funds and do not rely upon the expertise of a broker. Utilizing them will often times ensure a lower cost loan and gives an REO seller confidence that the buyer can perform up to the terms stated in the pre-qual letter. Some sellers will require you to pre-qualify via their lender affiliated channels. While you are not obligated to use those lenders, this will give the seller confidence that you can perform, and often times yield discounts for using the preferred source.
You will need an earnest money deposit of at least 1% of the purchase price or $1,000 minimum.
As an investor purchasing with cash, you will be required to show a proof of funds, such as an account statement or ownership of liquid collateral, such as equities and bonds, or a line of credit. If you are seeking finacning from a hard money lender or private financier, the lender or financier must provide you with a funding committment and be ready to provide their proof of funds upon request.
You will need an earnest money deposit of at least $1,000; and in some instances, up to 10% of the purchase price.
Q: Can my contract be contingent upon inspections?
A: For homebuyers, offers may be contingent upon inspections for purpose of satisfying lending conditions only. In the event that your lender requires inspections, and most will, you must schedule your inspection with us at least 48 hrs prior. In the event that repairs are required to satisfy loan conditions, you must obtain bids from the seller's contractors. Failure to do so may result in unwillingness by the REO seller to perform repairs and could terminate the deal.
As an investor, most homes are usually sold "as-is" with no inspections only for buyer informational purposes. If you are purchasing as an inexperienced or novice investor, it is recommended that you have a contractor view the property with you at least once and give you an estimate of repairs needed. The banks will perform no repairs and most of your competition offering on these assets do not make their offers contingent upon inspection. Some banks insitutions will give you up to seven days to rescind a contract without losing the earnest money deposit. Confirm inspection terms with your agent prior to signing bank addenda. Making an "as-is" cash offer contingent upon inspections is not recommended.
Q: I'm an investor! I only put my money at risk if absolutely necessary and only play on my terms! Why do my offers keep getting rejected?
A: Well that's too bad! Most seasoned investors understand that acquiring a great REO deal is all about giving the seller the terms and incentives that they are looking for. Seasoned investors know that their profit comes from buying the deal that everyone wants, but only some have the means of making happen. Remember, servicing companies & REO agents have little margin of error when liquidating these assets and have very little patience when dealing with amatuers. REO's cannot be assigned prior to closing (most can be simultaneously closed). Servicers will not take contracts with EMD's less than $1,000 or subject to terms outside of the servicer's addenda. Defaulting once upon these sellers will probably disqualify you from doing any business with them as well as us, for the forseeable future.
HOWEVER.... We know that you must be profitable to be able to keep coming back to buy more! While you may be a great person whom enjoys the endeavors of the housing business, we're sure you don't do this for free, nor would we expect you to. Investor profit is always considered on every "as-is" sale, we assure you. If you are serious about making a retirement and possibly even a living from buying, renovating, renting & re-selling bank owned properties, we want to explore the possibility of starting a mutually profitable & prosperous relationship.