How to buy a REO

What is a Short Sale?

What is a REO?

A REO is a property that the lender or bank acquired through foreclosure. It an acronym for Real Estate Owned. It is pronounced by saying the letters, R. E. O.

Is the price firm, or can I make an offer?

All list prices are negotiable.

Will the bank accept a lowball offer?

No. The banks are sometimes accepting lower offers than in the past, but a very low offer is not acceptable.

Will the bank counter a lowball offer?

You will get a counter offer, but the asset manger must have a serious offer to give a serious counter. I’ve seen counters only a few hundred dollars less than list price, and a few times the counter has been list price.

The property needs a lot of work. Will the lender accept less because of this?

While the lender has not had any inspections, and does not know the actual condition of the property, the lender is aware of the property’s general condition. Reports have been made by the listing agent and appraiser. Condition of the property has already been taken into consideration when the list price was set. The lender will consider offers, but don’t expect them to knock off thousands for repairs, because they have already lowered the list price due to condition.

Will the lender make repairs?

Very rarely. When the property is listed, it is cleaned, any trash and debris removed, and the yard maintained. If there are safety issues, example broken steps, the lender will address it to insure no one is injured while viewing the property. But addressing it may not mean repairing it. Using the broken step example again, the lender may simply have the steps blocked off if there is another way to access that area. Also very rare, the owner may make minor repairs required by the buyer’s lender as a condition of the loan closing. It is extremely hard to get the asset manger to agree to this.

Do all REO’s need work?

No, many are in move in condition.

Who decides to accept or counter my offer?

The asset manger. In most cases, when the asset manger approves an offer, it is still subject to management approval. So far, I have never had an offer approved by an asset manger and then rejected by management.

How long will it take for the bank to respond to my offer?

Three to five business days is common. Sometimes quicker, sometimes longer.

My offer was in first. Won’t it be accepted or countered before any other offer is accepted?

No, the order the offers are received does not matter. All multiple offers are consider at the same time. Sometimes, even if at least one of the offers is acceptable, the asset manger will counter all offers for “The Highest and Best Offer.”.

Isn’t the highest offer always accepted?

Absolutely not. There is much more to an offer than the sales price. It is very important to have an agent that knows how to prepare a professionally written offer. I have seen many highest offers rejected and another offer accepted because the agent preparing the offer did not follow instructions. Incomplete offers are not even considered. I’ve had a second offer accepted while the first agent is trying to correct all their errors. By the way, this is true for all offers, for owner occupant sellers as well as REO’s. Buyers often focus on price, but there are any other factors for the seller to consider. Financing is very important. Has the buyer been pre-qualified? What kind of loan? Is the closing date too soon, or is it too far away. Sadly, many buyer agents also focus only on price. They cost their buyers money by missing all the other important considerations.

How much earnest money deposit is needed?

The amount varies with each property and is usually negotiable. $1,000 is usually acceptable when the purchase price is under $150,000. When a cash offer is made, some REO seller’s will require a 10% earnest money deposit.

Can I write a personal check for the earnest money deposit?

Yes. Some sellers require a cashier’s check. Wire transfers are also commonly accepted. Cash will not be accepted for the earnest money deposit.

Do I get the earnest money deposit back if my offer is not accepted?

Absolutely. In fact, your earnest money deposit check is not even deposited into the Escrow Account until after your offer is accepted.

Should I have a Buyer’s Agent?

While the listing agent does represent the seller, the listing agent must inform the buyer of all known material defects, and treat everyone fairly and honestly. It is most important that you select an agent that has experience writing REO offers. Asset mangers will not even consider an incomplete or incorrectly written offer.

Does the property have a clear and good title?

The Title company makes sure the title is clear. It is your title company’s job to research the title. If he finds a title issue, it will be corrected prior to closing. If it can not be corrected, the contract will be voided and your earnest money deposit returned to you.

Who pays the back real estate taxes?

All real estate taxes are paid by the seller up to the day of closing. It is your Title company’s job to see that this is done. The buyer is responsible for all real estate taxes from the day of closing forward.

Can I have a Home Inspection?

During the due diligence period, it is highly recommended that you do. Neither the seller nor Realtor has any knowledge of the condition of the property. With a foreclosed property, we have no one to ask “Does the furnace work?” or “How old is the roof?” If possible, it is best to have the home inspection completed prior to making an offer. If the offer is made contingent upon the home inspection, it must be completed within the agreed upon time frame from when the offer is accepted. Common due diligence periods are between 7-10 days.

What is a Short Sale?

A Short Sale is one way of avoiding foreclosure and bankruptcy. It is when the lender accepts less than the loan amount (a discount on the loan) and releases the lien on the property at closing, without requiring the owner to make up the difference. I have made Short Sales one of my specialties, and can guide you through the process either as the buyer or the seller. If you are a buyer and want to make an offer on one of my short sales, please contact us. If you are looking to avoid foreclosure or bankruptcy, and can no longer afford the house you have, please contact me. I have several resources at my disposal to help you with your unique situation. If you have not received a notice of foreclosure yet, you still have several options. Let me help you decide which one is best for you

Who Qualifies for a Short Sale?

In order to qualify for a short sale, the seller must prove to the bank one or more of the following conditions: * Loss of job, and difficulty in finding new suitable job * Job Relocation, when equity is deficient * High medical expenses due to disability, injury or illness in family * Divorce * Unable to afford the loan from the beginning * House needs unexpected major repairs * Overextended Credit * Changing Economy * Adjustment in mortgage payment due to interest rate or an unforeseen increase in living expenses Incidentally, these are also the most common reasons for a foreclosure.

Why Would a Lender Accept a Short Sale?

Why would a lender accept less than they are owed? Because the alternative is a foreclosure. Just as with the borrower, there are significant consequences to the lender if they foreclose. * The legal costs of eviction and repossession, * The loss of loan payments during the foreclosure process until it is re-sold * A foreclosed house will need work before it can be resold * After the foreclosure, the bank has two options: Sell it at the courthouse steps, or try to resell in the market. If they resell in the market, they are penalized by the government by freezing 3-10 times the loan amount so that the lender cannot lend those funds to another borrower.

Will my lender consider a Short Sale if the mortgage is current?

Sometimes, some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent.

Do lenders approve all Short Sales?

No. Each short sale application is reviewed on an individual basis. The bank may not be willing to take that high of a loss, or they may feel your hardship is not hard enough.

What if a property needs work, can I still apply for a Short Sale?

Yes. In fact, lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn't. The lender knows the risk of loss goes up when they foreclose on a property that needs lots of work..

What is a Short Sale Packet and What Needs to be in It?

A short sale package it used to determine whether a homeowner can afford the property. Most lenders already have a standard package which they will send to the borrower upon request. The borrower is expected to provide financial information to include income and household expenses. The seller must fill out forms with the Listing Agent to be submitted to start the Short Sale process - and submitted with any offer. These forms include: * The Listing Agreement * Authorization to Release form (to allow agent to discuss with bank) * Hardship Letter (see "How to Qualify" above) * Financial Statement * Seller Net Sheet (a copy of the HUD form with offer) * Contract (when offer is accepted) * Buyer's Proof of Funds (with offer) The Buyer must provide additional items as well. The basics are: * Earnest Money check of at least 1% of sales price. * Special Stipulations form * Proof of Funds * Contract stating buy "As Is"

What are the Tax Consequences to the Seller of a Short Sale?

Before, the Seller was sometimes required to declare the difference between the loan principal and the amount the bank received as income on their tax forms, and pay tax on it. In November 2007, a law was passed that changed this. Effective January 1, 2008, "Forgiven Mortgage Debt" (the difference between the principal and the amount the bank received) is excluded from taxable income. There are restrictions. In order to qualify for this exclusion, the house must be occupied by the owner as a principal residence (not a summer home, vacation house, rental property, etc.). Investors do not qualify.

I have more than one mortgage on my property. Is that a problem?

No. Subordinate lenders are more flexible than 1st mortgage holders.

What if I have 2 mortgages held by different Lenders?

When you have 2 loans with the same lender, it is more beneficial to them, as there is no need to negotiate with another lender. When the two loans are with different lenders, the process is a little longer, but the second lender is the one who has more to lose if they don't reach a settlement. This is because if the property goes to foreclosure, the first loan is the first one to be paid and the second usually nets nothing.

Do I have to be past due on my mortgage to be able to get the benefit of a short sale?

No, but it is likely that the lenders' guidelines will prevent them from formalizing a short sale if the loan is not past due,. This means, for them, that the borrower has the means and can continue to pay on the loan each month. Please understand, however, I AM NOT RECOMMENDING THAT ANYONE STOP PAYING THEIR LOANS. In the current market conditions, it is possible that a bank would accept a short sale, even when the borrower is current.

What is a BPO?

A Broker Price Opinion (BPO) is when the lenders contact their own Broker/Real Estate Agent and pay them to render an option on the condition, value and time on market for the property. This is because many lenders do not have the knowledge of the market in Las Vegas as their offices may be anywhere in the country.

If a lender saves so much money working out a short sale arrangement, why do they request so much information and why does it take so long for them to work a file?

The lender wants to make sure that a borrower is truly having financial problems and is not one of those people who for various reasons just wants to stop paying for the property and the mortgage debt. If the borrower has liquid funds, the lender will want the borrower to use them in the sales process. The lender also wants to make sure the borrower is not selling the property to a related party for the sole purpose of locking in a reduced pay off. The bottom line is that the lender is going to manage the transaction with the objective of recovering the most money for the lender. The time frames involved cover a multi-step negotiation process between the borrower and the lender with either the lender or borrower objecting to certain terms and making various counter proposals before coming to an agreement. Third party inspections and BPOs will also need to be done before the negotiations can be formalized in an agreement.

What is a hardship letter?

This is a letter that explains the borrower's current financial circumstances. Which circumstances have changed from when the house was purchased, and why the mortgage payments can no longer be made. These circumstances are what led to a borrower’s inability to make payments and to pay off the loan in full. This letter must be written by the borrower, and be sincere in demonstrating (with documentation) that it is the truth.

What types of information does the lender require the borrower to submit?

Along with the Hardship letter, each lender will have different forms that we will need to complete. All lenders generally require various items such as two months of bank statements, pay stubs, past tax returns, W2, etc.

How long does it take to complete a short sale?

The time frame for the lender to receive and evaluate the short sale proposal is about 8 weeks from the time the offer and Short Sale Package are received. Buyers need to realize that this is a lengthy process. This is why it is very important to work with a Short Sale Specialist who knows how to manage the transaction. The other agent and the buyer may get cold feet at the end, and the transaction may fall through.

Why does the bank accept less than they are due?

They lose less on a short sale. On average, lenders lose tens of thousands of dollars less on a short sale versus a full foreclosure. It is simply in their best interest.

Can a borrower do this for themselves?

Yes, but doing it alone and on the phone with the lender leads to inconsistent results that are, frequently, not acceptable to the borrower. Working with us, with written negotiations, yields more consistent results.

Why Lenders Prefer to Work with Experienced Agents?

In steeply declining markets, short sales are booming. Selling a home for less than the underlying mortgage often provides troubled home owners with their best chance of avoiding foreclosure and ruining their credit. A cottage industry of bankruptcy specialists and other self-described loan mitigators are trawling for clients, but lenders would often prefer to work with real estate professionals in negotiating short sales for clients. Here’s why: 1. Agents are licensed by the state. 2. Agents adhere to a code of ethics. 3. Agents carry errors and omissions insurance. 4. An Agent has too much at stake to cut corners. A licensed professional is not likely to commit fraud that could put their entire career at risk. 5. An Agent specialized in Short Sales does not need extensive training by the lender’s loss mitigation department. Many departments simply move the file to the foreclosure stack when they realize the listing agent is not experienced in short sales because they have hundreds on their desk and do not have time to train the agents.

I owe more than my home is worth. Is a short sale my only option to get out of foreclosure?

You have other options, like a Deed in lieu of foreclosure. That is a perfect case to demonstrate to the lender that if they do not accept a short sale, they are going to lose even more money than they are now.

How long does the foreclosure process take?

The process starts when you are about 3 months past due on your mortgage payments. You then receive a certified letter stating that the bank will begin the foreclosure process. After 90 days, you will get another certifed notice that a trustee sale date has been scheduled. They then advertise this for three weeks in a legal newspaper. At the trustee sale, your home will be auctioned off to the highest bidder. If this sale is successful, then the home no longer belongs to you and the bank will begin the eviction process. If the sale is not successful, then they will schedule another trustee sale. They then repeat the 3 weeks of advertising and try again at the next trustee sale to sell the property.

What are the implications of a deficiency judgment?

With a deficiency judgment, this allows a lender to garnish your wages, attach your other properties and aggressively collect for years to come any amount that remains unpaid after a sheriff’s sale of the property.

*All information provided is deemed reliable but is not guaranteed and should be independently verified.