Tips in Buying REOs

It costs in the neighborhood of $20,000 in attorney’s fees, administration, and carrying costs for a bank to foreclose on a property. In addition, if the home is damaged and needs work to make it saleable, the costs go up.

So, when you make a low offer on an REO, the bank will look at the costs it has incurred on this particular home. It will also consider the chances of getting a better deal in the near future. If the market is slow and this home has been on the books for a while, the chances are good you’ll get your deal. In other words, the right timing helps. But, there’s also a caveat here. If the home needs work, you’ll have to tread carefully. Many times buyers get these homes and find out that the costs of restoration can equal or exceed the savings they hoped to get on their good deal.

So, the first step in buying an REO is to go through the home carefully and make a list of needed repairs and what they will cost. Next, add the costs to the price you’re willing to pay for the home and compare with what similar homes have sold for in the area. This will guide you on what you should offer the bank. Hopefully, the REO committee will be in a good mood that day.

On the other hand, if the market is hot and homes are selling fast, you’ll get a cold shoulder to a low offer. Also, if there’s bidding on a property and you’re competing with several other buyers, the chances of getting a good deal drop considerably. There’s usually an uninformed bidder who gets carried away and bids too much. In this case, you’ll want to walk away and look elsewhere for a good deal. When Shawn and Marie were looking for homes, they found an REO in a neighborhood they liked that was close to an elementary school their daughter went to. In going through the house, they found it in bad condition. The lawn was dead, the carpets were beyond cleaning, the appliances needed to be replaced, and five doors had holes in them.

The first thing Shawn and Marie did was invest $350 for a profession inspection. They knew spending the money was a gamble, but they needed to find out exactly what it would cost to put the house in livable condition. After they got the inspection report back they shopped around for carpets, appliances, and materials and got bids for the work they couldn’t do themselves. Totaling all the costs, they came up with $13,578, including their inspection report. Getting together with their agent, the buyers pulled up on the MLS computer other similar properties that had sold recently.

They noticed that about $175,000 appeared to be the market value. Also, looking at similar homes currently for sale in the area confirmed that price range. Shawn felt that if they were going to all that trouble fixing up the home, they should get a good deal. Putting a sharp pencil to the figures, they decided to offer the bank $150,000 for the home. Their agent wrote up the offer and attached a copy of the bids and repair list they had put together, along with the inspection report and the buyers’ mortgage prequalified letter. The package was mailed to the bank’s REO representative who was handling the home. About five days later Shawn and Marie’s agent got a call from the REO department that it had accepted the offer.

The buyers had essentially gotten a home for about $10,000 under market in an area they wanted. Not a bad return on the work they would do to make the home their dream. The key to getting a bank REO committee to look at an offer is to include supporting data such as bids, cost lists, inspections, comparable sales, and a prequalification letter that shows the buyers are ready to go. Bankers like bird-in-the-hand offers, too.