Tips for Buying REOs: Five Things to Consider Before Buying a Foreclosure, Bank-Owned Home (REO)

Posted By on March 31, 2011

Right now, the economy in Florida and across the country is questionable and some are predicting it’s going to take a turn for the worse. Even if the economy does take a turn for the worse, there are lots of opportunities to bargain shop for those with the ability to purchase – and one of the biggest buyer’s markets may be the residential real estate held by banks, those homes that have been subject to foreclosure and did not sell at the foreclosure auction (real estate owned, or REO).

Lots of people are interested in buying this real estate.  For many, however, they may be buying future lawsuits instead of profitable real estate investments or pretty new homes.

Tips for Buying Bank Owned Homes – Warnings, Things to Consider

Television advertising and web sites show tantalizing deals: beautiful homes for pennies on the dollar.  Back in January, for example, the Miami Herald covered a story of a Palm Beach Foreclosure sale where $250,000 homes were sold for $200.00 (for details, read our earlier post here).

If you can afford it, then it seems almost stupid not to go and invest in these foreclosures, right?  Maybe, maybe not.

Consider the following before jumping into that foreclosure purchase:

1.  The condition of the property. Lots of these properties have been setting vacant, which is never a good thing for houses.  The owners who were losing their home may have vented their frustration on the home and repairs may be needed after they’ve punching holes in walls, pulled off cabinet doors, etc.  Additionally, the bank has been responsible for upkeep and maintenance on these properties and that investment has been minimal.

2. The value of the property. What is the true value of the home?  That number may be different from the amount left due and owing on the bank’s note – the bank will be interested in getting as much of that note paid off as possible – after all, the home (collateral) was originally considered to be sufficient to cover the bank’s loss if the owner defaulted on the note.  Other variables must be considered as you place a value on the property.  Additionally, fair market value today may not be the same as it will be in six months or a year from now — it may fall before it rises.

3.  The offer. Investors are known to offer significantly less than the bank’s asking price.   An offer that would have been a low ball in past years may be standard operating procedure now. You need to be knowledgeable on local negotiation tactics.  Twenty to thirty percent off the asking price as your initial offer might be customary these days?

4.  Your future financial responsibility. When performing your due diligence, it’s important to research if there are any liens  against the property or any money due an Association (Homeowners or Condo) and, if there are, make sure the seller pays those items off at or before the closing.   The Contract will set forth the seller’s obligation in this regard.  Additionally, the seller should provide an affidavit at the closing stating that the Seller does not know of any outstanding liens that could affect the property.

5.  Your title to the property. The problem with foreclosures in Florida as well as across the nation is that there are so many novel examples of wrongful foreclosure occurring.  Too many times, legal title has never passed from the homeowner who defaulted on their mortgage.  If this is true, then the subsequent buyers have no legal rights to the real property – title was not conveyed under the law because the foreclosure process was flawed.

It is true that many prudent REO buyers are knowledgeable about construction, home inspection (codes, etc.), state contract law (the documents necessary to close a deal) and in state real estate law (title transfer issues).  However, even if the costs of involving contractors, lawyers, and inspectors in the buying process seems to dampen the idea of a great deal, it’s the smart thing to do in this marketplace.  Buyer beware.

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