What you should know about Buying Foreclosure Homes in California
Buying foreclosed properties is quite a bit different from making an offer on a short sale. Unlike a short sale, the price of the home has been set by the bank and is not a “guess” by the seller in hopes of getting offers to buy their home.
Once the bank forecloses and owns the property it is listed with a Real Estate Broker to sell. Any pending offers made prior to the foreclosure are now disregarded. A short sale offer is an offer to purchase from the current owner, which in turn must have the offer approved by the bank. A foreclosed property puts you in direct line to negotiate with the bank through their Real Estate Broker which is usually different from the original owner’s Agent.
Real Estate Owned (REO) is the term that most banks and Real Estate Brokers use for Bank Owned foreclosed properties. You will also hear them referred to as Bank Owned and Owned Real Estate (ORE) although the last term is seldom used anymore.
The Burden of an REO on a Bank is quite significant and expensive. Banks are very motivated to liquidate REO inventory. The first and maybe the greatest burden that REO properties represent is that the bank is required to keep in reserves the equivalent of the value of their REO inventory.
What this basically means is that the value of the homes the bank owes is money that they can not lend. Banks make money by lending money and charging interest on those loans. By requiring them to keep that money in reserves, you can see where that can significantly impact that banks ability to run thier business.
Property Taxes are the responsibility of the bank while they have it on their books. Property taxes are assessed based on the price of the home at the time the deed of trust transfers from one owner to another. The value of the property is the balance of the lien against the asset, which in most of these cases is higher than the actual value of the home. This is again, a huge burden on the bank.
DOM - Days on Market becomes an important indicator when researching or shopping for REO homes. DOM represents the number of days that this property has been on the market. The bank literally looses money every single day the home is on the market.
Many REO homes are priced to sell is my experience. It’s a losing proposition for a bank to “hold out” for the values to increase or in expectations of a better offer. For this reason, many banks will list these homes just under market to move them quickly.
A floor price is set by the bank and is an internal sales price that the bank will not go under without getting many suits involved to evaluate the offer and the opportunity to sell the property for more. Sometimes you will find a Real Estate Agent that has information on what this “floor” price is - if your Buying Agent has the ability to extract this intel….consider yourself lucky! You can now make an informed and educated decision as to whether you’re willing to purchase this home for that price.
Always ask for closing costs even if it’s a bank owned property. A great negotiating tool is to offer a fair and reasonable price, your Buyer Agent should be able to educate you about this, and ask for the maximum concessions to cover all recurring and non recurring closing costs. You can typically get 3% of the purchase price for higher loan to value loans, more if you’re making a down payment of more than 10%. In most cases - $10,000 is plenty to cover all possible closing costs.
Sold in “As-Is” condition, No Warranties is a common phrase that you will find on REO listings. This basically means that the bank will not make any repairs to the property and does not make any guaranties about the condition of the property. These banks will not pay for a home warranty policy to cover against future defects either. I always pay for this policy if the bank will not.
The most important thing to know about REO properties is that the condition of an REO home has a greater chance of needing repair. Lenders will not lend on homes that are in need of repair. Things to look out for are water stains on the ceiling or walls, holes in drywall, exposed wiring, missing flooring, mold, broken windows or doors and, less obvious, additions or expansions that may not be permitted. These are all red flags that should send you looking at other properties if you are depending on financing from a conventional lender to purchase this home.
Down Payment Assistance programs are still available for REO homes. The same conditions apply for the ability to get financing on the property. Buying a foreclosed home will not prevent you from using first time home buyer programs or home buyer grants as you would for a property that is not owned by the bank.
There are many REO Homes on the market right now, and many more to come. My advise to anyone looking for a great deal is to focus your search on REO properties and be patient.
Feel free to contact me for a list of REO properties in your area.
Once the bank forecloses and owns the property it is listed with a Real Estate Broker to sell. Any pending offers made prior to the foreclosure are now disregarded. A short sale offer is an offer to purchase from the current owner, which in turn must have the offer approved by the bank. A foreclosed property puts you in direct line to negotiate with the bank through their Real Estate Broker which is usually different from the original owner’s Agent.
Real Estate Owned (REO) is the term that most banks and Real Estate Brokers use for Bank Owned foreclosed properties. You will also hear them referred to as Bank Owned and Owned Real Estate (ORE) although the last term is seldom used anymore.
The Burden of an REO on a Bank is quite significant and expensive. Banks are very motivated to liquidate REO inventory. The first and maybe the greatest burden that REO properties represent is that the bank is required to keep in reserves the equivalent of the value of their REO inventory.
What this basically means is that the value of the homes the bank owes is money that they can not lend. Banks make money by lending money and charging interest on those loans. By requiring them to keep that money in reserves, you can see where that can significantly impact that banks ability to run thier business.
Property Taxes are the responsibility of the bank while they have it on their books. Property taxes are assessed based on the price of the home at the time the deed of trust transfers from one owner to another. The value of the property is the balance of the lien against the asset, which in most of these cases is higher than the actual value of the home. This is again, a huge burden on the bank.
DOM - Days on Market becomes an important indicator when researching or shopping for REO homes. DOM represents the number of days that this property has been on the market. The bank literally looses money every single day the home is on the market.
Many REO homes are priced to sell is my experience. It’s a losing proposition for a bank to “hold out” for the values to increase or in expectations of a better offer. For this reason, many banks will list these homes just under market to move them quickly.
A floor price is set by the bank and is an internal sales price that the bank will not go under without getting many suits involved to evaluate the offer and the opportunity to sell the property for more. Sometimes you will find a Real Estate Agent that has information on what this “floor” price is - if your Buying Agent has the ability to extract this intel….consider yourself lucky! You can now make an informed and educated decision as to whether you’re willing to purchase this home for that price.
Always ask for closing costs even if it’s a bank owned property. A great negotiating tool is to offer a fair and reasonable price, your Buyer Agent should be able to educate you about this, and ask for the maximum concessions to cover all recurring and non recurring closing costs. You can typically get 3% of the purchase price for higher loan to value loans, more if you’re making a down payment of more than 10%. In most cases - $10,000 is plenty to cover all possible closing costs.
Sold in “As-Is” condition, No Warranties is a common phrase that you will find on REO listings. This basically means that the bank will not make any repairs to the property and does not make any guaranties about the condition of the property. These banks will not pay for a home warranty policy to cover against future defects either. I always pay for this policy if the bank will not.
The most important thing to know about REO properties is that the condition of an REO home has a greater chance of needing repair. Lenders will not lend on homes that are in need of repair. Things to look out for are water stains on the ceiling or walls, holes in drywall, exposed wiring, missing flooring, mold, broken windows or doors and, less obvious, additions or expansions that may not be permitted. These are all red flags that should send you looking at other properties if you are depending on financing from a conventional lender to purchase this home.
Down Payment Assistance programs are still available for REO homes. The same conditions apply for the ability to get financing on the property. Buying a foreclosed home will not prevent you from using first time home buyer programs or home buyer grants as you would for a property that is not owned by the bank.
There are many REO Homes on the market right now, and many more to come. My advise to anyone looking for a great deal is to focus your search on REO properties and be patient.
Feel free to contact me for a list of REO properties in your area.
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