Buyers

This section is for buyers interested in purchasing distressed and foreclosed properties. Whether you are an investor looking to add to your portfolio, and a buyer looking for a good deal, our team can help find the properties best suited to your needs.

Below is a no-nonsense guide to successfully buying a distressed property or REO. We describe the entire process in a straightforward manner, explaining the terms and acronyms unique to this business as we go along.

And now…

Everything You Ever Wanted to Know About Buying a REO, But Didn’t Know Who to Ask.

The BASICS: Foreclosures, REO’s, Asset Management, and REO Brokers

Foreclosure

This section can be skipped if you are an experienced buyer. But these terms can often be confusing to those beginning their searches.

A property can be in foreclosure, which means that the mortgage holder/bank has started legal action to gain possession of the property, usually for nonpayment of the mortgage. The property is still owned by the existing owner until the court process ends with a court-ordered foreclosure auction, where buyers bid on the property. The highest bid is the winner, even if it is a bid lower than the existing mortgage and liens on the property. The auction is mandatory. That high bidder gains legal possession of the property – this is most often the bank or financial institution that holds the mortgage. At that point the property is foreclosed upon, and has a new owner.

Another point of confusion: sometimes the new owner (usually a financial entity, see that explanation below) – the one that has the winning bidder at the legal foreclosure – will then put the property up for auction on an internet site (Auction.com, for example). This is NOT the legal foreclosure auction, it is just an auction, and the owner has no obligation to accept the highest bid. These auctions often repeat a number of times, with the owner hoping to get a certain price.

REO

REO is an abbreviation for Real Estate Owned. This is a term used in the financial industry for property that has been foreclosed on and is now owned by a bank or other institutional entity. Such properties are often called bank owned, as well. In general, banks are not in the business of owning and managing physical property, so they will make preparations to sell the property.

Asset Management Company

Once a property becomes a REO, the financial entity holding ownership will look for a company that has experience in maintaining and selling the property. Lawns have to mowed, taxes paid, and someone has to do that. Asset Management Companies will also oversee any repairs or renovations. Some also subcontract that work out to a Property Preservation Company (PPC).

REO Broker/Agent

Asset Management companies often operate on a national scale and they have developed networks of real estate brokers who are familiar with the specific area that the property is located. These brokers are then assigned the pre-marketing listing and are responsible for overseeing maintenance and renovations of the property and getting it ready for sale.

REO Sales

When the property is ready for sale, the REO Broker will list it in the local Multiple Listing Services (MLS) for the area, where it is then syndicated to national sites like Zillow, Trulia and Realtor.Com, etc. At this point, the property can be shown to buyers and offers for purchase made.

SOME TRUTHS About Foreclosed Property Sales You Need To Know

We run into a lot of buyer misconceptions about REO sales. No, sorry, the ‘bank’ is not looking to just get rid of their properties. To successfully bid on a foreclosed property (REO), please keep the following in mind.

Most REO’s are NOT owned by the banks that held the mortgage. The sale of most mortgages on the secondary market (see our resource section for a more detailed explanation of a complicated process) results in a variety of financial entities owning the property when it is pulled from a bundled property tranch as part of a foreclosure. When the term ‘Bank’ is used here, for convenience, it refers to a financial entity, one usually specializing in REO’s.
These financial entities are not interested in losing money. It can be assumed, that like any other seller, they are interested in getting the best price possible for their property.
They don’t want to hear about what lousy shape the property is in. Their REO agent has already told them, and they have valuations and appraisals that take the lousy condition into account. But, you as the buyer should have a realistic idea what full repairs will cost. If you do not have a construction background, we recommend that you return and do a second informal inspection with a qualified contractor or inspector you trust. Remember, this is for your information only. Most REO sellers will not accept offers contingent on inspection. The properties are usually sold as-is.
The ‘bank’ will finance your purchase. NO. This is due in part to the fact that the financial entity that owns the property is probably not a bank and mortgage origination is not something they do. But, sometimes, they may partner with a bank or mortgage brokerage that does. You should have an experienced buyer agent to help with this and other issues specific to REOs.
Foreclosure sales are all the same. NO. Similar to buying a house from a homeowner, ‘bank’ sellers are quite different from each other. Each financial entity has its own orientation and business plan. Some may want to sell quickly, others may be prepared to wait until they get a higher price. They may prefer to sell to owner occupants or to first time home buyers.
Another important point here is timeframe. A seller is happy to quickly get their asking price or above, but that does not always happen. Perhaps the listing price is too high, or, sometimes, the accepted offer falls apart, and the deal is dead. THEN, the property comes back on market as active. This is an opportunity for a smart buyer to get the property at a somewhat lower price, as the seller just wasted a lot of time on an offer that did not work out and may possibly be looking for a quicker sale this time. You need a buyer’s agent who will track the progress of accepted offer and pending status and let you know if the property comes back on the market. The game is still afoot! Until the property closes.

FINDING the Right Realtor

That’s us, of course. But perhaps you have an agent you like already, or would prefer someone you already know. Or, possibly our approach does not work for you. We are happy to get offers from other agents for our listings.

But, make sure that the agent you use has experience in the distressed property field. If you read the rest of this guide, you can educate your agent if they do not, but that really is not your job as a buyer. For example, we often get offers from agents with a pre-approval for conventional financing, when it is clear that the condition will not allow that. These offers will be rejected.

FINDING the Right REO Property - Residential

First, you have to search for and find it, right? That’s where you can trust TRST to be of help. We can set up a great search for you, but we need the right information and we rely on our buyers for all the specifics; where are we looking, what is a realistic price range, are you pre-qualified in that price range, and then, of course, important property specifics – size, style, amenities, and condition. Condition is an important factor, and many distressed or bank owned properties are not in the best of shape, unless renovated. How will needed repairs or improvements be paid for? We find a 15 minute phone consultation is often the most efficient way to set up an initial search. And we encourage our buyers to give us feedback on search results – the search is not set in stone, we can alter the parameters to make it even better.

FINDING the Right REO Property - Commercial and Investment

The same basic question that needs to be answered exists for all real estate searches – what are we searching for and why. For investors, some of the basic criteria are the same – where and what for, but others diminish in importance as questions about return on investment are emphasized. For potential rental properties, a pro forma is needed based on potential rents. For resale, accurate valuations of a property as-is and as repaired, along with realistic costs to repair are essential. We can provide a proper proforma along with NOI and CapRate calculations.

ANALYZING a Residential Property (to Live In)

For residential buyers, we offer an overview of property value. This will help determine whether you are getting a deal below, at, or above market value. And we can assist with a general evaluation of condition, which certainly factors into value. However, if you get an Accepted Offer, we advise a full inspection by a licensed home inspector, to fully investigate any potential problems.

When a formal inspection happens is different than a retail listing. Most asset management companies want fully executed contracts (signed by seller & buyer with down payment deposited) before inspections are allowed to occur. The buyer can request an inspection period (typically 5-7 days) after contract signing. This is written into the contract. During that time the buyer can inspect and should they choose to withdraw, the down payment will be returned no questions asked.

ANALYZING a Commercial or Investment Property

For investment property, criteria vary depending on the client’s goals. We can help analyze potential cash flows factored against maintenance and capital improvement needs, or if for resale, provide an accurate ARV value.

FINANCING

Conventional Mortgages

A property must be in at least fair and habitable condition, with utilities (electric, heat & water) functional in order to qualify for a conventional loan. The interest rate is fixed and does not change through the life of the mortgage, so it is important to get the best possible rate when you apply. Usually the mortgage term is 30 years but it can be less or more, depending on buyer’s income and desired monthly payment. To qualify, you must provide full documentation of your income (W2, Paystubs or 1099 forms), bank statements etc., and your expenses. These mortgage loans are amortized, which means you pay a fixed amount each month, and at the beginning you are paying mostly interest and very little principal. As the loan progresses through its term, more and more principal is paid off through the monthly payment. At the end of the mortgage term, you have paid the loan off in full. Your mortgage payment will include taxes and homeowner insurance as well.

FHA Loans

These are essentially conventional mortgages that are insured by the government. They can have advantages to buyers as they can have lower down payment requirements and do not put as much emphasis on credit scores and trade lines (active credit card accounts, etc.)

ARM Loans

These are conventional mortgages with one major difference. The interest rates can change! They will probably go up, so monthly payments will increase. These loans come in a wide variety of packages, with the primary advantage that an initial lower interest rate can help borrowers qualify more easily. In this economy, interest rates have been historically low, so these loans are not used as often. Buyers should be very aware of how much their rates (and thus monthly payments) can go up and what indexes those increases are pegged to.

Renovation Mortgages

This type of mortgage is of particular interest to buyers who are considering houses in poor to fair condition that will not qualify for conventional financing. But, they are also useful to buyers who are buying a property in average condition but want to do substantial renovations.

A simple example is the best way to explain how these loans work. Say you have found a house for 300K that has most of what you want, but it’s not in great shape. The roof is leaking, the bathrooms and kitchen are ancient, it needs painting and some repairs, and the heating system produces more smoke than heat. It will cost around 100K to take care of these problems, and even if it qualified for conventional financing, you do not have the money for all the repairs.

A renovation mortgage will work for you, assuming you qualify. You must apply (not all banks handle these) and go through the usual pre-qualification process. Leaving out downpayments, etc, to keep this simple, let’s say you are approved for a 400K renovation loan. The bank is now willing to finance the purchase of the house at 300K because they know you are going to fix it up and it will be in acceptable condition when the work is completed. You close on the house, and the licensed contractors that bid the job get to work. Two months later, they finish and you can move into your newly renovated home. Your mortgage amount is now $400K, which is the total of the purchase price of the house plus the $100K paid out to the contractors.

It’s a bit more involved than that, but that is the essential process.

There is one more important thing for the loan to qualify – the appraisal. The appraiser may value the house as is, but they will also estimate its value when the work is completed (as-completed). This is important because of what is called LTV (Loan To Value). The mortgage company will NOT lend you more total money than the house will be worth when the renovations are completed. The LTV varies with loan programs but is often 97%, so in the example above the renovated home must appraise at approximately $412.5K. ($400K divided by 97%).

GETTING AN ACCEPTED OFFER

The last section should be kept in mind when bidding. Generally, a seller will accept the highest offer but factor in the risk of an offer not going through. For example, if two buyers offer $300K for a house, but one is an all cash offer with more than adequate proof of funds in an account, and the other is a financed offer with only a 3.5% downpayment, the seller will go with the cash offer. But what if the financed offer is $310K? This is where different sellers have different business plans and risk approaches. Decisions vary.

In this market, with a high demand for properties and fairly low inventory, and an accompanying increase in real estate values, an obviously low offer is kind of like hoping to win the lottery.

A realistic offer on the low side is a more viable approach. Often, if a property is desirably priced to the market, multiple offers will be received. Asset managers will usually then ask for ‘Highest and Best Offers’ by a certain deadline.

So, what is your highest and best offer? A lot of subjective factors are come into play here, in addition to estimated sales value as determined by an analysis of recent similar sales. How much do you like the house, how many of the things important to you does it have, how much can you afford. We offer this definition of proper offer price – that amount where, if you win the bidding, you don’t feel you paid too much, and, if don’t get it, you don’t kick yourself for not offering more. It’s a fine line.

A good buyer agent can help considerably, by researching current market demand and providing you with a good estimate of market value, apart from the personal factors you bring to the decision. But they cannot tell you how much the property is worth to you. For example, if a property has almost everything you have been looking for, it may be worth more than the valuation suggests, and if you lose the deal, you may end up regretting it.

ATTORNEYS/CLOSING