Purchasing Foreclosure Properties
Occasionally, a bank owned property or REO shows up on our potential investment property list, and may be a viable investment. How is buying an REO property different from a traditional purchase? First, let's start with "What is foreclosure?"
What is foreclosure?
Foreclosure is the process by which the bank gains ownership of the property which secured the mortgage. Once the foreclosure is complete, the bank has ownership and the property is referred to as an REO (Real Estate Owned) property. In Nevada, the title you receive with an REO purchase is the same as a traditional purchase; you receive a clear and marketable title free of liens and encumbrances. However, there are a few practical differences between REO and traditional purchases:
How is buying an REO different Different?
- REO purchases generally require more paperwork than a traditional sale. Some examples include: a bank specific purchase contract, an affidavit stating that you are not employed by the bank that owns the property, the buyer may be required to turn on the utilities in order to perform the due-diligence (which we will take care of for you), etc. None of this is too onerous. We have handled over 100 REO properties.
- You may not receive a Sellers Real Property Disclosure. The Sellers Real Property Disclosure is a "disclosure of the condition and information concerning the property known by the seller which materially affects the value of the property." The bank can not provide such a document because the bank has no personal knowledge of the property. You will generally be required to sign a document stating that you acknowledge the bank has no knowledge of the condition of the property and the property is sold "as is". This has not proven to be a problem since we have an excellent property inspector who can establish the condition of the property. Note that the bank will not make repairs unless there are health or safety issues, or appraisal requirements. An example of a repair most banks would make include replacing a missing water heater, air conditioner, damaged stairs or broken windows.
How long does it take to purchase an REO?
Two parts to this answer. First, the seller's response time. With traditional sales, the seller usually responds to offers relatively fast, usually hours or days. With a bank owned property, it can take a week or more before they respond. Second, the time it takes to close. Overall REO properties take slightly longer to close. Since the banks choose the cheapest title company they can find, we frequently experienced title related delays. This is not usually a problem with an investment property.
Can we make an offer lower than the asking price?
Usually, no in today's market. The bank conducts an internal "appraisal" of the property then set the listing price as the result of that procedure. If the property stays on the market for a long time then they will lower the price but they usually do not consider offers that are lower than the asking price. Sometimes banks will list the property below market value to attract multiple offers and hope to sell for more than the asking price (close to market value). REO properties are not necessarily bargains once you take into account the property's condition (like any purchase).
Please contact us if you have any questions regarding purchasing a REO property.