Mortgage companies and banks own houses because they have acquired them through the foreclosures process. These homes are called REOs, short for Real Estate Owned. When banks obtain homes through the foreclosure process, in most cases, it is because no one at the foreclosure auction bided the minimum amount, usually the amount of the existing mortgage(s), unpaid interest, penalties and legal fees.
At first look, it may not seem as though foreclosures are a good deal. After all, if it was a good deal someone would have bought it at the foreclosure auction, right? Also, if the bank wants to sell its inventory on the open market for the amount that was once owed to the bank by the previous mortgagor maybe they are trying to sell it for more than it is worth? With all that said, here are two reasons why an REO can be a great deal “value” to you.
• If two loans were obtained to buy the property (which is very common these days), the second mortgage holder sometimes does not foreclose. If the second mortgage holder does not make up the back payments to the first mortgage holed, including and back interest, penalties and legal fees and file its own foreclosure proceedings, the second mortgage holder will get wiped out in the foreclosure proceedings of the first mortgage holder. Many second mortgages comprise 20% or more of original market value
• Not being in the real estate business the bank does not want to sit on its inventory. Since it did not receive its minimum bid from an investor or home buyer during the foreclosure sale the bank is likely to price that REO home for less, just to get rid of it and to get if off their books.
About REO Listing Agents
There are many web sites available to find DFW Real Estate and DFW Foreclosures, your DFW Realtor can also find them in the DFW MLS. If you ask your buyers agent to search MLS for "REOs," you will probably find that a very small handful of real estate agents specialize in listing REOs for sale in your neighborhood. Don’t take a chance on a Realtor that tells you “sure I specialize in REO property”.
Here are tips that will help you when searching for DFW REO listing agents:
• Most REO listing agents list only REOs, not other type of property.
• REO listing agents often give commission discounts to the banks and mortgage companies in return for their business, because these REO agents deal in volume.
• REO listing agents make money by either selling a lot of REOs or operating as a dual agent, both listing the home and assisting the buyer in buying the same home. In Texas this is known as an “Intermediary”.
• REO listing agents generally represent the seller, not the buyer but can operate as a dual agent.
• REO listing agents are typically top-producing agents because of the volume of business they conduct.
• Some REO listing agents are so busy that they hire assistants to handle calls.
About Hiring a Buyer's Agent
Unless you have direct experience negotiating with mortgage companies and banks, it will do you well to obtain representation by hiring your own buyer’s agent. Be sure you interview three buyer’s agents before you select one. Choose one that has a lot of experience with foreclosures and REO homes and one that is professional and you feel comfortable with.
• Buyer's agents have a fiduciary (legal) responsibility to protect your interests.
• Buyer's agents are usually paid by the seller.
• Buyer's agents represent you, not represent the seller.
• Buyer's agents may ask you to sign a buyer’s broker agreement, which will lay out the agent’s duties to you and it will also specify who pays the commission.
• Hire a buyer's agent who has experience working with REOs.
About Negotiating with REOs
If the listing is relatively new to the market the bank usually will not come down much from its asking price. You will have more negotiating power if you make offers on homes that have been on the market for longer than 30 days. Here are more tips:
• Banks negotiate bulk discounts with title and escrow companies. If you choose to use the bank's title & escrow company, check the fees that these companies are going to charge you. In general, fees not paid by the bank but paid by, you the buyer, will be higher because title & escrow often make up those discounts by charging buyers more.
• You will likely be asked to buy the home "as is." Make your offer subject to a home inspection. Generally, the bank will not make repairs but if a serious problem comes up during the inspection you will have the right to back out.
• Many banks are moving away from paying typical closing cost for the buyer. Some fees such as transfer taxes, county and state fees, are borne by the buyer and not the bank. Banks rarely will pay for pest inspections, repairs or home warranties.
• Expect the bank have you sign their purchase contract and/or addendum to your standard purchase contract. Read it thoroughly and ask a real estate lawyer for advice if you do not understand it.
• If the bank won't budge on your offer and you receive an offer rejection, wait another 30 days and then resubmit your original offer, with the original date crossed off and your new date inserted. Maybe this time the home will be yours.
• It may take 10 days, or more, to receive a response to your offer from the bank.
• The bank may ask for you to submit a loan application so it can prequalify you; however, you are not obligated to obtain your loan from that bank.
• If you cannot close by the predetermined closing date, in many cases, the bank will charge you a penalty for each day you pass the closing date. Make sure you have a loan preapproval letter from your own lender before submitting an offer. Without one the bank may not take your offer seriously.
