10 Tips to Buying an REO Listing for first-time homebuyers
Working with first time homebuyers makes bank-owned (referred to as REO … Real Estate Owned) properties seem like an attractive purchase opportunity. These properties on which foreclosure has been completed are now owned by banks (think Wells Fargo, Chase, Bank of America, etc.), HUD, VA or government backed investors (GSEs) such as Fannie Mae or Freddie Mac. They’re attractive to homebuyers because transactions involving such properties typically close fast, unlike short sales that can drag on for months.
Some REO properties have had some “fixing up” completed — the grounds have often been cleaned up, sometimes critical missing appliances like the range have been replaced, carpets have been cleaned, and rooms and exteriors painted.
Other properties, however, require fixing and updating, meaning buyers must have funds to present all cash offers or financing with significant down payments. These properties, in particular, are attractive to investors who are looking for investment properties they can fix up and re-sell (flip) or rent.
In addition, often REO properties are priced aggressively, meaning they’re subject to multiple offers.
First time homebuyers, however, often come to the purchase table with a financing goal of asking for closing cost contributions from a seller while using a rehab loan to complete the purchase. That can be tough when buying an REO listing.
What’s a first time homebuyer to do? They often don’t have deep enough pockets to be tremendously aggressive in pricing offers, nor do the REO folks (the Seller) like to wait the additional 2-3 weeks needed to close a transaction where the buyer will use a rehab loan.
Here are 10 Tips to Buying an REO Listing:
- Absolutely be preapproved before writing an offer. You need to know what you qualify for and you’ll need to prove it to the Seller.
- Shop below your top financing approval number. Understand that you may be involved in a multiple offer situation. You may need to offer MORE than the list price in order to “win” the purchase.
- Cash is king. Use your available cash to increase your down payment, thus perhaps enabling you to use conventional financing rather than an FHA or VA loan. If you have a 20% down payment, conventional loans won’t require mortgage insurance, which can save you a couple hundred dollars a month.
- Check with your lender to see if you can include your closing costs inside your purchase loan. Sometimes it can be done, although it may increase your interest rate slightly.
- Understand and be prepared to try for several homes and lose several before you’re the accepted offer in a transaction. It’s a learning process and the more houses you see and tries you make will enable you to move more quickly each time you see a desirable house.
- Experience counts: Work with a lender and an agent that both thoroughly understand and have experience with Rehab loans and purchases. You’ll need every advantage in order to close quickly.
- An experienced agent can eyeball a house and know whether or not it will qualify for standard financing or whether a Rehab loan will be required.
- An experienced lender should be able to close a streamline FHA rehab purchase within a 45-day window.
- REO properties often have a window or so where only owner-occupant offers will be considered. You need to present your best offer right away, and then be prepared (if multiple offers are received) to present your “highest and best” offer again.
- Move quickly. If an intriguing property is listed, you need to see it as soon as possible. Some REO properties receive multiple offers within hours.
- Remember that the holder of an REO property is looking at a combination of the NET number (your purchase price less any concessions you’ve asked for), a quick closing, and their assessment of whether you qualify for the purchase.
- Finally, be sure your agent has evaluated the pricing structures commonly used by the various Sellers. For example, Fannie Mae tends to price homes a bit higher at first, and then reduce prices slightly if no offers are quickly forthcoming. However, Chase aggressively prices properties, gathers multiple offers, and ultimately closes sales for more than list price.
Auburn, Kent, Algona & Pacific REO sales 2/7/2013-4/8/2013