For experienced representation dealing with foreclosures.
fill in your request information below.
This page is intended to be only a treatise on the foreclosure process!
Foreclosure laws may differ from state to state, however, one simple fact remains - A home owner has defaulted on a loan and the mortgage holder has aquired a
property that will cost them money if it remains on their books. Following is a brief explination of the foreclosure process and how homes are marketed by the banks.
REO vs. Foreclosure:
An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. Usually foreclosure auctions do
not receive any bids. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank.
That is why the property ends up at a foreclosure or trustee sale. If you want to see an auction in person, go down to the County Courthouse and see for yourself!
Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney's fees and any costs association with the foreclosure process. In order to bid at a foreclosure auction, you must have a cashier's check in your hand for the full amount of your bid. If you are the
successful bidder, you receive the property in "as is" condition, which may include someone still living in the property (did the courses tell you about
that one!). There may also be other liens against the property.
Since what is owed to the bank is almost always more than what the property is worth, very few foreclosure auctions result in a successful sale. Then the
property "reverts" to the bank. It becomes an REO, or "real estate owned" property. In Michigan, banks regain ownership after the 6 month redemption period
expires (6 months to the day after the sheriff’s sale.) At this point a bank will take necessary action to remove the tennant who is no longer the homes owner.
Now it’s a Bank-Owned Property:
The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some necessary minor repairs. Realtors like me who work with banks sometimes get assigned to go talk to the formers owners to help with the eviction, possible repairs and eventually the listing of the home. The bank will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property (usually a 7 day inspection after accepted offer but even before the offer most foreclosure buyers have already had a chance to view the property once or twice).
A bank owned property might not be a great bargain. Do your homework before making an offer. Make sure that the price you pay (if you’re successful) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a ‘bidding war’ and
pay over market value. It’s an old myth that “foreclosures” are a bargain. REMEMBER: the bank is now the owner of the property and will want to get the most they can for it. The big difference is they don’t want it for long and they have the financial resources to take a hit if it sells low, unlike most homeowners.
How Banks Sell REO's:
Each bank/lender works a little differently, I work with many, but they all have similar goals. They want to get the best price possible and have no interest in "dumping" real estate cheaply. Generally, banks have an entire department set up to manage their REO inventory. If they do not have an REO department,
they outsource the selling process to REO Servicing companies. In recent years outsourcing has become a more common practice because of the huge
number of foreclosures and the number of employees required to process all of the specialised paperwork. If you’ve ever made an offer on a bank owned
property and it takes days or even weeks to get a response, many times you are working through a REO Servicer used by the bank, who then sends it
to the bank for approval. In some cases there may even be an investor who's approval is required for acceptance.These transactions can be very complicated
and should not be handeled by someone not informed on the proceedures..
Once you make an offer to purchase, banks generally present a "counter-offer." It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible. You should plan to counter the counter-offer.
Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, the bank may insert wording like “..subject to corporate approval with 5 days."
Points to consider:
Banks always want to sell a property in "as is" condition with disclaimers to void any liability to them. They will allow you to get all the inspections you want (at your expense), but they resist investing money they feel they cannot reclaim in a sale. Unless a house is unmarketable chances are it is an "as is sale.
Your offer should include an inspection contingency period that allows termination the sale if the inspections reveal unanticipated damages that the bank will
not correct. At times a counter offer will contain words that may void your deposit even if you back out because of a condition revealed during an inspection.
Even though you agreed to “as is," always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted.
Banks do not want to see a lot of proprietary disclosures. If there are real estate agents involved, either representing you or the bank, those agents are
required to provide you their disclosure statements. In many REO sales there are no disclosures required because neither the bank employees nor the
Agents have lived in the property. In this case you are on your own to hire competent inspectors to uncover any potential problems.
Most banks choose not to provide financing on their REOs but it doesn’t hurt to ask. In Michigan, the Winter can beat up homes pretty badly so try to
understand what you’re buying, especially if the property has extensive damage and you are purchasing it "as is." Remember, most properties have been
vacant for a period of time before the bank gets them on the market.
Making the Offer
Before making an offer, here are some things to ask:
- Are there any new inspection reports that came out after the property went REO?
- Are there any addendums to sign to accompany the offer?
- How quickly does the bank get back on offers?
- How does your agent deliver the offer?
The listing agent needs the original purchase offer document so it can be faxed or e-mailed to the bank. There is no formal presentation. If you make an
offer on Friday, don’t expect an answer until at least Monday. Nothing happens evenings and weekends (banks are closed). Since there is no face-to-face presentation to the bank, most require a pre-approval letter, minimum $1000. earnest money deposit and/or a source of funds if it is a cash offer. A buyer biography also can be helpful, remember, the bank does not want the deal to fall through when there is a valid buyer. Make your offer easy to accept.
Hopefully these tips will manage your expectations. Remember that sometimes there are deals and sometimes you’ll be paying pretty close to full price
so buying bank homes is not a guarantee of instant equity!