8 Tips for REO Foreclosure Offers
How to Write Offers to Buy REO Foreclosures
Many homebuyers want to hit the REO jackpot and buy a bank owned, lender owned, foreclosure, or short sale which a good number of are under priced. When banks price foreclosures under the comparable sales price multiple offers are often received by the selling agent.. This means you could be up against stiff competition for that bank-owned home.
It's not unusual for some REO foreclosures in the Prescott area to receive 6 to 10 offers in a matter of days. Sometimes the bank will throw out all but two offers and then ask the selected buyers to resubmit what is called "Highest and Final" offer (which is usually the case). Sometimes the bank simply accepts the best offer and moves forward.
If you're wondering how you can make your REO offer shine and be the winning offer, here are a few tips to help you beat the competition:
1) Get the Property History of that REO Foreclosure
Ask your buyer's agent to find out the bank's purchase price on the Trustee's Deed or Sheriff's Deed. It is usually noted on the document itself, which you can get from county records or a title company. Compare that price to the price the bank is asking.
Look at the amount of loans that were once secured to the property. Somewhere between the original mortgage balance(s) and the foreclosure sale price is the amount the bank will accept, if the home is under-priced.
In dealing with bank owned homes on a daily basis it also a personal decision. What is the home really worth to you? I’ve found that many properties that get to the “Highest and Final” stage with multiple offers go for around full listing price.
2) Determine Comparable Sales for the REO Foreclosure
The market value carries the most weight. The bank usually do monthly price reductions to keep the home in line with current pricing. If you are up against competing offers, other buyers will often offer at or above list price.
Look at the last three months of comparable sales, a mini CMA, for that neighborhood to determine how much this REO foreclosure is worth. Try to use only those homes that most closely match the REO regarding square footage, number of bedrooms, baths, amenities and condition.
Look at the pending sales in the immediate area.. Ask your agent to call the listing agents of those pending sales to try to find out the accepted offer price. Some will share that information and some will not.
Look at the active listings. Those are most likely the listings other buyers will use to formulate a price because they are the only homes those buyers actually tour.
3) Analyze Listing Agent's REO Solds
Most REO agents work for one or two banks. Some listing agents are exclusive listing agents for REOs, and they do not list any other type of property. Since REO agents deal in volume, they typically apply the same pricing principles to all their REO listings.
Pull the history of those listings to determine the list-price to sales-price ratio. If most of those listings are selling for, say, 5% over list price, then you may need to offer 6% over list price, and vice versa.
4) Ask About Number of Offers Received for that REO Foreclosure
If there are no offers on the REO home, you can probably offer less than list price and get your offer accepted. However, if there are more than two offers, you will most likely need to offer at or above the asking price. The banks typically will consider an offer that is within 10% of current list price.
If there are 20 offers, bear in mind that some of those offers might be all cash. Banks like all cash offers. If you are obtaining financing, then you may need to increase the price on your offer to be considered or look for another home.
5) Submit Preapproval Letter
For bank owned homes you must present a preapproval letter or proof of funds along with your offer. Get preapproved from your choice of lender in advance.
Moreover, get preapproved by the lender who owns the property. You do not have to use this lender for your loan, but submit the pre-approval letter from this lender, along with the letter from your own lender. Many times the lender themselves will have special offers on their REO properties if you do chose them. Banks don't trust other lender preapprovals but trust their own departments.
6) Don't Ask the REO Bank to Pay for Repairs / Inspections
Sometimes banks will pay for repairs, but typically will not agree to do so at the offer stage. If there are problems found during a home inspection, renegotiate after your offer has been accepted.
7) Shorten the Inspection Period
If other buyers ask for 20 days, for example, to conduct inspections, and you ask for 5-7, you will be deemed the more serious buyer.
8) Banks do look at closing periods
The more days the bank has the home on their books, the more it costs them. If a competing offer is able to close in 15 days and you have offered a 45 days close that is thousands of dollars in hold costs to the bank. They do look at this and do like quick closings. Keep this in mind when negotiating.
Consider the Appraisal Consequences
If you offer over list price, bear in mind that the appraisal will need to substantiate that price. If you find yourself dealing with a low appraisal, you have options, so don't despair. Remember, the bank will most likely run into this problem with the next buyer who obtains financing. Many times the bank will lower the sales price to the appraisal price to allow for financing.