I don’t have the figures handy, but a large percentage of homes sold today in Santa Cruz county are bank-owned REO (“Real Estate Owned”) foreclosures. In some areas, like Watsonville, it is as high as 75% of all home sales. In other areas, it represents a small but growing fraction. If you are thinking about buying property in Santa Cruz County in 2009, there’s a very good chance that you’ll be considering buying one of these homes.
There’s a great deal of confusion around buying bank-owned homes. I do have some information on my web site that should be of interest to folks interested in doing so, specifically my Santa Cruz Foreclosure Report (delivered via e-mail), as well as the Santa Cruz Foreclosure Opportunities video which I had taped last year at the Santa Cruz County Housing Expo.
In many ways, however, buying a bank-owned REO foreclosure property is much like buying a house from a private individual. There are some differences, though. Here are a few things to know about making an offer on these properties:
1) You need a pre-approval letter, and proof of down-payment funds. Unless there is some defect (e.g. a red tag) with the property, you do not need to pay cash. Sometimes, you will need a pre-approval from a specific lender (e.g. Countrywide, Prospect Mortgage, Downey Savings, etc.). Many times, no specific pre-approval letter is required, except that you have a pre-approval from a direct lender – that is, a bank, not a mortgage broker.
2) They are priced to sell – at the asking price. When a financial institution goes to sell one of its assets, it typically makes a pretty thorough investigation as to how much the property will sell for. They do not price these homes for $100,000 more than they think they will get for them – they price them to sell for close to asking price, in the present condition. Normally, the homes are priced quite low anyway, usually at the very bottom of the market, and often 3-5% below that. Of course, sometimes they get it wrong and price the home too high; in that case, they will gradually reduce the price until the property does sell. You are welcome to make a low-ball offer, and so long as it is at least credible, they will usually counter – they don’t get offended. However, do not be surprised when they counter back close to asking price.
3) They are generous with closing cost credits. Do you only have the 3.5% down payment required for an FHA loan, and not much besides? No problem, the banks will give you closing cost credits of 2, 3, 4% – just ask. They usually look at their net cash after sale when considering your offer. Many times, buyers will offer 2% over full price, and then ask for 2-3% back in closing cost credits. For buyers who are low on cash, this is a great way conserve cash when buying.
4) The properties are sold as-is. The price the bank puts on the properties is an “as-is” price. They do not like to pay for termite repairs, fumigation, or small repairs which may be discovered in a home inspection. Some banks will absolutely, never ever give termite repair credits – but some will. You’ll never know until you ask – but don’t be surprised if the bank refuses to grant any credits. One big exception to this rule are repairs for “health and safety” or lender required repairs (such as for an FHA loan).
5) Cash Is not King. Some cash-laden buyers are under the impression that waving a lot of cash under the nose an REO seller will get them some kind of big discount. In my experience, this is not the case. These are, after all, banks you are dealing with. They like loans. In fact, that’s their business, not real estate sales. They know if a property is lendable or not, if t is, why not sell it for maximum value from someone who can get a loan?
6) Banks want no hassles. Some banks don’t want buyers with FHA loans, because this may result in a long list of lender required repairs. If a bank has two offers on a property, one with a conventional loan and the other with an FHA loan, the buyer with the conventional loan usually wins out, even if it’s for a bit less money. An all-cash offer will, of course, trump an offer from a buyer needing a loan, assuming it’s close to the same price – a cash buyer will not have any loan or financing contingency, and that’s one less thing for the seller to worry about, and one less way a deal could fall apart.
7) Limited disclosures will be made. The banks have no knowledge of the homes they are selling. Per California law, they are required to make some basic disclosures, such as about natural hazards, lead-based paint, water heaters, and smoke detectors. The listing broker will also have to make a visual inspection and disclose that to you. However, the onus is really on the buyer to be extra-thorough during the investigation period. One good idea is to talk to the neighbors – they often will know something about the history of the house which you may not discover any other way.
8) Banks are reasonable. This is perhaps the most important point of all. There’s a lot of innuendo out there that perhaps the banking industry is run by buffoons, crooks, flunkies, and con artists. That may be true, but the people charged with selling these foreclosure assets are not the same people who made the original lending decisions. In my experience, the people working to sell these assets are reasonable, pragmatic, and practical. They want these homes sold – they need these homes sold. If the buyer is also reasonable, pragmatic, and practical, most issues which come up in the course of a purchase can be worked through to the satisfaction of both buyer and seller.
I hope you find this information useful. If you have any specific questions about a particular bank-owned REO property you see listed for sale, give me a call or shoot me an e-mail. I’m happy to give you my advice on any real estate-related matter, foreclosure or otherwise.