What to Expect When Bidding on REO Foreclosures
Anybody who has bid on an REO foreclosure in the last year or so probably knows that getting one under contract isn’t what it used to be. A few years ago, buying an REO was a fairly straight forward process; i.e. make lowball bids, get counter offers from the bank and eventually settle on a sales price. However, with the glut of dirt cheap foreclosures that have flooded the market over the last few years and the tremendous level of competition from other investors, the REO sales process has morphed into a completely different animal.
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For those who haven’t figured out why their last ten full-price offers haven’t been accepted, here are a few tips to help you understand how the game is played.
Tips for Buying REO Foreclosures
- In many cases, the list price of the property is artificially low in an attempt to drum up interest from multiple investors. Whether it's the listing agent or the bank, these entities often try to create a quasi bidding war. In my market, most REO properties end up in a "highest and best" scenario between multiple buyers and the sales price often ends up exceeding the original list price.
- Banks are interested in selling quickly and without the uncertainty of financing. As a result, most REO sales are made to cash buyers who close in two weeks or less. It is almost impossible to get accepted offers if the bank believes the transaction is contingent upon your ability to get financing. If you are serious about buying REOs in this market, it is much more effective to make cash offers.
- In addition to financing contingencies, banks typically don’t want to see other contingencies that might cancel the transaction. If you are serious about a particular property, it is better to do your inspection up front and then submit an offer to the bank with no inspection contingency. The last thing the bank wants to do is tie up a property for 10 days while the buyer decides whether or not he or she wants to move forward.
- Banks are also asking for much larger earnest money commitments than are typical for ordinary real estate transactions. I’ve found that many REO banks expect the buyer to put up 10% (or higher) in earnest money.
There are some incredible REO properties to be purchased right now if you know how to play the game. I’ve found that in this market it takes a little patience and know-how … but eventually the good deals will come. And for those who don’t have the ability to pay cash or stay engaged in the process, find a good wholesaler. Paying a few extra thousand for a good property is still a great alternative – especially if you need to use financing. Either way, don’t miss out on an incredible window of opportunity to buy real estate at these unbelievable prices!