How do I find a foreclosure?

Finding a foreclosure property requires a combination of diligence and patience. Each MLS system has its own set of criteria to be filled out by the listing agent. My best advice is to call one of the larger real estate companies and ask which agent in the office works mostly with REO’s, foreclosures, and investors. You can then contact that agent and ask to be put on an email list of their foreclosures as they come in.

That works really well for getting the addresses, but many of the agents who list a lot of foreclosures don’t have time to work with buyers. Handling foreclosure properties for a bank requires a lot of paperwork and caretaking. They may have a few steady investors that they work with, but for the most part you’ll need to find a buyers agent.

Finding a buyers agent is a little harder. Many REALTORS say they work with investors, but don’t really understand the foreclosure market. Bank owned properties are a different breed, and buying a bank owned property is not for the faint hearted!

A good investor agent will not have time to show you the 25 properties you need to see to find the “diamond in the rough”. It will be up to you to drive by the addresses and decide if you want to go inside. Then call your REALTOR to meet you. Ask them if you buy lunch if they will discuss your goals and how best to meet them, and how you can most efficiently find the properties you are searching for. Ask them for advice on locations and strategies, as well. If they don’t “get” what you are trying to do, try again until you find the right agent to help you meet your goals. Then, treat them like the team member they are!

If you drag your REALTOR out to see 15 houses and never make an accepted offer, you will find that they no longer answer your calls. They have 10 other investors who do screen the houses and respect their time. A good investor agent is money in the bank for you, never take them for granted!

Banks do not follow the normal rules and practices of the local MLS board. They almost alway have an “addendum” which is essentially a re-written contract that puts them in control of the sale. They are sold “as is”, there are no disclosures, and there is no recourse after the sale. They set the good faith deposit, and after a certain number of days it becomes non refundable for any reason. They also set the closing date and place, and any delays will cost a “per diem” or daily surcharge. You must provide a proof of funds or financing letter with any offer to be considered. VA foreclosures here in Louisville, Kentucky actually add on a “service fee” (the last one I sold added $800 in costs to the buyer), and when we tried to contest the fee because it was not disclosed until after the withdrawal deadline, the seller was told he would forfeit the deposit if he didn’t close. The deposit was $1500. He closed the deal, but hasn’t bought another VA foreclosure.

It is up to the buyer to perform “due diligence”, and it is often best to do most of this prior to making an offer. Unfortunately, the seasoned investor will walk through a “hot” property and determine the condition quickly. They may even take their contractor through to give a rough estimate. This enables them to write an “as is” offer with a quick closing, and may shut the novice investor out of the best deals. This is why having a good investor agent is so helpful, they can steer you clear of some bad deals, check on sewer connections and flood plains, and help with neighborhood price ranges so you can make a quicker and more informed decision.

In this market their are plenty of deals to go around. You just need to have your financing ready, and be willing to move quickly. Getting caught up in the “Paralysis of Analysis” has lost many a deal!

Downside of REOs Part 2

I am currently working with clients buying an REO home to live in.  They are not real estate investors, so I have had to be very sure they understand the process.  The particular asset management group for this transaction used the addendums to change the inspection period from 12 days to 10, required use of the seller’s title company and closing of the seller’s choice, reduced the number of days to closing by half, put a high per diem charge for every day after their close by date, and required $2000 in certified funds as a deposit.  The buyers had already given a good faith check made out to the listing realty company as per the original contract. 

This addendum put me in the precarious position of trying to best protect my clients, without causing them to not be able to buy the home they wanted.   We did this by writing up an addendum agreeing to their addendum after the inspection period, and agreeing to exchange the original good faith check for certified funds once the inspection contingency was released.   The asset management company never signed our addendum, but they did wait for the inspections to be done before demanding the certified funds.

Because this particular home had some pretty obvious defects, we negotiated a lower price up front to cover the expected repairs.  Where we got into a bind, was that we discovered the house had a very high radon level and no sump pump.  Radon abatement was going to be costly, so we asked the asset manager for a credit at closing.  About 50% of the time they will agree to this if it is reasonable.  This particular company would not agree, so my buyer clients had to make a decision to continue with the purchase or release.  Fortunately, they felt like it was still a good buy for them and they moved on to closing.

The Downside to Buying REOs

REO stands for real estate owned, with the implication that it is owned by a bank or finance company.  With the big up swing in foreclosures, there are more and more bank owned properties listed with the various MLS providers.

What we are seeing here, in

Louisville, Kentucky, are the asset management companies becoming more and more difficult to work with.  Because a property is listed, and I am a REALTOR, I use a standard Board of REALTORS offer to purchase agreement signed by my buyer client.  The REO company, or asset management group then “verbally” counters or agrees to the contract via the listing agent. 

Unfortunately, just because you have an “acceptance”, doesn’t mean you have a real contract, because all of the REO companies stipulate that acceptance is contingent upon the signing of additional addendums.  These addendums vary greatly by company and oftentimes negate major portions of the original offer. 

It is really important for buyers to understand that with a bank owned property, the original offer to purchase agreement is only the starting point, and the owner or management company is essentially calling the shots on the transaction.  For REALTORS working with clients, it is imperative to understand and convey to the client, that almost all the banks have certain guidelines and procedures that may not be in the best interest of the buyer.   Sometimes the listing agent will be able to provide the addendums prior to writing the offer.  In other cases, the listing agent doesn’t know to which company the contract will be assigned so they will not get the addendums until after the contract is written. 

Most companies require the good faith deposit to be non refundable after the inspection period, and I even had one company send notice of required fees for the buyer well after the inspection period.  The buyer was justifiably angry, since he was told he could pay the $650 fee to the asset management company or release the contract and lose his $1000 good faith deposit.

 REOs are usually listed “as is” and it is unheard of for a management company to agree to repairs, so offers need to really reflect the condition of the property.  That being said, I have sometimes seen them agree to a credit for the repairs at closing.  This gets really tricky if the lender requires repairs prior to closing, and the bank owner will not allow any repairs until after closing.  Asset management groups never agree to escrow for items after the closing.

Buying REOs is complicated, and not for everyone.  I’m really trying to educate first time and low down payment home buyers about these properties.  Unless they are in stellar shape, the loans usually won’t go through based on repairs.  I hate to have a buyer client spend money on inspections then have to release the contract over the repair request.