Foreclosure FAQ

• Foreclosure vs. Real Estate Owned (REO)
• Before Making an Offer on A REO Property
• What the Banks Look For In an Offer
• Bank's Counter Offer
• What is the condition of the property?
• Stages of Buying a Foreclosure Property
• 3 Important Call Outs for Buying an REO
• Buying a Foreclosure Check List

An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure auctions do not even result in 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. 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.

1. Make sure you are working with a Broker that knows the REO – Foreclosure Business. Most agents are salesmen, a Broker has had a lot more schooling and is a better educated Real Estate Professional. They will be able to make sure that REO’s are good for you and be able to explain and take you through the process.
2. Make sure your Broker / Agents asks the Bank / Lender (REO - Owner)
   • Are there any inspection reports?
   • What work has the bank agreed to?
   • Is there a special "as is" form?
   • How long does it take the bank to accept an offer?
   • How does your agent deliver or communicate the offer?
3. Your Broker/ agent should do the research to make sure the property represents a good Foreclosure opportunity.
   • The research should not take more than one or two days because you do not want to delay too long before contacting the foreclosing bank.
   • First and foremost you need to know the estimated market value of the property. This is not as easy as it seems, a lot of work needs to go into making a market comparisons. It is not just looking and comparing numbers on a sheet of paper but knowing the neighborhood. You need to work with someone who has knowledge based information, where the market is going. Together with where it has been.
   • Your Broker/Agent needs the bank's break-even amount including the unpaid balance of the loan, any fees and costs incurred during the foreclosure process and any other liens the bank had to pay off to take ownership of the property. The unpaid loan balance plus any foreclosure fees and costs are included in the opening bid.
4. What do I need to provide to write an offer on an REO?
   The following will be needed by all banks so you need to have these ready before you start looking for an REO:
   • Pre-Approval Letter: must be on a lender’s letterhead (don’t even try with a PreQual letter).
   • FICO Scores: can be obtained from your lender (first two pages of the credit report will do).
   • Verification of Funds:
     • What % are you putting down?
     • You’ll need verification that you actually already have the funds.
     • Provide photocopies of the accounts where the down payment money is currently on deposit.
     • Getting a gift? Have an official gift letter in hand. Make sure you understand the gift rules – ask your lender.
     • Deposit Check: for 1% of the purchase price (Good Faith Deposit) made out to “Title Company”.
5. In the recent real estate market, buying directly from the bank has not been as profitable as buying during pre-foreclosure (see my section on short sales) or at the public auction. That's not to say there aren't good deals available. Many buyers and investors prefer to buy directly from the bank because it's typically a more predictable process than buying during pre-foreclosure or at a public auction.

Banks are like water and electricity – they flow down the path of least resistance. They absolutely don’t like FHA loans and will go out of their way to avoid dealing with someone who has one. They love a minimum of 10% down and conforming loans. If two offers come in at the same price – a conforming and an FHA deal – they will take the conforming offer EVERY TIME. You can ask in your offer for help with closing costs, banks often provide help with closing costs. However, make sure that you understand that in a multiple offer situation, your net price to the seller must match other competing offer’s net prices. Hopefully, you’ll be using a Realtor that has a lot of experience getting REO offers accepted by banks. Each bank has a very specific way that they will accept offers. Long forms, questionnaires and sometimes totally on line, so you Realtor needs to know the requirements. Nothing like submitting your offer and never hearing anything back because the bank immediately trashed an improper offer

The bank will issue an Addendum or Counter Proposal to your offer.
The bank will remove anything in your favor and substitute language in their favor.
Such as:

• They may ask for an increased deposit.
• They may try to shorten the close of escrow to 21 days. Don’t let them.
• They will include per diem charges that you will incur should you not close escrow on the agreed upon date. These “fines” can be as high as $150.00 a day. If it’s the fault of you or your lender that escrow closes late, you’ll pay. It it’s the bank’s fault, you’ll still pay. Don’t think it’s fair? Bummer. The bank has already taken a bath on the property: they want to make their pain go away by sharing some of the pain with you. It’s called an incentive to close on time.
• They may change your contingency time periods. Typical periods are 7-10 days for Inspections and 10-12 days for your loan and appraisal. They may even change your contingency removals from active to passive. ( In normal transactions you need to sign a release of contingencies, active. The bank could put in language that the contingencies expire automatically on a certain day, passive.) This is the fine print that a knowledgeable Broker will look for
• They may counter out any requests for them to cover fees such as title and escrow, home warranties, County and City transfer taxes, HOA fees and so on.
• They will counter out any requests for personal property.
• They might counter out any liquidated damages or arbitration language.
• Their documents will contain “AS-IS” language. It is highly unlikely they will pay for any repairs
• If there were tenants that were evicted who did not get their good faith deposit returned to them, the bank will make sure you know it is your responsibility to deal with them.

The list can go on and on don’t go down an REO path alone. Remember the banks are not your friend, they have been burned and the asset manager or bank officer’s job is to ease the pain at your expense

Be prepared to buy the property as is, or make a strong offer to get your repairs made. Banks will always push to sell the property "As Is" to avoid coming out of pocket with additional money. Section 1 termite clearance is typically still covered by the bank but make sure you include this in your offer. You will have to work hard to have additional items covered; working with a solid Realtor can help your negotiations.

In addition, make sure you get a good inspection of the property so you know exactly what you are buying. It is so important to have a good physical inspection of the property.

Most contracts call for a time period to back out of the transaction should you find problems with the home. Make sure you have enough time to back out of the transaction if you need to and do not jeopardize your deposit.

Even though the bank wants to sell the property "As Is", make sure you try to get the bank to make the needed repairs or provide you with a credit at closing to complete the necessary work. If it really gets tough and you feel that you really want to back out of the deal because of the repairs, the bank may work with you instead of having to go out and find another buyer. This depends a lot on what the current market is doing in your area and how many other buyers the bank may or may not have.

• The foreclosure process is not very difficult to understand. There are several stages during which the homeowner has an opportunity to bring the loan current and avoid foreclosure.
• After about three to six months of missed payments, the lender orders a trustee to record a Notice of Default (NOD), at the County Recorder's Office. This puts the borrower on notice that he or she is facing foreclosure and starts a reinstatement period that typically runs until five days before the home is auctioned off.
• If the default isn't corrected (the loan must be brought current) within three months, a foreclosure sale date is established. The homeowner will receive a Notice of Sale, and this notice will also be posted on the property. In addition, the Notice of Sale is recorded at the County Recorder's Office in the county where the property is located. Finally, this Notice of Sale is also published in newspapers local to the county in question over a three-week period.
• The foreclosure Trustee Sale typically occurs on the steps of the county courthouse in which the property is located. The time and location of this sale are designated in the Notice of Sale. At the Trustee Sale, the property is auctioned in public to the highest bidder, who must pay the high bid price in cash, typically with a deposit up front and the remainder within 24 hours. The winner of the auction will then receive the trustee’s deed to the property.
• At auction, an opening bid on the property is set by the foreclosing lender. This opening bid is usually equal to the outstanding loan balance, interest accrued, and any additional fees and attorney fees associated with the Trustee Sale. If there are no bids higher than the opening bid, the property will be purchased by the attorney conducting the sale, for the lender.
• If this occurs, and the opening bid is not met, the property is deemed a REO or Real Estate Owned. This typically occurs because many of the properties up for sale at foreclosure auctions are worth less than the total amount owed to the bank or lender.
• When you purchase property at a foreclosure sale, all junior liens other than property taxes are wiped out. Priority of liens is determined by the date of recording. When you purchase a REO aka. Bank REO, you will typically receive the property with a clean title.

• RESPA goes out the door - The Real Estate Settlement Procedures Act protects buyers from having to accept a title company that the sellers want, especially if the buyer is paying for half the title costs, amongst other things. Banks will almost always have a title company they want to use and more often than not it will say so in the addendum they require the buyer to sign. Usually this doesn't bother too many buyers, but I thought I would mention it here because it always sticks out at me.
• Timelines always get mangled unless they are in the bank's favor - I remember being frustrated with short sales in the past because the lender would come back with an approval that was good for fifteen days. Most escrows take 30 days. However, this last weekend I wrote an offer for a bank-owned, foreclosed home for a client. The offer was more than fair - it was full price, cash and the buyer was paying for half the escrow costs. It has now been ten days and we hear the same thing from the listing agent - "Nothing yet." Today the message changed to "We have another offer, over asking. Bank will pick one soon." Just how soon? Message to banks and the listing agents that represent them: when you get what you're asking for have the wherewithal to accept it and move on!
• Banks are exempt from the Transfer Disclosure Statement - This makes sense since the bank has never really been inside the house. Chances are they don't know what's wrong with it. However, it does leave the buyer with a lot of questions that can be resolved only with numerous inspections.

• Inspect Property
  Most foreclosure properties are referred to by investors as "distressed" properties. Bank-owned foreclosure homes are usually sold "as is," which means that the 15 percent discount you just saved on the purchase price can easily be eaten up by unforeseen expenses — such as repairs not immediately apparent in an exterior inspection. Many owners of homes that go into foreclosure have been struggling financially, which usually means that the house has not received needed repairs or general maintenance for a while. Some homeowners who lose their property to a lender frequently damage the property. So be prepared to do renovations and repairs. Hire a licensed home inspector to give you a written estimate of the cost to repair the property. Budget that number into your purchase price. Repair costs can be used later in your negotiation with the bank to reduce the asking price.
• Title Search
  Once a home has been located, search the public records for liens and outstanding taxes. You can perform a preliminary check of title on RealtyTrac and then hire a title company to run a full, insured title search before closing the deal. Liens on the property can drive up the purchase price. Common liens typically are placed on a property for unpaid loans borrowed against the property, taxes or unpaid contractors (mechanics liens). These liens remain intact until the money is paid, which means that you may have to pay off the liens on the foreclosed property you are buying — even though you're not the one who didn't pay the property taxes. Banks should clear the title before selling but never assume this is the case — just as you would if you were buying a property from anyone else. Learn more about government tax foreclosures.
• Negotiate
  Investors should be prepared to negotiate a lower down payment, a lower interest rate, a reduction in closing costs and a lower asking price. Many mortgage lenders may be willing to waive some closing costs, maybe even offer a break on the interest rate or the down payment. Moreover, some lenders might offer to finance the property at a below-market rate or with a lower-than-usual down payment. Don't be afraid to ask for a better price and favorable terms.
• The Offer
  Although most banks want to unload their foreclosed properties, they won't necessarily do so cheaply. So you aren't guaranteed a fabulous price. But remember you're dealing with an eager seller. Even though the bank's REO manager or their listing agent might suggest that the list price is "firm," never be afraid to negotiate price — especially if the foreclosed bank-owned home needs repairs. When submitting a low offer, you need to substantiate the reduced price in writing and document your case. You should furnish photographs and cost estimates for repairs to support your offer amount.
• Financing
  With good credit, many banks will loan the full price of the foreclosure or more. If the home is to be used as a rental, many banks will require only a 10 percent down payment. Foreclosure investors with a large amount of equity in another home may get a line of credit from their bank to purchase a foreclosure. When they convert the line of credit to a mortgage, no down payment may be required. Find out how to receive a free credit report

Contact Me
So if I have not put the fear of g-d into you, perhaps you are ready to talk about short sales as one of your options. Call me at 310.505.5571 or email at bob_schmalz@wlaregroup.com . Let’s start looking at what is out there!. One last thing check with your lender or mortgage broker on their requirements and if they will make loans based on a short sale

Bob Schmalz