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Foreclosure vs. REO
When the owner of a home stops paying the mortgage payment the mortgage company attempts to collect from the owner. If the mortgage company is unsuccessful they will file a NOD (Notice of Default) and move forward with taking title to the property through the legal process. Once this has happened, the mortgage company attempts to sell the home at a Foreclosure Auction / Trustee Sale. Foreclosure sales begin with a minimum bid set by the mortgage company or investor of the loan. To bid on a property at the Foreclosure Sale / Trustee Sale, you must have a cashiers check in your hand for the full amount or over the amount you are planning on bidding. If you win the bid, you will receive the property in "as is" condition, which may include someone still living in the home (former owner or renters). There may also be other liens against the property. If no one bids on the home, then the home reverts back to the mortgage company. The home is now an REO (real estate owned) property.
The mortgage company (bank) now owns the home. The bank will start an eviction if necessary and may do some repairs to preserve the condition of the home. They will then pay off tax, HOA and any other liens that may exist on the property. When you purchase an REO home, you will receive a title insurance policy free of liens and you will be able to conduct inspections on the home.
Each bank may work a little bit differently, but the ultimate goal of the banks is to get the best possible price in the shortest amount of time. Some banks have departments set up to only handle and manage their REO inventory. Some banks that do not have a department for REO´s may use an asset management company or another larger bank to handle their REO assets.
Writing offers on REO´s
Offers to purchase must be accompanied by a copy of an earnest money check. Offers must also be accompanied by a completed pre-qualification letter with the name and telephone number of the lender/loan officer. If the buyer is paying cash, they will need proof of funds from the buyers lending institution. Offers without prequalification or proof of funds will not be submitted to the bank! Offers contingent upon the sale of an existing home are usually not considered. Occupancy of the property prior to the closing will not be considered.
Most REO homes are sold as-is. The bank will not warrant the condition of the property and will require that the buyer waive their rights to receive a seller´s real property disclosure provided by the seller. So it is very important to have an inspection of the home! Very rarely will the bank pay for repairs or allowances. Even though you agreed to as-is, you can still try to ask the bank to make repairs or give you a credit if there is a major issue. Sometimes they will re-negotiate to save the deal and prevent the property from going back on the market.
Offers to purchase an REO are sent to the bank or investor through a website portal by the listing agent. The banks response time can vary! Banks do not work weekends or holidays. Sometimes the bank that holds title may only be a servicer for an investor who is the real owner. So offer response times may take a longer amount of time because the servicer may have to contact the investor for acceptance of the offer.
Once your offer is accepted, the bank will usually have their own addendums that the buyer will need to sign. Once the buyer signs these addendums, they will be sent back to the bank or investor by the listing agent. The bank will not put a signature on the offer or addendums until the buyer has first signed these documents. The bank or investor can still accept or negotiate another offer until the buyer and the bank or investor has signed the offer and addendums. Once signed by all parties you truly have an accepted offer!
Closing escrow on a REO
Once you have signed your loan documents, escrow and title documents, the documents will then be sent to the bank for signatures. This can take time depending on many factors. Again, the bank doesn´t work weekends or holidays. And some banks maybe in a different time zone. Sometimes the bank or asset management company many need to forward the closing documents to the investor for signatures.
Some REO properties are master keyed! You should always have the property re-keyed once you have closed escrow!
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