What to Know about REO in Santa Cruz
February 01, 2009
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.
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.
Posted by SantaCruzBroker at 1:00pm
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The Crazy, Mixed Up Market
May 18, 2008
I know that you know it’s a buyer’s market out there, right? I’ve said it a bunch of times. It’s also a declining market – that is, property prices are, broadly and generally speaking, declining. In a market like this, you’d think it’d be pretty easy to buy a house, right?
Think again. While C.A.R. puts out its advertisements saying that the selection of homes is great right now, you have to take that with a grain of salt. First off, the selection really isn’t that great. It terms of “days of inventory” there may be an historically average selection of properties. But the problem here is that most of those properties aren’t really in the market.
They may be on the market – that is, listed for sale and available for purchase, but their asking prices are way too high for the current state of the market. Or, if their asking prices are reasonable, more often than not, it’s a short sale, which means that the contract and price are subject to approval of the one or more lenders which have loans outstanding against the property. Given that these “short sales” often take a very very long time to gain the approval of the lender’s loss mitigation department, it’s difficult to say that these properties are really “in the market.”
So what does that leave? That leaves bank-owned “REO” foreclosure properties (not all of which are actually priced to sell) and those few not-overly-encumbered homes with enlightened sellers who realize where their homes need to be priced in order to actually be in the market and have a decent chance of selling.
So when you look at homes that are actually in the market and priced right, there really is not a good selection of these kinds of homes. For these kinds of homes, though, there is tremendous demand. I put an offer in on a property last week, for example – we didn’t get it, even though our offer was pretty decent. There were ten offers on the property, and someone came in there and hit it out of the park and got the property.
Sigh. It’s like 2004-2005, all over again – because, really, the right-priced properties sell very quickly still, often with multiple offers. If you’re in the market to buy today, the same rules apply for making an offer as applied back in the good ol’ days – weak offers get batted aside and only the strong survive.
Now, here’s a tale of two sellers. I have one seller who got an offer on their place. The buyers had the effrontery to ask that the seller pay for Section 1 termite repairs. The gall, I thought. This is Santa Cruz. We don’t do that here. But in a market like this, if ever there was a time to try and get the seller to pay for Section 1 termite work, this is it. This tactic only works when there are no other offers on the table and demand for a particular property has shown to be only warm instead of piping hot. As it happens, this is the only offer we’re working with right now, so we’re going to take a long hard look at them section 1 repairs.
Now I’ve got another seller. It’s “the bank” – an REO property. Three offers on it in a week. Before one of the buyers was chosen, I went over the terms of the counter offer the bank was thinking about making. “Now, let’s be clear,” I said. “This property is being sold as-is. Under no circumstances will any credits be given or repairs made. Is your client aware of that and accepts this?” The buyer’s agent replied: “Yes, my client knows that, and that’s fine.” And then today, I got the phone call, “Well, the buyers are going to ask for some credits to repair some of the stuff that came up on the home inspection…”
That’s fine. That’s a complete waste of time, but it’s fine. Why is it a waste? Beyond the fact that the seller, a bank, already said it was an as-is sale and no repairs would be made or credits issued for same, there’s another salient point: there were three offers on the table. We got them in a week’s time. What does that tell you, in a market like this? Two things: the price was low, and demand is high for this property at this price. The bank doesn’t need that particular offer. It accepted the offer, with the understanding that the buyer wouldn’t turn around and try to nickel-and-dime them over repair items. But in a multiple-offer situation like this, any one buyer really is holding the weaker hand.
But go ahead and ask for your credits, if you’ve got the time to waste. Otherwise, suck it up and complete the transaction, or move right along. For right-priced properties, another ready willing and able buyer will be along shortly – and you need to know this when you’re negotiating.
Posted by SantaCruzBroker at 8:57pm
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