How to Get a Great Deal on a Bank-owned Property (REO) – Part 1

As we discussed previously, in Big Bear, the number of actual bank-owned properties is down considerably (about 75%) from the height of the foreclosure crisis.  Part of this is that many of the bad loans have been washed out of the system and part is that banks have become much more efficient at dealing with short sales, meaning that most of the underwater properties no longer make it to the REO (Real Estate Owned) stage, at which the bank actually assumes possession of the property.  There are still a few left on the market, approximately 6 currently in the 92315 zip code (Big Bear Lake); but they understandably tend to get a lot of competition and sell very quickly.  As the economist at our recent Real Estate symposium stated “investor-landlords have been very efficient at reducing the foreclosure inventory”.  This basically means that investors came in when the foreclosure crisis peaked and started buying many bank-owned properties (usually for all cash and often in bulk sales) and turned them into rental properties.  He also said that, looking at incomes and historic prices in CA, he believes homes are currently under-valued by about 54%.  Whether you believe that last part or not, there’s no possible disagreement with the fact that there are MUCH fewer bank-owned properties on the market than there were 2 or 3 years ago.

So how do you get a great deal on a bank-owned property now?  The first factor is SPEED.  When a great deal comes on the market, you need to be prepared to put in an offer within 24 hours.  There was a bank-owned lakefront about 2 months ago that had 4 all-cash offers within the first 24 hours.  A very important aspect of this is having your financing lined up beforehand.  No matter which bank owns the property, they won’t even look at an offer that is not accompanied by either a pre-qualification letter from a major lender or a verification of funds (copy of a bank statement showing the full funds for an all-cash offer).  It’s best to get your pre-qual letter from a bank that everyone has heard of (Wells Fargo, Chase, etc), because they often won’t honor one from a very small brokerage or bank or will make you get cross-qualified with one of their own lenders.

An example of speed being important is a client of ours who lost out on $60K in equity by trying to hold out for “a little better deal”.  It was an REO that had been on the market for a while and we knew a price reduction was coming.  As soon as it did, we let him know and he put in an offer.  We went through one or two counters by Friday and the bank finally countered back at a very good price and was even paying some closing costs.  We tried to convince him to take it, but he thought that if we waited until Monday, he could “do a little better”.  By the time the weekend was over, two other offers had come in and we had a multiple offer situation.  It sold two days later (after “highest and best” offers were submitted) for $60K more than the bank had offered to sell it to our first buyer on that Friday!

A good lender can usually get you a pre-qual letter after about a 5-10min phone conversation.  Keep in mind that a “pre-qual” is not as binding as a “pre-approval”, which means they have actually looked at your tax returns, paycheck stubs, etc.  A pre-qual is fairly cursory and can be gotten pretty quickly.  If you ever need the number of a good lender that can get one for you fast, just let us know.

continued (Part 2)