I get questions frequently from first time investors that are interested in purchasing REO’s (foreclosed properties) in Livermore or surrounding cities. The general perception is that they will be the best deal. That may or may not be true. Certain factors need to be considered when making this type of purchase.
Inventory. This is the most critical piece of the equation currently. There are very few homes on the market in Livermore in general. 58 total as of today, 8 of those being attached homes. And buyers are plentiful. There is fierce competition for homes in most price ranges. The idea of lowball offers is one of the past. Banks are certainly aware of the turn in the market. While nationwide some cities are still feeling the pinch, the Bay Area of California is not overburdened with excess inventory, foreclosures or otherwise.
Price. REOs are no different from traditional sales in one regard. The list price may be under value, at market value or actually overpriced for the condition and location. As with any other property purchase, it’s important to have your agent run a comparative market analysis to assess the list price.
Condition. Some REO’s have been vacant for a very long time, and that may have had adverse effects on the property’s condition. There are some banks that will prepare the home for sale, and do a very good job, but it’s not a given.
Investor Friendly? Some properties are part of special programs to get homeowners back into neighborhoods. In these cases, offers will be accepted by owner occupants first. If no suitable offers are accepted within a given timeframe, then offers are accepted by non-owner occupants.
As Is Condition. Banks expect properties to be accepted in their as-is condition. Your impression of value may change greatly if and when you learn about property defects and deferred maintenance items and their associated costs.
Disclosures. Banks are exempt from many seller-required disclosures. They have never lived in the property, nor have knowledge of previous alterations or repair items. Buyer beware has significant importance for this reason.
Anticipate Inspection Costs. This is a critical part of a successful investment purchase. The only way you will know the true cost of owning this house will be to do thorough investigation of the house. Whole house inspection, roof inspection, pest inspection, chimney, pool, HVAC – there is no one to tell you what works and does not, so it’s best to know upfront.
Timing – When you make an offer to the bank, you may not hear back as quickly as you would from a regular seller. They can be slow to respond, just due to sheer volume. That said, they will more than likely ask you to perform quicker than a typical escrow on some of the time sensitive due dates. (such as inspection contingencies).
Contract – In addition to a regular purchase contract, you will receive a separate REO advisory to alert you to many of the differences between an REO purchase and a regular sale. You should read and understand these thoroughly. In addition, you will receive a counter offer from the bank (even if it’s not about price), showing their terms and conditions which are apt to be very different from a standard purchase contract. Again, it is important that you read and understand them.
Bank’s Motivation. The bank cares about two things – what they will net, and how fast the transaction can close. They have a non performing asset, so the quicker they close, the better. They may also offer incentives if you use their lender.
No Two are the Same. Banks have their own internal processes, thousands of employees and a plethora of agents who list their foreclosed homes. The nuances of the transaction can be very different from one bank to the next, and many of their processes are subject to change. With banks as sellers, every time is a new experience.
Contract Elements: Banks often have very specific instructions that must be followed for an offer to even be considered. They may prefer a specific title and escrow company. They often request that you are pre-approved with their loan officer. And it’s likely that you will receive verbal acceptance far in advance of their written acceptance.
Counter Offers: You will receive one, even if the bank accepts your price. These documents then supersede your initial offer. Understand that these are written by attorneys for the bank and can be very lengthy. You’d be well advised to have this reviewed by your own attorney.
Disclosures: The bank agents and principals in the transaction have never lived in the property and won’t provide disclosures about the properties condition. Many of the documents you received will simply state ‘exempt’. (more…)