When banks foreclose on properties, they hire REO agents to put them on the market and get them sold. REO listing contracts are typically for 90 days, so the incentive to sell the properties quickly allows for aggressive pricing. To be clear, bank owned properties are sold for their true value, they are NOT discounted. The condition, repairs needed, location, and market demand are all factored in determining the list price. The value in buying a banked owned (REO) property is in THE POTENTIAL FOR RESALE, not the perceived low price. Further, because foreclosure properties often have deferred maintenance issues, the profit margin for fix-and-flip can be excellent.
I sell hundreds, yes hundreds, of REO properties every year. I have contracts with banks, Freddie Mac, Fannie Mae, HUD, VA, and the U.S. Marshalls to liquidate their foreclosed, seized and forfeited assets. As the gatekeeper, I can tell you what works and what makes me file your offers in the Rejected file. REO listing agents know about the current properties available and the ones that haven't hit the market yet. We are your first line of information and access to the properties. It's a smart idea to make friends with a few REO listing agents as well as selling agents. If you are the type of investor we are looking for, there's no end to the amount of premium information and access we'll give you to the Bank properties we manage. If you are that "other" type investor, there's no end to how many of your calls or emails we'll dodge!
So what can you do to make sure you have access and help finding and securing the best REO property deals to invest.
1). RESPECT THE AGENTS' TIME. REO agents have tons and tons of reports, phone calls and emails to manage our listings. Our clients are Banks and therefore have banker hours. We have to get everything in between 8 and 5pm. We simply don't have the time to chat or waste time during the work day. So calling us to "get to know you" or to hear your spiel on how many properties you sell, is a great way to get on the bad list. And calling us late, or at home or any time outside normal business hours is a sure-fire way to be barred from the good list forever. Make calls and emails to us, concise and to the point. Let the listing agent know that you are willing to see the property with any agent in their office. To see a property first and fast, you must be willing to see it early morning, late evening, weekends or lunch time. Its a good idea to drive by it before you make the appointment. And calling me 3 times a day will not make the bank respond to your offer any quicker.
2). BE PREPARED AND INFORMED. When calling about a property, have the address or at minim the street name available. Nothing bugs me more than someone calling and saying "hold on while I find the address" or "I've called on so many properties, I don't remember which one I called you on". Have pen and paper so when we give you information, you're ready to take it. Read the full descriptions of the properties available on internet sites like Zillow or Realtor.com. They contain important information that we have taken a lot of time to write and put out there for you. I can't tell you the number of times I get a call "I saw it online and was wondering how to make an offer" when it clearly states in the online description that offers are made on a website or through the listing agent.
3). DON'T TRY TO NEGOTIATE OVER THE PHONE. Offers on REO properties like all other properties require seller approval. They do not tell us "the lowest price they'll take" and even if they did, we still couldn't tell you. The bank will take the amount of the list price, unless there are multiple offers, and then they will take the highest acceptable offer. Period. If you want to know if they will take less, you have to make a qualified written offer.
4) MAKE AN INFORMED OFFER. Make sure you see the property so you can make an informed, reasonable offer. Pictures don't ever tell the full story, nor can you rely on what another home in that area looked like. Most REO companies will not reduce the price after you have an accepted contract. Make the appointment with the listing agent to see the property and look at it fully with an inspector's eye. Trying to renegotiate a contract is difficult. If the reasons you want to reduce the price should have been clearly visible in a showing, the answer will be NO.
5) DON'T ASK ME TO LIE This business is my career, its how I take care of my family. My reputation among my Realtor peers and customers, is very important. I will not jeopardize that so you can get the property for a few dollars less. No I can't tell you how much the highest offer is. No I can't hold off putting the property in MLS so you can get in first. No I can't say the property is under contract so you won't have competition. No I can not give you the lockbox code to go in un-escorted. SO DON'T ASK!
6). HOW MUCH TO OFFER. It's ok to ask if there are other offers on the property to decide your opening offer. If the property is new to the market (3 weeks or less), just come back on the market or has multiple offers, you need to make your highest offer. Nothing feels worse than to lose out on a good deal that you were really willing to pay more to get. Do your numbers and make the best offer that makes sense for your bottom line. I once had an investor offer 5k under list price because his rule was to never pay full list. A competitor bought the property for $6500 more and flipped it with a net profit over $98,000. Ouch, for $7000, he would have made enough to fund his next deal. Instead, he regretfully watched someone else get paid.
7). STRAIGHTFORWARD SALE REO contracts are NOT assignable. Some have deed restrictions requiring a 90 days to 1 year waiting period before you can transfer the property to another party. They typically don't allow changing names on the contract, no-money/net proceed sales or And/Or titles on the contract. REO properties are not good candidates for "wholesaling". Do not try to slip something by with addenda or back door deals. Your contract will be terminated, you'll lose your deposit and you'll get a reputation among agents in the area for not playing by the rules. Listing agents don't want to look bad with their Bank clients by having contracts fall apart.
8).CASH IS KING Investment seminars and books tell you how to get authentic looking bank statements and credit letters to show as proof of cash to close. I can spot those from a mile away! And so can any other experienced REO agent. If you are financing the deal, just say so. Hard Money is NOT CASH. You can make a financed offer with no financing contingency (if you don't get the loan you lose the deposit) which will be treated with almost the same favorability as cash. The agent will appreciate the honesty and fight for an extension without penalty for you, should you need one.
9). NO CONTINGENCIES IS QUEEN If you don't have the cash, and still want the high priority of a cash offer, waive your contingencies. Offers without inspection, appraisal or financing outs, are appealing to banks. For experienced investors, viewing the property more thoroughly than you ordinarily would on a showing, can yield valuable information of defects etc. that would be found in a home inspection. If you already know what's there, and you're comfortable with your ability to still turn a profit, you don't need a contingency to get out of the contract. You can still have an inspection, and I strongly recommend you do, but you can't void the contract for it. If you find a more substantial problem, just cancel the contract and forfeit the deposit. Better to lose a couple of thousand than your shirt in a money pit.
10). DEPOSIT I don't take any investor seriously who wants to put up a $250 deposit! Deposits say that you are serious and that you've got stake in making the deal successful. If you are an investor who doesn't have money for a deposit, you're not an investor. You're a dreamer who's probably going to waste my time. Deposits should be certified funds. I suggest you open an account just for investment deposits, so you are always ready.
REO properties can be a great investment source. They can often require more documentation and hoops to jump through, but when you find the right one, the profit is worth the hassle.