#1 - Define the type of foreclosure you are wishing to purchase. Not every foreclosure is the same! Lenders have varied protocols for bid submission, inspections and handling the closing process. Inquire up front about the protocol that will apply to the subject property you are viewing. Some foreclosures are handled through a sealed bid process. Some are negotiated directly between the lender and the investor. Some lender's utilize services of auction houses setting the sale on a specific date and time. Key#1 - Find out the type of foreclosure and identify the protocols.
#2 - Do your homework! Search all available public records regarding the property. Research the community data to understand school information and neighborhood benefits including proximity to doctors, shopping, airport etc. Check the tax records to see previous sale history and property tax assessment/valuation information. Drive through the neighborhood and talk with the neighbors. Look at the average price of homes on the street and what other (REO) foreclosures are selling for in the neighborhood vs. existing fair market value homes. Key #2 - Do your homework!
#3 - Have your funding source set before you write an offer! If you are paying cash for the property, have a pre-written letter stating that you have cash assets up to (?) available to purchase properties. Lenders often want documentation of funding approval or source of fund letters from investors at the time of the offer. These documents, when submitted with your offer, give you a stronger position in the negotiation process. Key #3 - Have your funding or source of fund documents ready to submit with your offer!
#4 - Be ready to move quickly and be ready to wait on the bank! Lenders can be slow when it comes to signing documents, submitting paperwork to the title company and expediting the closing process. Remember most of the REO properties are handled by "REO departments" usually in another state. An appropriate method of follow-up is to check on the process every 4 - 7 days after you have completed your tasks. Lenders will expect you to move timely and quickly, but I have found they often lag in their response. Don't get frustrated. Communicate by e-mail or other forms of "written" documentation. Key #4 - Be ready to move quickly and be ready to wait on the bank - don't get frustrated!
#5 - Lenders are NOT going to make improvements to REO properties in most cases. REO foreclosure properties are typically sold "AS IS". The lender is already suffering a loss on the property and the potential of increasing those losses through improvements is avoided. Position yourself against unexpected problems by getting inspections by competent, licensed and experienced contractors. Make an informed decision. Write inspection contingencies into your offer if you have concerns about a specific property issue. Lenders will NOT likely "repair" the items, but the clause does give you an "out" should the costs outweigh the benefits. Key #5 - REO properties are sold "AS IS" and be prepared to get inspections. Write your inspection clause into the purchase contract.
#6 - Make reasonable offers! Many new investors approach the foreclosure market as if the lender is just going to "give" the properties away. Yes, lenders do want to sale and they DO NOT want to have to hold onto a foreclosed property; but, often the price of the REO foreclosure has been established by an appraisal and a consultation of the current market conditions. Lenders do not base the list price on the opinion of the "Listing Agent". In most cases, the listing agent was "told" the list price and never consulted in that process but was only one of many opinions in the process of establishing the list price. A reasonable offer could be considered around 70% or greater of the list price. There are good deals but lenders are not just "giving" properties away. Lenders are mitigating losses and seeking to sale the property within the economics of the local market and community. Key #6 - Make reasonable offers!
#7 - "For the experienced REO investor" - remember in life the highest profits are returned to the person who can solve problems others will not or cannot. Everyone looks for the "quick flip" property - one that only needs cosmetic fixes and turned back into the market inventory. I want you to consider taking on the "harder" to deal with properties such as properties with medium to major repairs, remediation issues and/or structural issues. This is NOT FOR the new investor but if you are seasoned and have a great contractor crew, this tip may be for you. I'm seeing properties with significant issues just sit and not sale or sit and then sale a market bottom pricing. The common issues I am finding is mold (requiring remediation), plumbing issues, HVAC problems, or structural cracks/leaks. I would suggest having qualified remediation companies or engineers view the properties and give you a cost estimate. Submit these cost estimates with your offer deducting them from the list price. Key #7 - "For the experienced REO investor" - Be a problem solver and get paid for expertise!
#8 - Learn the difference between "owner's" title insurance and "lender's" title insurance. Title insurance in general insures the title of the property. A lender's policy generally covers the lender's interest (your mortgage) in the property but does not cover the property owner or the property owner's equity in the property. The property owner is covered by the "owner's" title insurance policy. Discuss with the title company about insuring your interest in the property as the owner especially on foreclosure listings! Remember those who are dealing with foreclosure are often having other financial issues. Insuring yourself against liens and other potential "title" clouds is key to protecting your investment. Talk with your attorney and title company about what options maximize your protection in the "foreclosure" world! Key #8 - Learn the difference between "Owner's Title Insurance and Lender's Title Insurance". Make decisions that protect your investment.
#9 - Don't over improve your properties for re-sale! When you are considering remodeling foreclosures for re-sale improve the property appropriate to the community. One of the bigger mistakes I see with investors is "over-improving" properties. Consider the market conditions focus on the needs of the buyers in your market. Make quality improvements but avoid over-improving. Key #9 - Don't over improve your properties for re-sale!
#10 - Contract the services of a professional and experienced realtor. You want a realtor who understands the difference nuances in the REO world. Involve your realtor in the pre-offer research and inquire about their thoughts for improving the property for re-sale. In addition, seek the advice of an interior designer for resolving storage issues, unique room issues, and general staging of the property for re-sale.
Timothy Osborn, CEO/Founder
The Property Pros, LLC
Broker - KY/ON/IN
PH: (859) 803 - 5034