Definition of REO: Lender owned property which was taken by foreclosure or deed-in-lieu of foreclosure.  Real Estate Owned by Lender

Banks end up owning the property when nobody at the public auction bid enough to cover the amount owed against the property or the seller signs over the deed to avoid foreclosure proceedings. REO homes are often considered the best way to buy a distressed property because the seller is already out of the picture. It's just the Buyer and the Buyer’s Agent and the Bank and the Bank’s Agent who are negotiating the transaction.

How to Make Offers to Buy REO Properties

Lots of savvy home buyers want to hit the jackpot and buy that “foreclosure” home, many of which are often under-priced. When banks price REO’s under the comparable sales, multiple offers are often the response. This means you could be up against stiff competition for that bank-owned home.

It's not unusual for some REO homes to receive 15 or 20 offers. Sometimes the bank will throw out all but two offers and then ask the selected buyers to resubmit what is called "Highest and Final" offer. Sometimes the bank simply accepts the best offer at inception.

Here are a few tips to help you select the right price and terms:

1) Get the Property History

Ask your buyer's agent to find out the bank's purchase price on the Trustee's Deed or Sheriff's Deed.

Generally, it is noted on the document itself, which you can get from the tax rolls or a title company. Compare that price to the price the bank is asking.

Look at the amount of loans that were once secured to the property. Somewhere between the original mortgage balance(s) and the foreclosure sale price is the amount the bank will accept, if the home is under-priced.

2) Determine Comparable Sales

In many cases, the list price has little bearing on the value of the home. The market value carries the most weight. If you are up against competing offers, other buyers will offer more than list price.

q       Look at the last three months of comparable sales, a mini BPO or Appraisal, for that neighborhood to determine how much this REO is worth. Try to use only those homes that most closely match the REO regarding square footage, number of bedrooms, baths, amenities and condition.

q       Look at the pending sales. Ask your agent to call the listing agents of those pending sales to try to find out the accepted offer price. Some will share that information and some will not.

q       Look at the active listings. Those are most likely the listings other buyers will use to formulate a price because they are the only homes those buyers actually tour.

3) Analyze Listing Agent's REO Sold History

Most REO agents work for one or two banks. Some listing agents are exclusive listing agents for REOs, and they do not list any other type of property. Since REO agents deal in volume, they typically apply the same pricing principles to all their REO listings.

q       Ask your buyer's agent to look up the listing agent in MLS.

q       Run a search using that listing agent's name to find the last three to six months of that agent's listings.

q       Pull the history of those listings to determine the list-price to sales-price ratio. If most of those listings are selling for, say, 5% over list price, then you may need to offer 6% over list price, and vice versa.

4) Ask About Number of Offers

If there are no offers on the REO home, you can probably offer less than list price and get your offer accepted. However, if there are more than two offers, you will most likely need to offer above the asking price.

If there are 20 offers, bear in mind that some of those offers might be all cash. Banks like all cash offers. If you are obtaining financing, then you may need to increase the price on your offer to be considered.

5) Submit Pre-Approval Letter & Good Faith Deposit

It goes without saying that you do not want a pre-qualification letter. You want a pre-approval letter. Get pre-approved from your choice of lender in advance.

Moreover, get pre-approved by the lender who owns the property. Do not expect to use this lender for your loan, but submit the pre-approval letter from this lender, along with the letter from your own lender. Banks don't trust other lender pre-approvals but trust their own departments.

Try to submit at least 1% of the purchase price as good faith with your offer.  Your buyer’s agent will send in a copy of your escrow check to let the bank know you serious.  Deposits are completely refundable if the bank does not accept your offer.

6) Don't Ask for Repairs / Inspections

Sometimes banks will pay for repairs, but typically will not agree to do so at the offer stage. If there are problems found during a home inspection, renegotiate after your offer has been accepted.

7) Shorten the Inspection Period

If other buyers ask for 17 days, for example, to conduct inspections, and you ask for 10, you will be deemed the more serious buyer.

8) Offer to Split Fees

Some banks will not pay transfer fees, for example. If the buyer offers to split those fees, the bank will feel more amenable to accepting the offer. Same goes for escrow fees and closing costs.

Many banks negotiate discount fees for title insurance. If the bank will pay for the owner's policy, the ALTA policy might cost a bit more. But it's still a good idea to let the bank choose the title company if you want your offer accepted.

Consider the Appraisal Consequences

If you offer over list price, bear in mind that the appraisal will need to substantiate that price. If you find yourself dealing with a low appraisal, you have options, so don't despair. Remember, the bank will most likely run into this problem with the next buyer who obtains financing.