The foreclosure crisis has created an unprecedented opportunity to invest in real estate at hugely discounted prices. When a homeowner defaults on their mortgage and goes into foreclosure, the end result is that the house ends up at a foreclosure auction. If no one buys the house at the foreclosure auction, then the house goes back to the bank that originated the mortgage loan. Once the property is returned to the bank, it is known as an REO which stands for real estate owned (by the bank).
Here's the foreclosure buying process:
The bank has a department that specifically deals with REO properties. In this department, there are Asset Managers, who are responsible for overseeing these bank owned properties. Each house gets assigned by the Asset Manager to a Realtor who is a listing agent for the Asset Manager (bank). These Realtors are required to submit a BPO (broker price opinion) to the Asset Manager. The BPO is the Realtor's opinion of what this bank owned house would sell for in today's market. This BPO is based on a cash offer price that an investor would pay to buy the house as soon as possible.
Bank owned homes that are sold by the bank are usually cash only deals. What this means is that traditional buyers that are looking to purchase a home with a mortgage are effectively “unable” to purchase these homes. Only cash buyers that can pay cash are allowed to submit offers to buy these bank owned reo properties. For this reason, usually the bank will require a “proof of funds letter” to be submitted along with the contract to purchase the property. The proof of funds letter is often a bank or brokerage statement showing that the buyer has the cash available to purchase the property immediately.
The Realtor submits the broker's price opinion to the Asset Manager at the bank. This price lets the Asset Manager know what price the Realtor thinks the house should be listed at; in order to be competitively priced. The Asset Manager might agree to list the house at this price or more likely will agree to list it for a price that is a little higher than the BPO.
At this point, the house gets listed on the MLS for everyone to see. All realtors and anyone with access to the MLS can now see that this house is available for sale. These listings are also available on free websites such as www.realtor.com and www.zillow.com.
Cash investors begin calling the listing agent to schedule a time to see the house. If the house has been priced competitively then the competition will be fierce among the buyers that are trying to purchase the house. Investors like me will often submit an offer to purchase a house within hours of the house being listed on the MLS. In some cases, if the house is priced competitively there will be multiple offers on the house and there may be as many as 8 or more purchase contracts to buy the house. In this scenario, the Realtor will contact all of the potential buyers and ask them to submit their “highest and best” offer. The buyers will then each submit their highest offer and the highest offer will buy the house.
Most of today's cash buyers are investors that are looking for either rental properties or houses that can be fixed up and resold. Houses that need virtually no repairs are in demand by cash investors looking to add to their rental portfolio. Houses that need repair are in demand by cash investors that are looking to fix up and then resell these houses to first time homebuyers.
There is tremendous competition in buying bank owned properties. Many beginners make “lowball offers” without being aware of the fierce competition amongst cash investors. The reality is that many of today's REO properties are being sold at or above the listing price. Making lowball offers in this environment is a waste of time. Short sales are also a waste of time. Why bother negotiating back and forth with a bank when you can just make offers on the bank owned properties listed on the MLS. The Asset Manager will have a response within a few days compared to the typical 3 months wait for a response on a short sale offer. There is much less paperwork too.
The competition for bank owned properties is most fierce in the entry level first time home buyer homes. The reason is because these properties make great rentals. Cash buyers can purchase these homes and since the prices are so cheap, the cash flow is very positive on these houses as rental properties. Houses that can be fixed and flipped to first time home buyers are also very appealing to cash investors. Investors can buy these houses, repair them and then sell them to first time home buyers with FHA mortgages at a huge premium.
If you have the cash, buying bank owned properties is a great way to make a tremendous profit in today's real estate market. However, for most potential new investors they are lacking three critical key components:
- Cash to purchase the house
- Proof of funds letter
- Education and training
If you already have all of the above components then now is a really good time to get started investing in real estate. Today's real estate market provides an unprecedented opportunity to get started buying bank owned reo properties. Invest in your education and get the necessary training and soon you will be buying and flipping bank owned properties too.