Real-Estate Companies
There are real-estate companies that specialize in the handling of REO properties. These companies market the properties and get them sold for the REO departments.
Many times these real-estate companies are real-estate brokerages that specialize in the disposition of the foreclosed properties.
Some real-estate agents specialize in the listing and sale of foreclosure properties. These agents work in regular real-estate brokerage offices but work almost exclusively in these foreclosures. It might take a little time to develop these contacts. As you make inquiries about advertised properties, you will often find these firms.
You may be thinking that it is wise to circumvent the real-estate agent. Beginning foreclosure investors often make this mistake. They think that by not acquiring properties listed by real-estate agents they are able to buy properties cheaper. They believe that by circumventing agents they are not paying money that is the agent's commission. Agents can be a steady source of foreclosure properties. The amount of properties they can find and the profitable deals they can produce far surpasses any savings you might realize on a deal without paying an agent's commission. You should work to develop a relationship with an agent that specializes in foreclosure properties.
Finding the right agent will take time and some perseverance. Ask your friends and relatives for recommendations. Look for an agent that understands your desire to invest in foreclosure properties. Pay particular attention to the agent's enthusiasm to work with a real-estate investor. Some agents seek investor relationships while others do not.
Lenders often use a BPO, broker's price opinion, to determine the value of their collateral. The lender orders the BPO from companies that compile real-estate information. Depending on local regulations, the BPO might be obtained from real-estate agents, REO companies, or brokers. Lenders order the BPO because it is less expensive and faster than ordering a full appraisal. A BPO is like a mini appraisal and a lot easier to complete. Many are only one or two pages in length, compared to the fifteen-page appraisal. BPOs can be created by driving by the property or by inspecting the interior.
Brokers and agents that prepare BPOs are often sources of REO properties. Don't overlook the contacts they have that can provide you with leads of properties in foreclosure.
Don't worry about the BPO or the current asking price of any REO property. The fair market value (FMV) is often the most questionable part of the foreclosure property transaction. The owner of the REO property wants fair market value, or at least wants to try to show that the highest possible sale price was attempted.
Fair market value is determined by the current as-is condition of the property. Lenders usually want to sell the property as is; they do not want to put any more money in the property. Most lenders will also allow any investor (and potential buyer of the REO) as much access as wanted to inspect the property. They will usually agree to formal inspections as long as you pay for the inspection service.
Lenders will seldom, if ever, agree to pay for repairs recommended by an inspector. The inspection report can, however, be used to justify a differing of opinion of the fair market value of a property.
The amount that is owed to the lender is usually more than what the property is worth. Most likely the lender will try to ask for more than the amount they are owed. That is just a starting point.
Keep in mind that the lender received the property because of an unsuccessful foreclosure auction. The lender made a bid for the property in the amount owed by the defaulting borrower. No one else bid more for the property at the public sale. The property reverted to the lender. It became an REO property.
Consider also that the minimum bid included all the extras in addition to the loan balance. That included the interest, late fees, attorney fees, legal costs, and other charges that have nothing to do with the fair market value of the property. Nobody wanted the property for the lender's initial bid, which was the loan balance.
Most likely the property was not worth the amount of the loan. If it were, the defaulting property owner would have sold the property, paid off the mortgage, and walked away with the equity. Since this didn't happen, the fair market value is probably less than the lender's loan balance and asking price of the property.
One of the reasons REO properties are not bargains is because of how the property was financed by the lender. Consider this scenario:
$200,000 property (fair market value)
20 percent down: $40,000
Total amount of loan: $160,000
If the homeowner defaulted and the property became an REO property, the property would be offered for sale for approximately $170,000 (the loan plus $10,000 in fees). To any real-estate investor this was a good purchase and an opportunity to earn a profit of $30,000.
Now consider the same scenario but with 100 percent financing:
$200,000 property (fair market value)
0 percent down
Total amount of loan: $200,000
If the homeowner defaulted and the property became an REO property, the property would be offered for sale for approximately $210,000 (the loan, plus $10,000 in fees). Just because the lender opted to finance the property with little or no down payment and is now the owner of the property that is no reason for you to pay more for the property. with little or no down payment and is now the owner of the property that is no reason for you to pay more for the property.
It may take negotiation, and offers and counteroffers, to get the lender to see your side of the fair market value.
Inflated prices for REO properties are not uncommon. For example, an REO property was offered for sale that two years earlier had sold for $295,000. Other similar owner-occupied homes in the area were selling for $315,000. The REO property was offered for sale by the lender in as-is condition; there was no home warranty, no disclosures, no heat, or appliances, and there were burst pipes and water damage, and the house was vandalized and filthy dirty. The lender listed this REO property with a notation that the price was firm. The listing also said that if a real-estate agent was buying the property on their own behalf the lender would not pay a commission.
Don't look at the lender's asking price or what the lender has to recover as a guide to the fair market value of the property. A lender can provide a loan of $500,000 for a $50,000 property. Just because the lender did and now needs to recoup its loaned amount does not make the property worth more.
The lender's list price was $365,000! Real-estate brokers believed the property was now worth $240,000 in its current condition. No real-estate investor should make such a purchase. The property in this example was overpriced even if it were in pristine condition.
