Steps Involved in the Bank REO Purchase Process

Thought I’d share some insight with REO properties and the like.

I’ve been receiving emails pretty consistently from people who would like to purchase foreclosures from major banks like Deutsche Bank, INDYMAC, Freddie Mac, Fannie Mae and the other big boys.

Now,the biggest reason for someone wanting to buy a REO property is the cost savings of one.

The normal process of REOs in my area is

  1. Owner becomes delinquent on current mortgage
  2. Lender files complaint against homeowner/mortgagor
  3. Court decides in lender’s favor if there’s no response from homeowner
  4. Court hands property over to be auctioned off at courthouse
  5. Property MAY be purchased by buyers, or they may be purchased back by the lender (Most likely)
  6. Bank begins the pre-list process
  7. Bank delivers property to either a AM company which in turns gives it to a Realtor to market, a auctioneer or they attempt to find a buyer themselves.

Now, the property can be purchased during almost every step of this process, it just changes on who you have to deal with. Risks change through the whole process, some points being VERY high, and some being low, I will not attempt to get into deed-in-lieu deals or anything like that.

Now, once it has been taken back by the lender, they (normally) send a real estate agent, and/or an appraiser to the property to assess the value of the property.

Most of the time, the agent or appraiser will factor in the condition, neighborhood and as many factors as possible to give the bank a 30,60, or 90 day sale. Homes WILL SELL QUICKLY if they’re priced right, I’ve seen homes that are caving in sell very quickly if they were priced correctly.

Banks USUALLY will look at a listing price reduction after about 45 days or so if it has not had an adequate amount of activity.

All these things can be beneficial when buying a home for investment or personal use.

Now the pitfalls I’ve run in to with purchasing a REO property……….

Unknown property conditions – With residential property, when a owner-occupant sells it, you have someone that has SOME information on the property. How long things have been owned, wear and tear, the location of plumbing and many other things can be described by a homeowner, and the new purchaser has at-least some insight on how things are. With a bank owned property, the only information you can gather (Most times) is from inspectors, and they won’t always know everything about the property. Asking neighbors is a good thing to consider when looking at the property, because there’s some things that are seasonal that can happen to a property like leakage, flooding,etc.

Financing – I had this issue on the last REO property I sold, the lender (who hadn’t told me) who was working with the buyer on a property hadn’t told me what the appraiser needed. The electricity in the property had been off for a while, which had caused some water in the basement (Sump-Pump was off). The appraiser noted this, and we had to have a structural engineer come out and certify that the foundation wasn’t damaged from the water. Of course, the water had been in there for 1-2 days and did not cause any damage. The engineer cost was $350 to the buyer which could of been prevented by the lender informing me that the power should be on. We also had to have the property re-inspected, and found out the furnace did not work. These were all things that dragged out the closing another week to 10 days, and cost the buyer $350 in additional fees. I was able to fix the furnace for buyer (Thankfully) so we avoided additional cost to the buyer.

Delays in Closing – If you ask many REO listing agents, you’ll know they’re swamped with business, and the asset management companies they work with are even more swamped than they are. As a buyer, you need to know that the time-frame of purchasing the property is in the asset management company & lenders hands, not the buyer. Most of my closings have been delayed by one reason or another with an REO property, banks also take quite some time on responding to offers and general inquiries.

Understanding the Bank REO/Foreclosure Proceedings

Foreclosed homes that remain unsold above the reserve price at a real estate foreclosure auction are taken back by lender or bank holding the mortgage. After this step, the foreclosed properties are considered to be bank owned real estate (REO). If the lender has a sizable mortgage lending operation, it can be reasonably expected to have an internal REO division to handle the foreclosed homes in its portfolio.

The REO division of any bank that lends on residential properties is constituted with asset managers to oversee all processes associated with the maintenance and marketing of the REO homes in its inventory. A Bank asset manager will assign a REO property to a local real estate agent to prepare the property and ultimately list it for sale. This process is more or less similar to the steps followed during the sale of a residential property.

The bank owned homes are treated as non-performing assets the bank’s books. Additionally, the banks incur a number of costs associate with maintenance and upkeep while it is in their possession. Due to these issues, the mortgage lender or bank is highly motivated to sell them off as quickly as the market allows them to do so.

REO Listing Agents

Real estate agents that primarily deal with foreclosed REO homes from US Bank are an excellent resource to find great deals on residential homes in the areas in which the bank holds repossessed homes. Working closely with approved US Bank agents can be very rewarding and profitable for homebuyers and investors. The key to getting a good REO deal is the swiftness with which a buyer can complete the transaction. Banks prefer cash deals and quick closings, whereas buyers seeking financing to fund their purchase are given consideration only in cases where no cash buyer is forthcoming.

Buying an REO listed through a agent presents a number of favorable and beneficial outcomes for the residential property investors, especially when compared with buying pre-foreclosures. A buyer can get to thoroughly inspect the property prior to making an purchase offer. As most bank REOs are vacant, the buyer need not have to worry about evicting the people occupying the property, like in the acqusition of property purchased through a foreclosure auction. The US Bank listed REOs also come with a clear title without any encumberances or outstanding claims. As banks are well-versed in the process, an investor can expect a fairly straight-forward and predicatable procedure. A buyer who establishes a good relationship with the agents and asset managers can expect to do repeat transactions skipping over the standard vetting process by the banks.

A fairly priced bank owned REO home attracts a fair number of bids. Only those offers that can assure the bank of quick closing are given priority and precedence. To acquire good REO homes, an investor must keep a close watch on the new US Bank listings to act on them ahead of other competing buyers.

REO/Foreclosure Process

The amount of time it takes for a property on which an owner has defaulted to end up as an Bank REO depends on the type of foreclosure procedure followed in the state in which the property is located. There are two types of foreclosures followed in states: Judicial and Non-Judicial. In a judicial foreclosure, the type of instrument used as security is “mortgages”, whereas in non-judicial foreclosures, the instrument used for security is “deed of trust”. Basically, the type of security instrument used to make a loan determines the procedure to be used in case of a foreclosure.

Judicial Foreclosure Process

As can be ascertained from its name, a judicial foreclosure will involve courts. So, the process for foreclosing is more drawn-out and lengthy when compared to non-judicial process where the foreclosure process is faster and smoother. In the current crisis, both the procedures are taking much longer to completed due to the overwhelming number of residential foreclosures entering the cycle. Additionally, the lack of well-trained staff and legal roadblocks have also contributed to the delay in enforcing the provisions of the security instrument used to secure a home loan. Depending on the legal or non-legal foreclosure process, the time it takes for a property to show up as US Bank foreclosure listing is determined.

In states like Florida and New York, it takes an average of 650 days from the time a notice of default is served to the time the note-holder gets the possession of the property. The overall national average is at around 400 days in no better either. As for generalization, one should expect a minimum duration of an year for a foreclosure procedure to be completed. So, just remember that judicial-foreclosures involve courts and thus takes longer, while non-judicial process is handled by trustees and thus is much quicker.

The provisions of a deed-of-trust, used in non-judicial foreclosures, contains the “power-of-sale” clause which allows for the initiation of a foreclosure sale without the involvement of a court. The “power-of-sale” clause states that a Beneficiary (Lender/Bank), in the case of a loan default, may sell the property to satisfy the outstanding loan on it. Unlike in “mortgages”, a lender may not seek to get a deficiency judgement on the borrower if the property sells for an amount lesser than the amount owed.

Non-Judicial Foreclosure Process

The following are the non-judicial (Deed of Trust) States: Alabama, Alaska, Arizona, California, Colorado, District of Columbia, Georgia, Hawaii, Idaho, Iowa, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, North Carolina, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Texas, Virgina, Washington, West Virginia, Wisconsin and Wyoming.

In a typical non-judicial foreclosure, the three parties involved are a Trustee, Beneficiary and Trustor. A third-party entity that a bank or mortgage lender chooses to protect its interest is referred to as the “Trustee”. The Bank or the note-holder is the “Beneficiary” and the Borrower is the “Trustor”.

The mortgage terms clearly laid out in the closing documents signed between the borrower and the mortgage lender determine the amount and the frequency of repayments to be made to service the debt. If the borrower for any reason fails to keep up with their payments according to the terms of the loan, the lender may choose to file a “Notice of Default”. This notice is typically served if the borrower is more than 90 days late on his payment. The “Notice of Default” is recorded with local county office and the same is served to the defaulting home owner. Depending on the state where the property is located, a period of reinstatement to bring the mortgage current ensues.

In non-judicial foreclosure states, a “Notice of Trustee’s Sale” is issued in local newspapers after three months from the date of issue of the NOD. These notice of trustee foreclosure sale is simultaneously recorded with the local county recorder. The newspaper ads run for atleast three consecutive weeks at a frequency of one per week. If the mortgage loan continues to be in default while these notices are being served, the lender may proceed to auction off the property at a Trustee Auction. At the auction, if the property attracts bids sufficient to beat the reserve price set by the lender, the property gets sold to the highest bidder. Otherwise, the lender retains the property, at which time it becomes part of their REO inventory.

In a judicial foreclosure state, the process involved in foreclosing on a defaulted loan is very different. First, the mortgagee (lender, bank or note-holder) sues the borrower in court inorder to obtain the court’s consent to foreclose. If the borrower does not contest this “Lis Pendens” or “Pending Lawsuit” within twenty days from the day of this filing with the court, the lender may proceed to obtain a summary judgement. After receiving the foreclosure judgement, the lender will choose a date to auction the property.

There are may states that allow both the judicial and non-judicial foreclosure sales. In such cases, the practice that is more commonly preferred is the judicial foreclosure as it allows the lender to get a deficiency judgement, which allows them to go after the income and assets of the borrower. The borrower may choose to get out a deficiency judgement by opting to file a bankruptcy, which may again delay the entire foreclosure process.

As a potential buyer of foreclosed homes, it is highly essential to stay abreast with the legal procedure to anticipate potential pitfalls that may delay the purchase.