Buying a Repo…An Explanation of the Process

Riverside, California…Repo’s, REO’s, Foreclosures…they all mean the same thing, and unless you have been in a real estate time warp, then you know that these terms are the latest buzz in our industry.  Our current economic business cycle includes far too many banks having to take back properties that they really don’t want, and this has led to an explosion of REO (real estate owned) properties now owned by banks that are on the market for sale.  These properties are generating a huge interest in buyers looking to get a deal, and since this segment of the market is here for a while, I thought you might like the REAL INSIDE SCOOP on what is happening with an REO property, and what to expect if you get involved with a purchase.

 A LITTLE BACKGROUND

Let’s first discuss how an REO property gets to an agent to be sold…because the lender doesn’t just grab the yellow pages and pick a Realtor in the town you live.  In fact, banks really don’t want to talk to the Realtors much at all. 

Understand that the bank made the loan on your home with the singular desire not to be where they are right now…in the real estate ownership business.  They would have been delighted to simply collect their monthly check from you, and go merrily on their way…of course, sellers would be happy with that as well.  And while they expect a few “casualities” along the way (they know there will be a few foreclosures), BANKS ARE TOTALLY UNPREPARED TO DEAL WITH THE VOLUME OF REPOSSESSIONS THEY NOW MUST HANDLE.  In fact, many times the noteholder isn’t even a bank, but merely some wall street investment company that wouldn’t know a home from a snowmobile…they just bought the note from your originating bank to collect your monthly payment.  Now this investment company needs to get involved in the seedy side of the mortgage business, and they are ill-prepared to do so.

SO…what does a foreclosing bank do?  Once they have acquired ownership of the property (a very short sentence for a very long process…more on this some other time), the bank essentially has two options, depending on how they are internally set up:  they will either work through their local branches to get the names of good local real estate agents who have the capability to handle this very specialized branch of real estate sales (the person for the bank who does this is called an asset manager), or they will make one call to what is called an “outsourcer.”  The outsourcer has contacts throught the real estate industry, and the lender is spared from having to deal with hundreds of real estate agents…they will now only need to deal with one…the outsourcer.

Why is this important to you, a potential buyer?  Because it will make a difference in the communication process for your purchase, which I will describe in a moment.  Also, understand that both a bank who works directly with their agent, or a bank who works with an outsourcer…both want to minimize the number of agents they have to deal with.  So, once a good relationship has been established, and the bank/outsourcer sees the agent representing them can do the myriad of paperwork and reports that they require, the bank/outsourcer will send as much business as possible to that now trusted agent…and in this market, the amount of property banks now own and must sell is staggering. 

My point here is that you really need to understand the incredible amount of pressure, deadlines, and paperwork a real estate agent who works in this line of business must handle.  I am not asking you to feel sorry for them…just understand the volume of properties they handle because it will make your process of purchasing easier if you know where they are coming from. 

IN OTHERWORDS, THESE AGENTS ARE BURIED, AND YOUR TRANSACTION WILL BE AFFECTED ACCORDINGLY.

Now that you have a little background, here are some specifics you need to understand in order to get the most from your REO purchase…and while we understand that every bank is different and that much of what follows is a generalization, it will be close enough to have some relativity to any REO purchase.  I will also assume, for conversation sake here, that you are represented by your own agent, and that the bank is represented by theirs.

COMMUNICATION/RESPONSE TIME…Due to the situation I have described above, the first thing you must understand in a REO transaction is that the normal communication time frames are thrown out the window.  Not only is the REO agent buried with possibly over 150 properties in some stage of care (listings, evictions, foreclosure process, repairs in some cases, escrows, etc.), but as we outlined above, the person they will deal with for a response (either the outsourcer or the asset manager) is worse.  Therefore, while everyone wants to give you the most prompt service possible, it’s not going to happen like a singular seller with a singular offer.  Think of our grocery store…one patron, one checker and you are in and out.  However, go during the rush hour, and you have one checker and 10 store patrons, and you are going to wait to get your groceries, no matter how tense you get.  In the REO business, it works the same way…SO STAY PATIENT.  You will get an answer, but it will take time, and stewing about it will not help.

MULTIPLE OFFERS…That’s right, even in this market.  Banks may be stupid (maybe that’s how we got here in the first place!), but they are not dumb.  They MUST sell the property, and are willing to take the loss in order to move it off their books in a timely fashion.  When all this mortgage meltdown started, they tried to make a few bucks on their REO’s, but not now.  Taking the financial loss is not personal for them, so most of them take a very aggressive approach to selling this unwanted possession.  Yes, some still have not gotten the message, and are therefore pricing their inventory too high, but most have seen the light, and are being very aggressive…and those are the properties you want to buy anyway.  SO…understand that you are not the only one out there who sees the value of purchasing a property now, and prepare yourself that you will probably be competing with other buyers such as yourself on the purchase of this great deal.

WHICH MEANS NO LARGE PRICE DISCOUNTS ON THE PROPERTIES YOU WANT…Please re-read this twice, because I know it goes against the infommercial you saw last night at 3:00 am from the guy with the lei around his neck and a huge boat in the background.  Trust me, he is wrong.  Generally speaking, these properties are already priced to sell..and while the lender understands they will get “wet” on the sale, the do not want to take a full “bath”.  Trust your agent on this one (may I suggest a Westcoe agent?), because once you get in the multiple offer situation, many banks do not deal with endless counteroffers amongst all the buyers…they do not have the time.  Mostly they just simply accept the best offer and move on.  SO…if your agent tells you the price is already discounted compared to comporable properties, DO NOT ATTEMPT TO DISCOUNT THAT WHICH IS ALREADY DISCOUTED.  The banks and their agents know this game, and will generally not play.

 REPAIRS vs. “AS-IS”…This one is not as universal, because lenders are currently all over the map on this one. 

Some lenders put a price on the home in it’s current condition, and will not fix anything… but their price reflects this.  Your agent will have talked with the listing agent about this (hopefully), and take your cues from your agent…but be careful here.  You should still have a home inspection on this so you are aware of what you are getting into, and you may have a problem with your appraiser…because the appraiser is there to protect the new bank’s interest, not necessarily yours…so simply because you and the seller are willing to close the transaction on this “disaster”, the appraiser may insist on some repairs being made.  After all, the new lender does not want to be in the same boat as the “old” lender.  Every situation is different, so be aware.

 Other lenders have either done all the fix-up work they intend to do, or have allotted a certain amount of money for repairs…repairs that they will only be too happy to have you do while they credit you some money for your efforts through escrow.  If you go this route with the credit for repairs, be careful…your lender may not like you getting any money back at the close of escrow, since you may run off to Vegas with the repair money instead of doing said repairs…so check with your new lender on their policies.

I guess the bottom line here is that most of the time, you will be purchasing the home in its current “as-is” condition, and we would advise you to get a through home inspection simply for your own piece of mind…AND DO NOT EXPECT THE BANK TO DO ANY WORK ON THE HOME AS A RESULT OF YOUR INSPECTION.  In rare cases, they may, but mostly, they will simply cancel your sale and wait for another buyer.  Remember…the price should already reflect the current condition of the home.

 TO SUMMARIZE

 Buying any property is exciting, and if you have read anything on this blog at all, you know we think it is a great idea to buy at this time for many reasons…and since most of the motivated sellers at the moment seem to be banks, chances are you may be dealing with an REO.  It can be a frustrating process if you are not prepared for the differences outlined above, or you can reduce some of your stomach acid if you simply understand a few fundamentals…fundamentals we have outlined above.  We hope this helps you in your purchase as you enter the sometimes bizarre world of REO’s…and if you have any questions, by all means give us a call at Westcoe.