Why Your Financing Can Make an REO Asset Manager Reject Your Offer

Westcoe Realtors, Riverside California…I get calls a couple times a week from potential buyers who are so frustrated with trying to purchase a bank REO (REO…stands for Real Estate Owned..same as the word repo).  The scenario is generally built around a similar theme…that no matter what they seem to offer for a home, the asset manager of the bank rejects their offer for another…and sometimes that other offer is even for less money.  So, what’s the deal?

Well, let me tell you the dirty little secret that is permeating our real estate business at the moment…and that is that banks are rejecting you for your financing, not your price or qualifications, or job, etc.  You are losing your offers because of the type of loan you are obtaining…because there is a pecking order to financing that almost asset managers observe. 

Allow me to rank the type of financing the REO asset manager looks for in an offer, from best to worst.

ALL CASH…no surprise here.  An offer that is all cash will beat other higher priced offers almost every time.  Why?  First, there will be no appraisal needed, which eliminates a huge source of pain for the REO manager.  They do not have to worry about the value coming in low and jeopardizing the loan, and it also eliminates any work requirements that the appraiser my demand for the bank to make the loan.  All cash kills two birds with one stone.  Secondly, these escrows can generally close much quicker than an escrow with a loan…and speed is very important to these managers.  While it is seldom discussed, many asset managers get paid a bonus if the REO property closes escrow within a certain time frame…a time frame that can always be met with a cash buyer, and seldom be met with a loan buyer.  Rumor has it that some bank asset managers will keep an REO on the market for a longer period of time just to get a cash offer.  Stranger things have happened, but while we have no proof, we hear it happens. So…remember, when buying a home in today’s market, cash is king.

CONVENTIONAL FINANCING…If you need a loan to purchase your home (and let’s face it, most of us do), then almost all asset managers prefer conventional financing to those listed below.  Again, why?…Because conventional appraisals have fewer work requirements, as a general rule, than an FHA or VA loan.  Remember, fewer work requirements means the REO lender has less money to expend in order to close the home, and this is critical since they have already lost tens if not hundreds of thousands of dollars on the property already.  Also, a conventional buyer must have a little more money for a down payment (minimum of 10% as opposed to 3.5% FHA), and this makes them a stronger buyer in the eyes of the asset manager.  Therefore, when splitting financing hairs, conventional loan financing will always win out over any other type.

FHA FINANCING…BUYER PAYING THEIR OWN LOAN COSTS.  This is next in the bank owned pecking order.  FHA financing has its issues for an asset manager, principal among them is the appraisal.  Not only is the appraisal itself subject to a more stringent guideline, but many times must “protect” the buyer from purchasing a home is major disrepair.  As a result, and FHA appraisal will almost always have more work requirements than a conventional appraisal.  This means the buyers new bank will not make the loan if certain repairs are not made to the home.  As I said earlier, the REO lender is already taking a bath on the home, and the do not want to put in any additional money into the home to sell it.  The buyer can make the repairs, but most of the time, an FHA buyer does not have the money to do this…so the bank is either forced to spend the money on the repairs, or cancel the escrow and put the home back on the market.  Neither option is especially appealing to the REO bank, so do not expect the bank to do handstands when presented with your offer.

FHA FINANCING…REO BANK PAYING YOUR CLOSING COSTS.  FHA financing only requires the buyer to have 3.5% of the purchase price as a down payment…and the closing and loan costs can be paid by either the buyer or seller.  In most cases, when the buyer does not have the money to pay their closing costs themselves, they ask the bank to do it, and in almost all cases, the amount of the closing costs the buyer is asking the seller to pay is added to the offering price.  This is all fine, and overbidding on a REO home is absolutely OK, but sometimes the price has to be inflated so high that there is the possibility the home will not appraise for the higher price.  Now the REO bank has a problem, and they either have to accept the lower appraisal price, or cancel the escrow and start again.  Therefore, if an REO bank is going to accept an FHA offer, asking the bank to pay the closing costs only compounds the potential problems for the REO seller.

VA OFFERS…This is the lowest rung on the REO asset manager’s ladder, and it is too bad, since anyone who has served his or her country in the services deserves better.  However, the REO bank is not bound by what “should be”, but instead is bound by “what is.”  The major problem with a VA buyer is twofold…the appraisal and the closing costs.  A VA appraisal is the most stringent of them all, and many REO properties simply cannot be brought up to the standards a VA appraisal requires without massive repairs.  Even properties in relatively good shape can have trouble passing a VA appraisal, so you can imagine what the repair costs are for your average repo.  Secondly, the closing costs to the seller of any property that accepts a VA offer are larger than with any other type of financing.  By law, there are some costs the veteran buyer is not allowed to pay, and therefore must be paid by the seller.  The original intent here was to give the veteran a break for services rendered…and in a “regular” housing market, this normally works..but not in an REO dominated market.  For a REO seller, it is all about dollars and  cents, and unfortunately, the VA buyers costs the bank the most money to work with on an offer.  Hence, there are very few successful VA offers accepted by REO asset managers.

 In the end, none of these problems would be an issue, or even exist, if the market was not frenzied with too many buyers and not enough sellers.  The only reason the asset managers can pick and choose like this is because they have about 20 offers per property to choose from.  Trust me, if this was 2 years ago, when all this REO “junk” had just started, and REO banks were begging for buyers, nobody was “cherry-picking” the financing.  However, markets change like a politicians promises, and in the not-to-distant future, things will equalize and buyers will not be at the mercy of the REO sellers.  Until then, do the best you can, manage your frustration, and try to save enough down payment to hit that 10% mark for a conventional loan.

 Take care, and as always, let us know if there are any issues you would like to see us address in this blog.