Beating out Investors for REO Properties

The ongoing real estate crisis has created huge opportunities for buyers and investors in the Real Estate Owned (by bank) or REO properties. Where there is opportunity, there is competition. Since banks usually prefer cash for REO transactions, individual buyers considering purchasing a REO must often combat competition from investors. But there are ways for home buyers to stay ahead of the competition from investors.

The first step starts with picking the right agent. It’s a good idea to call and interview a bunch of agents in your area. Ask them about their experience with REO sales. Ask them how many they have sold in the past few months. Get some client references. Experienced agents can help find homes that are in better shape than others, and can also help you with various aspects of the paperwork involved.

The fiercest competition for REOs is for the entry level or first time home buyer properties. This is because such homes can be rented quickly by investors, which gives them positive cash flow. Investors also like fixer-uppers because they can be easily fixed and flipped to first time homebuyers that qualify for FHA mortgages. Most first time buyers make lowball offers on REOs and this is where they get beat by seasoned investors. That’s why it behooves to seek the services of an agent that’s well-experienced in REOs.

Since most REOs are sold as cash-only deals by banks, it is imperative to get prequalified and obtain a “proof of funds letter” from your bank. This must be submitted along with the initial offer. This letter is typically a bank or brokerage statement which proves that the buyer has cash in hand to purchase the home immediately. So if you have liquid cash and an experienced agent to represent you, buying a bank owned property can be a very good deal.

Both Fannie Mae and Freddie Mac are currently offering incentives to buyers and selling agents as a way of liquidating their REO inventories. Fannie Mae sells its REOs through its HomePath program. Agents can get $1,200 as selling bonus on qualified properties. Buyers can get up to 3.5% of the sales price to put toward closing costs if they make the REO their primary residence. Buyers must request the incentive during the initial offer. Offers submitted on or after June 14, 2011 and closed by the end of October 2011 are eligible.

Freddie Mac’s HomeSteps’ program also includes a $1,200 bonus for selling agents, and up to 3.5% of the buyer’s closing costs on offers that meet the criteria. Initial offers must be received between May 16 and July 31, 2011 and closed by September 30, 2011. Buyers also get a 2-year Home Protect Home Warranty, which covers plumbing, electrical, air conditioning, heating, and other major systems and appliances. These offers are only available for owner-occupied homes.

Freddie Mac, Fannie Mae and the Department of Housing and Urban Development (HUD) prefer buyers that occupy homes over investors who typically rent or resell them. Therefore, some banks will only accept offers from potential owner-occupants for the first 10 or 15 days that a property is on the market. If you are fully prepared, you can move fast and capitalize on the opportunity.

In addition to being prequalified for financing, you must also have an inspector lined up to help you evaluate any property you are seriously considering buying, since foreclosed properties tend to be in worse shape than those sold by homeowners. The few hundred dollars you would spend on the inspection is definitely worth it because you’ll know what’s wrong and how much it would take to fix. Having this knowledge can help you negotiate with the bank.

Although these steps cannot guarantee that you would beat an investor in scoring a REO, it will certainly improve your odds.