Ahead of the curve, fact-based blog with editorial style views on the current status and future of Kirkland, WA real estate. Written from the POV of an experienced Realtor working in the trenches of every day real estate in Kirkland.
You Don’t Have to be a Cash Buyer to Buy a ForeclosureNovember 12th, 2012 at Mon, 12th, 2012 at 3:44 pm by Jennifer Nilssen
REO Purchasing for the Common Man: Locating and Buying a “Listed” Foreclosure
An Interview with Jennifer Nilssen of Real Living NW Realtors and Tina Mitchell of the “The Money Hour” on AM 1090
Fannie Mae REO in Kingsgate – 2 Bed, 923sqft
TINA: Let’s start out with a definition of a bank owned or Real Estate Owned (REO) property.
JENNIFER: When a home is foreclosed on by the bank and is sent to auction, but doesn’t successfully sell, it then reverts back to the bank’s possession and becomes an REO (Real Estate Owned).
Many REO’s today are listed with a real estate agent. There are far too many REO’s and banks are now streamlining their processes and utilizing agents. REO’s are no longer mysterious, they are out there for the public and you don’t need to be a cash buyer to buy bank owned homes. Brokers that specialize in buyer representation for REO’s can help you access them. In fact Fannie and Freddie require that every buyer use their own broker.
TINA: I’m sure you have clients come to you saying “I just had a friend that purchased a property at the foreclosure auction for .50 cents on the dollar.” What would you say to them?
JENNIFER: I would say that’s incredibly lucky because that is somewhat rare these days. They would need to be a cash buyer or have had to secure hard money lending which is quite expensive and usually adds thousands to their total acquisition cost. Because there is so much competition for the good ones at the auctions, 50 cents on the dollar is rare. Plus auction buyers are buying a home many times sight unseen and likely without a guarantee of title so they may be getting a deal but the risk can also be extremely high. They’re often getting a deal because they’re taking on risk. If you’re not into taking on that sort of risk, then look at listed bank owned homes.
TINA: I know the biggest myth is that all foreclosures are better deals then traditional sales. Can you give our listeners the truth?
JENNIFER: It’s a common myth among buyers that all foreclosures are good deals. A good deal is a good deal. It does not matter what the home sold for in foreclosure, the bank is going to get an appraisal or ‘brokers price opinion’ and determine what they believe it’s worth and what they want to sell it for, and that is not necessarily under market value. In fact, I see many REO’s sell for market value and above.
TINA: Let’s break it down for our listeners. There are two types of distressed sale opportunities, a short sale and a foreclosure. With a short sale the seller is still a part of the sale, and with a bank owned the bank has already taken over. What is the benefit of a bank owned vs. a short sale?
JENNIFER: With a short sale you are dealing directly with the seller but you must wait for all of the lien holders to approve the price, determine the closing date, and approve terms of your purchase. Also, the published listing price of a short sale is not necessarily what the seller will be able to sell it for. The list price of a short sale is a moving target. It’s a best guess of the sales price that the bank will approve and what the seller hopes to negotiate with the bank. With a bank owned home there is no guesswork as far as the price or closing date, you are dealing directly with the bank as the seller and the price and terms have already been approved.
TINA: Why is a primary residence purchase a benefit for a bank owned property?
JENNIFER: Banks typically give preference to owner occupied buyers because they are looking to stabilize communities that have been hit hard by foreclosure. This can give buyers looking to use the home as their primary residence an edge over investors. For instance, with Freddie Mac owned properties, investors need to wait 15 days before they can make an offer. For the first 15 days, Freddie Mac homes are only available to owner occupied buyers and non-profits due to their First Look initiative. So owner occupied buyers are able to make offers during that time without the pressure of competition from cash investors. That’s been very helpful especially this year with inventory so tight and so many multiple offer situations.
TINA: There are a few programs just for bank owned properties. The most well known is HomePath for Fannie Mae homes.
JENNIFER: Yes, Homepath has been an extremely valuable tool for my owner occupied buyers. I am hoping Fannie puts more of their properties on the market soon because buyers really love this deal. Homepath allows buyers to purchase with as little as 3% down and they do not have to pay mortgage insurance on the loan. This is critical because mortgage insurance can add hundreds to the buyers mortgage payment every month. Plus, there is no appraisal or appraisal fee.
TINA: It’s important for a listener to understand the meaning of “as-is” and the realistic expectations to have on bank owned properties.
JENNIFER: Go into an REO purchase knowing that unless it needs repairs that are prohibitive to your financing or are absolutely necessary to sell the home in any case, it will be sold as-is. However with listed REO’s you are able to have an inspection. So you need to find a very skilled and thorough inspector. I would suggest finding an inspector who has a thermal cam because they can actually determine if there are leaks in the walls. I see several homes a year that have not been properly winterized and have leaks in the walls that you may not otherwise see with the naked eye. Also, the bank knows nothing about the home or it’s history, they have never been to the home and will not be able to disclose anything about the home to you.
TINA: Let’s talk about how the “as-is” aspect can affect financing?
JENNIFER: Because many of these homes have been vacant and neglected, you see a lot of issues coming up with water leaks, roofs, exposed wiring, missing drywall ….. These are issues that can be cited on an appraisal if evident enough and thus they will become issues for the bank. So if you are a buyer who needs financing, you may want to look into a renovation loan. I have even seen instances where buyers felt confident enough in the sale that they asked for permission from the bank to make the repairs themselves before closing in order to get an approval from a lender, but there is risk there.
TINA: Can you talk about the property likely being sold using a special warranty deed?
JENNIFER: Most banks will only convey or sell a home using a special warranty deed. This is a deed that conveys ownership with a limited number of assurances about the seller’s ownership in the property being conveyed. The bank is not warranting anything about the property except to transfer whatever interest they have in the property while they owned the property and does not take into consideration any other interests that may exist. GENERALLY not a big deal because you’ll have title insurance but it can present some problems. You may want to consult an attorney or your title insurance rep if the banks contract is saying they will only convey the property with a special warranty deed.
TINA: What do you see happening with the utilities and what tips can you provide?
JENNIFER: It’s a good idea to verify any balances owed on the utilities and HOA dues and have the escrow company pay the utility bills at closing. While the bank or the listing broker may have paid them current when they listed the home or agreed to prorate the utilities at closing, I have seen some bank contracts that make the buyer assume any back utilities OR the bank will only cover up to 6 months of back utilities This can be a problem if utilities haven’t been paid in a year because technically the new owner would be responsible for any balance beyond what the bank will cover.
TINA: When I receive a contract on a bank owned property the contract is completely different than with a traditional purchase. Why is that?
JENNIFER: Simply put, the bank wants to use their own biased contracts. Our NWMLS forms are extremely pro-buyer. Most banks, Fannie, Freddie, VA and HUD homes will require buyers to use their own state specific, lawyer prepared contracts, with no exceptions. In addition to your broker, it’s a good idea to have your attorney read over the bank contracts.
TINA: I think it’s also important to talk about the difference between dealing with a bank and a traditional seller when it comes to emotions.
JENNIFER: Right. This is different for most buyers because your not dealing with a seller who is also emotionally vested, local, present, and understanding. With REO’s you’re dealing with a corporate entity and this is going to come down to their own policies and simple math. Some of the listing brokers and banks have it down but for the most past be prepared to be frustrated by lack of communication, lack of information, lack of buyer-friendly paperwork. It is a crap shoot- you could be working with a fabulous bank and/or asset manager who is reasonable, quick to respond and will provide helpful info OR you could work with a very frustrating, non-emotional, non-committal, often out of state seller who doesn’t understand local customs and who has never been to the home.
Often times I find that the selling side doesn’t regard timelines within the contract but expect you to. Be prepared to have to turn paperwork quickly and usually that day, it may mean having to buy a new scanner at home if you want the home badly enough.
Also, some MLS listing info has been known to be dicey or incomplete so make sure you verify all aspects of the listing info, too.
TINA: What % of the greater Seattle market are bank owned properties?
JENNIFER: Right now the market has slowed a bit naturally because of the winter but right now according to the MLS about 8% of the homes on the market are bank owned. That’s down from the peak in March of this year when almost 12% of the homes on the market were foreclosures. As far as distressed homes go, there are far more short sales than REO’s BUT I find that buyers prefer working with REO’s because of the certainty they come with. So far in King County there have been 7,364 trustee’s sales this year with homes in Seattle, Kent and Renton leading the way in volume. I suspect that the rates are even higher in the outlying counties.
TINA: The good deals on bank owned properties are limited. Can you identify some great deals locally?
JENNIFER: Two come to mind that are on the market right now. One is a Freddie Mac REO in the Petrovitsky area in Renton. It’s an adorable 3 bed, 1 bath, 1100 sqft home with a big, private yard, and hardwoods for just $139k!!! That’s less than the cost of a condo! It comes with a 1-2 year home warranty on all appliances and systems in the home and buyer can get up to 3% of their closing costs paid for. This would make a great home for a first time buyer
There is also a Fannie Mae condo listed in the Totem Lake area of Kirkland. It’s a 2 bed, 923 sqft condo for $87k. It includes all appliances, a fireplace, patio, and parking spaces. It qualifies for Homepath financing so owner occupied buyers would need only 3% down, they’d pay NO MI, and no appraisal fees.
Of course you need to vet these homes for any issues but the upfront numbers really pencil.
TINA: Thanks so much for the info. You can catch The Money Hour on AM 1090 on Saturdays from 2-4pm and hear this interview with Jennifer Nilssen with Real Living NW in it entirety this Saturday, November 17th at 3pm.