Common questions REO buyers ask
I heard on the news this week that realtors in some areas are reporting 40 percent of homes sales are foreclosures. Here on the mountain I’d be willing to believe it’s 65 percent or more. The reasons are, bargain hunters are shopping and demanding lower prices, home owners cannot reduce the price like a bank can in order to move some of their inventory. Most buyers shopping today are looking for good value and are specially looking for homes that need some work, believing a little sweat equity will pay off. Bank owned (REO) homes are normally a bit distressed, a person who cannot make the house payment doesn’t maintain it either. So for a bargain hunter, bank owed properties are a perfect fit.
Since I started the foreclosure tours, I have had many buyers ask about buying bank owned homes, so this week, I thought I’d focus on some of the common questions I hear.
How does buying a bank owned property work? Buying a bank owned property is very similar to buying a home from Mr. and Mrs. Smith with a few exceptions. The house is listed with an agency, and a lock box is located on the property. The listing agency makes arrangements to have any trash and personal debris removed and the property is inspected for safety hazards. In some cases if the carpet is a trip hazard or ruined it will be removed. A listing price is determined and the property is loaded on at least one Multiple Listing Service (MLS), an internet based data base shared by agent members, as a bank owed property being sold as-is.
Do I have to offer full price? Once the house is advertised on the MLS buyers can start viewing the home. A value priced REO property will sell fast, in some cases less than a week. So the answer is, if it is a new listing that is obviously under priced, then offering over asking price is not a bad idea. The problem is, often the listing price is extremely low, and REO properties management normally take up to three days or more to respond to an offer. So what happens is during that waiting period other offers come in. The listing agent announces that there are multiple offers on the property, which drives the offering price up.
The waiting period has a strange effect on buyers, especially if they really like the property. Some buyers back away because they do not want to be involved in a bidding war. Others fret and raise their offering price at least once. We are competitive by nature, and when buyers know there is competition, but do not know what the competition is doing, it plays on their emotions, and they offer more than asking price hoping to outbid the competition. Once the bank or asset management company has all the offers they will select one.
If the property has been on the market for more than 30 days, then definably do not offer asking price, it is not priced correctly. On properties that have been shopped, buyers have the best opportunity to negotiate terms.
One of the big differences between working with a bank over a home owner is, a private party has loans they have to pay and are limited as to how low they can sell the property. Where a bank, can sell the property for any amount they are willing to accept, the difference will be a write down. In 2006 when the REO’s started, and there were only one or two REO homes, the banks were firm on their prices. But now there is so much unsold inventory and the banks have so many non-producing loans, they have to move some of this inventory and reducing the price is the way to do it. Remember, it is the buyers who control pricing and they are demanding lower prices.
Do I have time to inspect the property? The contract defaults at 17 days for inspections. The idea is buyers have approximately two weekends to complete their inspections. Some banks may counter the time period and require buyers to complete the inspections in a much shorter period of time. They want to know if the buyer is going to perform as soon as possible. Most will even have their agent turn on the utilities for the inspections. If there are plumbing leaks, normally, they just shut the water off.
The only disclosures the banks are required to make is lead based paint, this is a federal law. Any property built prior to 1978 may have it, and that is all they disclose. It is up to the buyer to test for lead based paint. California requires water heaters to have earthquake straps and smoke detectors to be installed. However, many REO departments and escrow companies are not even in California, so it doesn’t get done. Generally, since the house sold recently, the water heater has earthquake straps. On homes I sell, if the smoke detectors are not working I will buy new ones for my buyers and ask them to install them prior to occupancy.
Since the banks do not have to disclose any defects in the property it is up to the buyer to inspect thoroughly. Once escrow closes, it is the buyer’s responsibility to correct the defects, both know and unknown, broken water pipes inside a wall for example are an unknown defect.
There is a certain risk involved in purchasing an REO property because the buyer has to accept the condition the property is in, and agrees to take responsibility to make the repairs themselves after escrow closes and that is one of the reasons why REO’s are bargain priced.
Can I make a request for repairs? You may ask, but the chances are slim to none that repairs will be made on an REO property. The thing to think of is, banks are really bad home owners. They do not have the staff to make or oversee repairs; they are not local, often not even in this state, so they do not make the repairs. The properties are sold as-is.
Will the bank pay closing cost? Yes, it is not unusual for closing cost to be included in the offer. In all actuality, the buyer is paying them, but it is amortized into the loan. What I mean is if the home is listed at $100,000 and a buyer offers full price, with 6 percent in closing, the net offer is $94,000. So even though we say the seller is paying closing it is really the buyer that will pay them eventually.
What about the liens the previous owner may have had? All liens, including tax, child support, and utility liens are paid. The bank will pay for title insurance to ensure any recorded liens are cleared. However, if a utility such as the water company or sewer company has unpaid bills not recorded but still due, the new buyer may inherit them, since they will not turn on service until the balance is paid.
Real estate has been a foremost method to build wealth in the country, and buying a bank owned property can be a great way to do, as long as you are willing to take the risk. This is not a market for everyone; it is buy and hold market, not a flipping market. So if you are planning on holding a property for at least five years, then I’d say, it’s time to buy.
A reader wrote me with the following questions regarding the tax assessment of an addition:
How could a person get a list of the information about which houses sold in the past few months, the size of the house, and the price? Is there a way to know how many homes were sold in the past 3 months, or the past 6 months? The newspaper sometimes has the information, but not always, so using that information may not be complete.
I am asking because I just completed an addition on my house and the county says it is now valued much more than the new addition cost. I have heard that, in general, room additions like I added (bedrooms, den, nothing high grade or fancy, no fireplace, etc, and a 3/4 bath, with vinyl siding on the house) add value at about 75% of the cost. I'm not sure if there will be comparables for this house as its overbuilt (by square footage) for Crestline, but I like where I live and want to stay. The "plain" addition fits with my life and Crestline, even though the square footage would be better in Lake Arrowhead or Big Bear.
Thanks for any help or direction you can give me.
There are two questions here; first we print sales statistics for mountain homes as they are e-mailed to us, normally we print them in the issue nearest the 15th of the month.
To answer the second question, I had to call the tax assessors office. I was told a room addition tax is assessed on current market value regardless of how much it cost. They do not reassess the entire structure, just the additional square footage and add it to the existing tax bill.
If you feel your property was assessed incorrectly you can appeal the assessment. There is a time limit for appealing so if you plan on appealing, do not delay. Appealing a regular assessment must be between July 2nd and November 30th. If you are appealing a supplemental notice, the appeal must be filed within 60 days of the mailing date on the notice. To appeal an escape assessment you must file within 60 days of the mailing of the notice of enrollment of escape assessment and to appeal on damaged property reassessment must be filed within six months of the mailing of the notice of reassessment.
It was also recommended to call the assessor in Twin Peaks at (909) 336-0650 and just asking them to take a second look at the assessment. There is a possibility they may review the file prior to going through the appeal. The person I spoke to suggested to get the appeal filed in San Bernardino with the clerk, then call here in Twin Peaks. That way, if you are unable to have your assessment resolved over the counter, you will not lose the opportunity to appeal the assessment.
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