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Bank Foreclosures - Chapter 6

Buying Foreclosures from Banks

REO foreclosure properties and bank foreclosures

Another great opportunity to purchase foreclosures is after the real estate auction, when the lender is either the successful bidder or there are no bids at all. In either case, the bank becomes the legal property owner and the property is considered a non-performing asset of the bank. When ownership is transferred to the bank as a result of foreclosure, these homes are classified as Bank Foreclosures or REO Foreclosure Properties. They are added to the lender's REO list of homes to sell. At this stage, the key point to remember is that banks typically are not in the business of managing real estate, nor do they want to be. This can create a solid opportunity to buy property at a great price. This section will provide an overview on the REO process and why banks are so eager to sell their bank foreclosure inventory.

Where is the Opportunity?
There are several reasons why banks want to quickly sell their bank owned properties. The top three reasons are discussed below:

(1) Non-Performing Assets: Banks are primarily in the business of lending money and have little interest in diverting their resources toward managing the disposition of real property. Consequently, banks are anxious to dispose of their REO bank owned foreclosures. However, this does not mean that banks want to lose money in the sale process. The banks' goal is to quickly recoup the capital tied up in these non-performing loans and re-deploy it in the form of a new profitable loan.

(2) Carrying Costs: As soon as ownership of the property reverts back to the bank, the expenses of holding the foreclosed houses quickly begin to add up. These costs include property taxes, maintenance expenses and insurance premiums. These costs continue to mount until the property is sold which puts added pressure on the bank to quickly dispose of the asset. In most cases, the longer a bank holds a property the more unprofitable it becomes.

(3) Property Damage: Since most bank foreclosures are vacant, there is always risk of property damage from vandals and/or bad weather. The problem grows with every additional home that is added to bank's REO list. Again, this creates additional incentive for a bank to quickly move the home foreclosures out of its possession.

While banks are clearly motivated to sell their REO bank foreclosures quickly, there are both pros and cons to buying bank owned properties.

Pros and Cons of Buying Foreclosures from Banks?
Buying REO properties directly from the lender has both advantages and disadvantages. Let's start with the key benefits of buying directly from the lender. First of all, most bank foreclosures are sold with a clean title, meaning that all junior liens or encumbrances on the property are resolved. The means you can buy the property without worrying about the redemption period or any unexpected judgments against the property which can significantly impact the value of your investment.

The second benefit is that there is typically an abundance of bank foreclosures nationwide, creating significant opportunity to identify good deals. However, this does not mean it is easy to find them at below market, but it does mean that with hard work and persistence you will be able to identify properties that meet your investment criteria.

The last key benefit to bank foreclosures is that banks may be flexible with the terms and conditions when selling foreclosed property from their non-performing asset pool. While banks will always attempt to get the best deal possible, the fact that they are experts in financing real estate gives them the flexibility to be creative and negotiate the terms and conditions of the loan. They often have a variety of alternative financing options available to suit a buyer's unique needs.

Now let's take a look at the key disadvantage of buying bank foreclosures. The key disadvantage is that the purchase process is quite simple with most REO properties having clear title. While this sounds like a benefit, it ultimately has the effect of attracting more buyers creating added competition for a given property. As the competition increases, the selling price can be driven up resulting in lower profitability in the deal.

Closing the Deal
Inevitably you will encounter some competition in your quest to find a great deal on an REO foreclosure. As such, we have provided some useful tips to give you an edge on the competition. First of all, we recommend establishing personal relationships with the lenders in your area. A strong personal relationship with the lender can provide just the edge you need against another qualified buyer. Second, if you have established an outstanding credit rating, make sure the banks know about it. While lenders are eager to sell a REO foreclosure, they also want to ensure that the property does not return to their inventory any time soon. By highlighting your strong credit history, the banks will naturally gravitate toward your offer.