It can be tricky trying to put together the right offer on a bank owned property. These investment properties oftentimes come at a discount, so a lot of real estate investors compete to get them. While you don’t want to pay more than you need to, your offer should be attractive to the bank holding the REO properties, as it’ll be juggling multiple offers. So how can you be sure that your offer will beat out the competitions’?
Understanding Bank Owned Homes
Buying an investment property and making offers is all about negotiating. How can you negotiate for a bank owned property if you don’t first understand what it is?
When a bank forecloses a house, they try to sell it at an auction. If the foreclosed property doesn’t sell at auction, it stays under the bank’s ownership and is referred to as an REO foreclosure (real estate owned). Now because banks have no interest in the business of selling homes, they typically price these homes below market value so that they can sell quickly. Naturally, investors and non-investors alike will view this as a real estate deal they can’t pass up. So you’ll probably find a lot of competing offers on the property you’re after. But, of course, this doesn’t mean that real estate investors should blindly be buying a bank owned home. Just because they’re cheap houses for sale, that doesn’t necessarily mean the bank owned property is worth the bidding war.
But there are many success stories from savvy investors who swear by this real estate investment strategy and even specialize in buying bank owned homes. So whether you plan on buying multiple rental properties or just investing in one, bank owned properties can be a potential investment opportunity. But if you want to explore this segment of the real estate investing market, you need these tips on closing the deal.
How Banks Choose an Offer
As mentioned, you won’t be the only one making an offer on a bank owned property when it’s an attractive investment priced lower than it’s real estate comps. Before we give you tips on setting the right price for these properties, let’s first go over how banks choose an offer.
“Highest and Best Offer”
When trying to sell these REO properties, banks will require interested buyers to submit their highest and best offer. This is an easy way for banks to screen offers to find the ones which best meet their terms. It’s very rare for a mortgage lender to just accept the first offer received on the foreclosed property. What usually happens instead is a lot of back and forth negotiation. The goal of the “highest and best offer” is to create a bidding war between the interested buyers to see how high they’re willing to go.
Typically, banks will have an asset management company handle REO real estate transactions. The bank will give this company guidelines to follow like how long to wait before reducing the price of the property. The price of this REO will be set by using a comparative market analysis (CMA)- finding the property value by using the purchase price of similar properties which recently sold in the same real estate market. A bank owned property will then be priced either at or below the fair market value.
Of course, every case is different. Nowadays, foreclosures can be anything from a broken down one-bedroom home to a luxury three-story villa. Some properties will be worth more than others so the right offer differs based on the bank owned property you’ve chosen. But in most cases, you’ll be going up against other bidders so your goal is to have the most attractive offer.
How Much to Offer on Bank Owned Property
Let’s get into some ways to help you determine how much to offer on bank owned property.
Study the History of This Bank Owned Property
This is a great starting point when trying to evaluate the property value of an REO. You can ask the real estate agent you’re working with to get you documents like the Trustee’s Deed or Sheriff’s Deed. Usually, it’ll be included in these documents how much the bank’s purchase price of this property was. Also, go over the loans and liens on the property. A good range for you would be between the property’s original mortgage balance and it’s foreclosure sale price at auction.
Do Your Own CMA
Studying the real estate market is a necessary step in any type of real estate investment. Going over things like market trends and the latest investment property mortgage rates can really help you make a decision. But doing your own CMA is also important. Sometimes the bank will push for a property to be an REO foreclosure and set a price so high at auctions, it won’t sell. That’s why it’s important for real estate investors to focus more on the actual market value of the property instead of its list price. Look at recent sales going back three months and only choose properties that are most similar to the bank owned property you’re interested in. Your real estate market analysis can also include the offer accepted on pending sales and the price of active listings.
Find Out How Many Offers You’re Going Up Against
The number of offers on this bank owned property will help you determine your position in negotiations. If there aren’t any offers, you can probably offer less. The question then becomes how much less to offer on bank owned property. Don’t go too low. Of course, based on the CMA you’ve done, you’ll have a better range of what the property’s actually worth. When you’re the first offer to buy a foreclosed home, you can go slightly below the asking price, but be ready to bid up if other offers start rolling in.
The method of financing a rental property foreclosure also plays a role in having an attractive offer. If there are multiple offers on this bank owned property, factor in that some of these might be all-cash offers. This changes the game a little bit as banks are very keen on cash offers. For example, one bidder might be the sixth person to throw their name into the ring and has an offer below list price, but because it’s an all-cash offer, the bank will accept it.
Factor in the Cost of Repairs
How to buy an investment property? By thinking about everything. Bank owned property, like many other off-market properties, typically sell in “as is” condition. If you want to find rental properties that were foreclosed and are still in perfect condition, your options will narrow. After the inspection period, factor in the cost of major renovations and repairs. You can use this as some sort of leverage in negotiations. Usually, the bank doesn’t pay for any repairs, that’s on the buyer.
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