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Article of the Month for September 2003 Printer friendly version

REO Offers

Lenders aren't chartered to own and manage property, so they face close scrutiny and pressure from state and federal regulators to dispose of foreclosed properties quickly - especially if they're on a regulator's "watch list".

When their REO departments are loaded with foreclosures, investors are able to finagle below-market interest rates with little or no cash down. And because they're dealing directly with the bank they can eliminate the 6 percent sales commission if they act fast - before the bank lists the property with a real estate agent.

If you have great credit you should require that a bank provide you with a "loan to facilitate" instead of paying them all cash. That will allow you to buy a lot more properties with your limited funds and make the bank happier by purchasing several foreclosure bargains at a time rather than just one.

The profile of a lender that's especially vulnerable to making you a great deal is one where:

  1. the lender continues to suffer an ongoing loss even after they've successfully foreclosed on the property. Thus if the property is still saddled with a large 1st loan balance that is in arrears it will feel pressured to cut its losses now . . . not later.
  2. the hold-over owner is spoiling for a fight and refuses to move out peacefully, thus blocking the lender from quickly selling the place.
  3. the ex-owner is stripping the premises of any special amenities or upgrades (carpet, built-ins, corrals, mirrors, prefab buildings, etc.)
  4. the lender is out-of-county or maybe out-of-state and thus in the very frustrating, exasperating and expensive position of having to deal through a layer of distant "experts" rather than quickly taking care of everything itself.
At the most, you shouldn't pay the bank any more for their equity in the property than what they originally lent on it minus the payments that were actually made on the loan. To figure the number of loan payments made . . . start when the deed of trust recorded and end with the delinquency date that's listed on the recorded Notice of Default.

This approach means that you wouldn't reimburse them for any accumulated charges such as interest, late charges, foreclosure fees, legal fees, nor any advances they might have made toward senior loans, property taxes, insurance, etc.

A big eye opener as to what a harried lender might take would be to research your local public records for the past year or so in the Grantor/Grantee index to see what prices they got for other recently disposed of REO's.

Finally, insist that the lender provide you with all the customary buyer safeguards such as escrow, title insurance, homeowner's warranty, termite clearance, etc.

Information provided by this website is for informational purposes only and is not a substitute for professional advice. Please consult your investment advisor and/or attorney before entering into any transaction. Read our privacy policy.

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