The Art of Making an Irresistible REO Offer
A good deal is what you’re looking for, right? Then consider real estate-owned (REO) properties. They’re the best strategy for winning lucrative real estate investment deals. Sadly, new investors are afraid of this investment opportunity because of unknown risks.
REO homes are a gold mine for real estate investors. They are sold at a discount and, when renovated, they can gain substantial value. This makes them fiercely competitive.
How can you win the battle and have your bid selected? Offer an irresistible price while paying below the property’s market value. What’s the best way to do it? Together, let’s find out.
However, you should first know what REO properties are and how much you should bid on them.
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What Are Real Estate Owned (Bank Owned) Properties?
REO properties are homes owned by a lending institution (bank) after failing to sell at the foreclosure auction.
How do they make it to the auction?
The lender repossesses a property when a borrower cannot honor their mortgage obligations. To recoup the unpaid loan, the bank auctions the property. If the home does not sell at the auction, the bank keeps it as an REO.
Banks incur high carrying costs when they hold these properties for longer periods. To reduce on the expenses they must make a quick sale. This is an opportunity for new and experienced real estate investors to purchase them at a discount.
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Why Should You Deal in REO Properties?
1. They can be purchased at a Discount
Banks make profits by charging interest on the money they lend, not by holding non-performing assets. Because of the maintenance costs involved with REO properties, banks are at a disadvantage. To cost-save, the bank has to quickly sell the property.
The lender already has a sense of urgency, so you have a splendid chance to make your offer. For a timely transaction, the bank is always willing to lower its asking price. Thus, you pay less for a property than its market value.
2. They Are Free Of Discrepancies
An outstanding claim on a property prevents the buyer from acquiring the home until the issue is resolved. When buying an investment property, this is unfortunately common. Incorrect public records, unpaid taxes, or title liens are some examples.
Would you invest in a property with such baggage? Absolutely not! The bank avoids questions about the property’s status by clearing all liens against it. You will get a property with clean records.
3. REO Properties Yield High Returns
Bank-owned properties allow you to buy low and sell high. For house flippers, they are an attractive business opportunity. Simply purchase the property, renovate it, and then sell it at a higher price.
Likewise, if you are considering investing in a rental property, REO properties are among the best. Invest in the home as a rental property to get monthly rental income. You can still sell the house at a profit in the long run.
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How Do Banks Choose REO Property Offers?
As mentioned earlier, REO homes attract a lot of interest from investors. Buyers make multiple offers to the bank. Knowing how they choose the winning offer will give you an idea of how to bid.
1. Asset Management Companies
To manage REO properties, banks rely on asset management companies. The companies perform a comparative market analysis to calculate the price of the home. They then set a price at or below the property’s market value.
As part of the bank’s guidance, they advise the company how long it must wait before considering price reductions. However, most companies wait for at least three months.
2. The Highest and Best Offer
The bank requires buyers to submit their “highest and best offer” when dealing with multiple offers.
The lender might compress inspection and closing time frames, or increase the earnest money deposit and the down payment. This is to motivate buyers to make sure that every aspect of their contract is strong before making their final decision.
The bank selects the offer with the highest price and favorable contract terms.
How Much to Offer on Bank-Owned Property
#1: Research the REO Property’s History
This is a great beginning point when estimating the value of the property. Find out the property’s original purchase price.
Check the mortgage balance and the foreclosure sale price as well. The original mortgage balance and the selling price at the auction will give you a range of the property’s value.
#2: Conduct a Comparative Market Analysis
A market analysis will give you an idea of the value of similar homes in that locality. Look at recent sales of comparable homes within the last three months. In addition, keep an eye out for active listings in the market. Comparing the bank’s listing price with the property’s worth becomes easier if you have this information.
#3: Find Out How Many Offers You are up Against
It is important to know your position in the negotiation before submitting an offer. In the absence of any other offers, you can offer a slightly lower price. But be prepared to bid up when other buyers submit their offers.
If there are several bidders and you submit a low offer, there is a low probability of your bid being accepted. Use your market analysis data to ensure you don’t bid more than the value of the home.
#4: Factor in the Cost of Renovations and Repairs
Bank-owned properties get sold in an “as is” condition, like other off-market properties. After the inspection period, account for the cost of major repairs and renovations in your property’s value evaluation.
#5: Research the Listing Agent
Past real estate transactions of the listing agent will give you more insight. Some listing agents specialize in REOs.
Look up the listing agent in the MLS with the help of your agent. Review the properties they have sold in the recent past. Analyze the listing prices and the final sale prices.
This will help you decide whether to make a lower or higher offer.
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How Do You Make Your REO Offer Irresistible?
Investing in REO properties can be profitable. Nevertheless, if your offer isn’t accepted, you won’t be able to enjoy the benefits. Here are some tips for an unbeatable offer.
#1: Offer a Quick Closing
Banks are in a hurry to get REO properties off their books. This is a good thing for you as an investor. The terms are negotiable as long as you are willing to close the sale very fast.
The average closing window for a deal is thirty days. Do you think it’s a good deal after crunching the numbers? Do you have adequate knowledge about the home? Then act instantly.
Offer to close the deal in five days to entice the bank. The bank might not manage to process the deal in a week. But you will definitely stick out and the lender might want to work with you again. Sad to say, a quick offer does not guarantee a sale but will give you an edge over the competition.
#2: Skip the Inspection Process
Another luring tip is to forgo an inspection process. An inspection is not a requirement, it is a contingency. But you must be very careful. To travel this road, do your math diligently. So that in the worst-case scenario you will still walk away with a profit.
In the absence of an inspection, the workload of the bank is reduced. The selling process is eased and shortened. Skipping an inspection is risky, but it will make your offer stand out against other competitive offers from other buyers.
#3: Pay in Cash
Cash is like dripping honey in the eyes of a bank with an REO property. You might have pre-approval and proof of funds letters, but cash is a game-changer. This is because it facilitates the quickest sale with the least amount of hassle.
It doesn’t mean that you can’t buy an REO property without cash. The bank requires the buyer to provide documents that demonstrate their ability to obtain financing.
Produce a physical statement from a line of credit in your next meeting with a lender selling an REO property. Your offer will be transformed into a profitable deal.
Learn –> How to Increase Your Income and Master Your Money (Saving, Investing, Taxes)
#4: Be Quirky
It is your uniqueness that will make a bank select your offer from a pool of others. But what can you do to stand out? Try out the following tricks:
- For $ 100 000 property, submit an offer of $100,111. This figure will trigger curiosity. The bank will want to read through your offer.
- Split closing fees with the bank. They will consider you a serious buyer.
- Provide pre-approval and proof of funds letters. Some buyers don’t provide these documents. You might have a better chance.
In Conclusion
To win a competition, you must sparkle. Why would a bank choose your offer over another? Before making an offer to buy a bank-owned property, ask yourself this question.
Whether you are a novice or a seasoned investor, REO properties are a jackpot. It is important to know how much to offer when purchasing a bank-owned property. A mysterious figure and a quick closing can make your offer impossible to refuse.
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