REO Properties vs. Buying Foreclosure Auction Properties, Buyer Protection is the key.

To start with, My name is Robert B. McArtor and I am a Real Estate Auctioneer in Maryland actively selling foreclosed properties through-out the state. I also have a Traditional Sales Team with Long and Foster Real Estate, Inc. http://www.MarylandHOMESTeam.com/

I have been auctioning properties since 1991 and well on my way to auctioning over $28 Million dollars worth of property in Maryland in 2009 alone. http://www.MDAuctionSales.com/

With that said I have experience in bidding on and buying property at the courthouse steps AND buying REO (Real Estate Owned) or "Bank Owned" properties in Maryland. I have sold my friends REO properties with 100% success and yes…even I purchased a Bank Owned home as my primary residence. I bring with this discussion a lot of experience in both ends of buying and selling bank owned and auction properties. Depending on your perspective and what you are ultimately trying to do with the property, your risks could be very high or very profitable.

AUCTION FORECLOSURE PURCHASE

The auction method of purchasing real estate can be the most profitable yet the most risky venture you can partake in. If you are looking to bid on and purchase a home and use it as your primary residence in Maryland, get yourself armed with all the information you need. Who better to ask than an Auctioneer selling Foreclosed Properties The key to a successful purchase is Due-Diligence. What does that mean? It means Do your homework first! Study the market in the area you are looking to live and know it! You do not want to be caught in a situation of over-bidding on a property.

There are several risk factors you will need to accept. One, The owner may still be living in the home. If this is the case, know that it is your responsibility to obtain possession of the property once you settle on it. This can be done in couple ways. You can offer the owner "Cash-for-Keys"…basically "I'll give you cash once you have removed your personal belongings, kept the appliances in place, didn't strip it of the fixtures and once we walk-through the property, I give you cash…you give me the keys". This can be a win-win for both parties, you get a clean home with minimal damage and the previous owner gets cash for a security deposit on his/her apartment. The amount may vary, I have had 100% success offering cash-for-keys and have paid out as much as $500 to $3,000 to the tenant or previous owner. It's all in how you approach the people. Remember, they are already emotionally spent. Don't make it worse.

1. Be prepared to give the Auctioneer the required deposit as spelled out in the advertisement. Remember, the ad IS the contract. Read it and understand it. If the deposit is $10,000 – You will need that amount in either cash, cashier's check (made payable to yourself then sign it over) in order to bid on the property. This is typically the only qualification the Trustee and Auctioneer require in Maryland. Do not come with a personal check unless your name is Senator so and so……then they will require double! Just kidding. No personal checks unless authorized by the Trustee prior to sale.
   
2. Do not focus on the debt amount owed on the property and assume it's the "starting bid" or "reserve bid" from the bank. Many properties are being offered BELOW the debt amount owed because the bank does not want to take on the added inventory of homes. Depending on location, as-is valuation, condition, etc. the bank may take a 20% to 50% reduction at the courthouse steps. Example, original principle mortgage amount was $100,000 in 2006. The owners made a few payments but fell behind. After penalties and interest, the amount is $109,000. The bank is requiring a $10,000 deposit. In the past, bidders have assumed the deposit is 10% of the banks starting bid or "reserve". This is not true! In many cases the bank will authorized a sale for much less than the amount owed. With this in mind…..bring your deposit and bid! I have sold many homes with only 1 person standing in front of me because bidders were scared of the deposit. Don't be. Experienced Investors know this and NOW you do too.
   
3. Ratification period. In most jurisdictions, it is taking approximately 30 to 90 days for the court to ratify or "ok" the sale. The interest rate published in the ad is what you will be paying on your bid amount from the date of sale to the date of settlement. The owner still has a right to file "exceptions" to the sale so don't assume you will only be paying the interest on 45 days or so. I purchased a property that took 8 months to settle! I was able to get 3 months of it reduced however that is only through the power of negotiating (pat on the back).
   
4. I have found that the sooner you contact the owner after you become the successful bidder on the property the better. Open that line of communication. Let them know you acquired their property through foreclosure and your intention is for a smooth, hassle-free transition..hence..cash-for-keys, etc. Your final option is an eviction but that costs time and money.
   
5. If you are purchasing this home for investment purposes, again, do your homework. Don't venture out on this alone. Find a mentor or someone who has done this before. I can't tell you how many "newbie's" show up at auction excited they are the successful bidders just to find out months later they overbid, did not work out their rehab numbers correctly, did not figure "going in" AND "going out costs", etc. I will not go into the details here but due-diligence is the key. Work closely with a Real Estate Agent who understands the mind-set of an Investor (me) and allow them to advise you on value, rehab, retail value, etc.
   
6. Last but not least, know that you will be paying BOTH sides of the closing costs. Remember, what you are signing is a No-Contingent (Not contingent on appraisal, your ability to obtain financing, home inspection), "As-Is" contract. If you do not settle, you could lose your deposit. I have seen it done many times. Concerning the financing, you need to be cash ready or obtain Hard Money for this purchase. You may have the option to refinance out of the loan later at a much better rate. Forget obtaining a conventional mortgage because you will not be able to conduct a walk-through appraisal. Some investors purchase with a HELOC but why use your own money. Your Bank or Mortgage Broker is there to answer your financing questions…know before you bid or it WILL cost you!
   

REO or BANK OWNED PROPERTIES

I am going to approach this scenario strictly as if you were purchasing a home to be used as your primary residence. Investors also purchase these properties and have done very well with rehabbing and either selling or using as a rental. I just represented a buyer/investor on a 4 bedroom, 2 bath Rancher with a 2 car garage on 1.15 acres for $150,000 in Jarrettsville!! It is being rehabbed now and will be ready for the retail market in March of 2010. My primary residence is a Bank-Owned property in Fallston, Maryland. It was initially purchased for $500,000 in 2005 and was foreclosed on. I purchased a beautiful Brick Colonial with a brand new kitchen – Jenn-Air Double Oven with a Cook-top Stove, In-ground Pool, 3 decks, gazebo, 3.5 baths, 2 car garage, new roof for less than $400,000 and negotiated the bank to pay ALL my closing costs! It can be done but only with an aggressive real estate agent who knows the REO business. I know how the banks think….I know how they operate….. I have bank owned listings.

1. After becoming financially qualified, Search for Bank Owned properties in the area(s) you want to live. How? Find a local agent that knows the REO market. Tell them you want bank owned listings sent to you immediately when they come on the market. Make appointments to see them. Many of the homes you will preview will need some sort of repairs done. Some more than others. Look past this initially. Think of the bigger picture. Ask yourself, "Is it the area I am looking for? Is it the right style of home? Can I work with these repairs needed? Does it work within my budget?" Just figure that every home needs AT LEAST paint and carpet. If you are thinking of other up-dates then evaluate those costs. Your agent may be able to help you estimate those initial costs.
   
2. If you like the home, ask for comparables in the area. You don't want to do the work that is needed and find out your saving $1,000 by buying a bank owned property. Most bank owned homes are listed 20% to 50% of retail based on a 30 day "as-is" sale AND or course….condition. We can help you experience that type of savings and will even guarantee it!
   
3. Before you start your search, make sure you are financially qualified. Let your bank or mortgage broker know what you are looking to do. If you only qualify for an FHA, there are certain things an agent must look for to make sure it will pass the appraisal process. I will not get into the details here only to say get an experience real estate agent to represent you to start the process.
   
4. What I love most about this type of sale for a buyer is that you ARE protected by the contract. Your agent can help protect you with a financing contingencies, appraisal contingency, mold inspection, radon inspection, home inspection, roof inspection, termite inspection, inspecting the inspector inspection (just kidding). Just know THIS….the more contingencies you put in the contract…the more difficult it will be for the bank to accept your offer over someone else's. Again, an experienced agent will help you negotiate your best deal. I know what the banks are looking for!
   
5. It is important that the contract is reviewed carefully. Banks many times will put verbiage in the contract stating they will pay NO closing costs. Then how is it I was able to negotiate the bank to pay ALL my closing costs AND reduce the price of the home by $100,000? Experience. Period. They may also limit the FHA repairs or ANY repairs they will do. Most will not do or allow repairs, just know that before signing the contract and undergo the expenses of hiring a Home Inspector, etc.
   
6. I have found that many times the bank will LIST a property for sale for less than what they would have taken at the courthouse steps. One reason is that most times the bank cannot evaluate the interior condition of the home. Prior to foreclosure they will order what is called a BPO or "Broker Price Opinion". This is basically an in-expensive appraisal. Most of the time it is a "drive-by" appraisal evaluating only the exterior condition. The bank will base their value on the condition, area comparables and whether the market is declining, etc. Once the bank acquires the property, the Real Estate Agent assigned to the property will verify occupancy, provide an Interior BPO for the Bank and prepare it for sale. The BPO will paint a picture for the bank as to the condition of the interior of the home. This is where the rubber meets the road. If the interior condition is poor, the bank, along with the agent must access the damage and place a value to that. I have found that many times the bank will list a property for $20,000 to $30,000 less than what you would have had to bid on auction day to purchase it. WOW! Condition, condition, condition.
   
7. Hiring a Full Time Real Estate Agent is crucial in a successful Bank Owned or REO purchase. If you have any questions, please do not hesitate to contact me.