There’s a lot of bank-owned, Real Estate Owned (REO) property on the market right now – most of the inventory is REO with short sales following second. The REOs are generating multiple offers; however, getting an offer accepted is challenging with acquiring the loan adding to the challenge. I have buyers, and I’m having a hard time buying.
Many REOs are requiring buyers to get pre-approved with their lender, which never goes over well with the buyers. Buyers say it’s steering and illegal, and it may be, so some buyers cross out listings with this requirement. REOs just want to double check because transactions falter weeks into the deal because the buyer’s bank did not do the proper front end checks.
When the buyer’s lender begins to really scrutinize the buyer’s financial situation, things become dicey. I usually cross myself when entering the loan phase. The lender who said they could close the deal all of a sudden disappears. Things come up that were not known before, ranging from lower FICO scores, insufficient funds, verification of employment, collection issues, and residency status. You probably have your own stories.
Before the bank approves the loan the bank has to check out the property. Enter the appraiser. The bank’s appraiser will go look at the property for value AND for conditions. What if the property doesn’t appraise in value? The bank won’t do the loan. Either the buyer comes up with the money difference or the REO has to lower the price.
What kind of conditions could prevent the loan? Mold, peeling paint, broken house heaters, ceiling cracks, issues with swimming pools, etc. The dilemma for buyers is that if they don’t fix the problems, they don’t get the loan, or if they fix the problems and don’t get the loan, they lose what they’ve invested. The problem on the REO side is that if they fix the problems, and the buyer can’t get the loan, the REO is out the money. REOs just want to sell property ‘as-is.’ Their position is: we’re selling it cheap because it’s in poor condition. That’s not what the lending bank wants to hear. As you can see, this can be a no-win situation. It doesn’t matter if the buyer is putting down 3.5% for 25%; the lending bank wants things repaired.
Another cause for losing a loan is that the REO and buyer’s banks have such different procedures that getting them to agree is time consuming. The deal drags on past the deadline and a couple of time extensions; everyone gets tired and angry; and the deal falls apart.
Even when it’s the same bank doing the selling and lending, things don’t necessarily go smoothly. The REO department doesn’t speak to the underwriting department. It’s a case of the left hand not knowing what the right hand is doing. Sometimes, even the one hand doesn’t know what it’s doing. The branch loan officer/consultant/specialist may not understand what the underwriters need because the bank changed guidelines yesterday. Sometimes they are just backlogged. Most often, the underwriting department is in another city or state, which doesn’t help the situation.
What does it take to buy a REO? First off, get the offer accepted – get it past the multiple offers. A good down payment helps. All cash is even better. Second, be ready to conduct any repairs if the property isn’t in good condition. Third, good FICO scores, organized financials such as bank statements, W-2s, pay stubs, Desk Underwriter’s approval, good work history, etc. are musts.
Because the buying process is complicated and long financed buyers are advised to be strong and patient. Their frustration is understandable; anyone would be frustrated…heck…we’re talking about a lot of money, a lot of moving parts, and a big dream.