Buying Foreclosures (REO) is Challenging

There's a lot of bank-owned, Real Estate Owned (REO) property on the market right now. (Short sales follow second.) However, getting an offer accepted is challenging, and then getting the loan is something else. I've got buyers and I'm having a hard time buying!

Many REOs require buyers to get pre-approved with their lender. Buyers say it's steering and illegal. And it might be. So buyers cross out listings with this requirement.

Some REOs say no FHA. Others only all cash. Those listings don't exist for most buyers.

Getting accepted is tough because there are more buyers than houses. Some houses go pending in one day, while others take two-three weeks or more! REOs also require a lot of paperwork up front. So the first thing is winning in a multiple offers environment.

Next is the loan.

When the lender begins to scrutinize the buyer's finances, things get dicey. I usually cross myself when entering the loan phase. Things come up that were not known, ranging from lower FICO scores, insufficient funds, verification of employment, collection issues, and marital status.

Before the bank approves the loan the bank has to check out the property. The bank's appraiser will check for value AND conditions. What if the property's value is off? The bank won't do the loan. The buyer comes up with the money difference or the REO has to lower the price.

Mold, peeling paint, broken house heaters, ceiling cracks, pools, kill the deal. The dilemma for buyers is that if they don't do repairs, no loan. But they risk losing their money/efforts. The REOs problem is that if they make repairs, but the buyer can't get the loan, they're out the money. REOs just want to sell property 'as-is.' Their position is: we're selling it cheap because it's in poor conditions. That's not what the lending bank wants to hear. This can become a no-win situation. Whether 3.5% or 25% down, the lending bank wants things repaired.

Handyman specials or contractor specials don't exist for regular buyers.

Another cause for losing a loan is that the REO and banks' procedures waste time. The deal drags on past the deadline and past a couple of time extensions and then everyone gets mad and tired and the deal goes south.

Even when the same bank is doing the selling and lending, things don't necessarily go well. The REO department doesn't know or talk to the underwriting department. Other problems occur between the branch's loan officer and their underwriters. Underwriters keep coming up with condition after condition. Most often the underwriting department is in another city or state.

So what does it take to buy an REO? Number one, get the offer accepted...get it past the multiple offers. A good down payment helps. All cash is even better. Two, a house in very good condition or be ready to fix it. Three, good FICO scores, organized financials such as bank statements, W-2s, pay stubs, Desk Underwriter's approval, good work history, etc., AND patience.