REO, or banked owned, properties can present extremely opportunistic buying options for almost any type of real estate purchaser. From the first time home buyer, to investors and even buyers looking for a 2nd home in the beautiful White Mountains of Arizona, these properties can afford the purchaser an opportunity to buy a property in a market they may not have otherwise been able to afford.
Regardless of the type of buyer you may be, certain steps must be undertaken prior to finalizing an agreement to purchase. The due diligence of the buyer will insure that an agreement to purchase will not come back to haunt the buyer.
The Arizona Association of Realtors® standard Residential Resale Purchase Contract states the following: â€œDuring the Inspection Period,Buyer, at Buyer's expense, shall (i) conduct all desired physical,environmental, and other types of inspections and investigations to determine the value and condition of the Premises; (ii) make inquiries and consult government agencies, lenders, insurance agents, architects, and other appropriate persons and entities concerning the suitability of the Premises and the surrounding area; (iii) investigate applicable building, zoning, fire, health, and safety codes to determine any potential hazards, violations or defects in the Premises; and (iv) verify any material multiple listing service information. If the presence of sex offenders in the vicinity or the occurrence of a disease,natural death, suicide, homicide or other crime on or in the vicinity is a material matter to the Buyer, it must be investigated by the Buyer during the Inspection Period.â€
The amount of rehabilitation required on REO properties runs the gauntlet from almost none to beyond the scope and resources of almost any buyer. The rehabilitation required should be one of the major determinants of whether a particular property will fit the needs and wants of a particular buyer.
Let's take a look at how each class of home buyer could benefit from purchasing an REO property.
First Time Home Buyer:
The biggest advantage here is that a potential buyer may now be able to purchase a primary residence in a market where pricing has precluded them from doing so in the past. Many REO homes will be listed at 20-30-40% below existing housing prices.
The amount of rehabilitation required is going to be an extremely large factor in the purchasing decision. There are two options available to the buyer which can overcome this potential hurdle.
First, if the buyer is somewhat proficient at construction type tasks, by performing the necessary work themselves, the home owner has created a tremendous equitable position in the property through â€œsweat-equityâ€.
Secondly,there is an FHA loan program available which will finance the purchase of the property and will also include, in the total mortgage, an amount to complete certain qualifying repairs, upgrades, and improvements to the property. The buyer may not gain the advantages of equity as described above, but they may be able to own a home where they couldn't otherwise.
Another good source for funding (if funds are limited) is the USDA Rural Development loan. Click Here to Visit their Site
The idea of a real estate investment is just like any other investment vehicle: Buy Low,Sell High! The opportunities for knowledgeable investors in the REO market are only limited by the number of properties available and the amount of long term risk the investor is willing to assume.
The real estate investor will probably view an REO property with one of two potential reasons for purchasing.
Purchasing the home now and holding it as a rental or income property. The investor is betting that by buying now at a lower price and having a tenant cover their carrying costs, they will be able to realize a substantial gain on their investment by selling the home in the future when market conditions have turned around.
By buying now, rehabilitating the property to a marketable condition and then selling it, the investor could still realize a profit over and above his purchase, rehabilitation, and selling costs (commonly known asâ€œflippingâ€)
Eitherway, the REO market is an active and attractive avenue for real estateinvestors
2nd Home Buyers:
As with the first time home buyer, someone desirous of a second home in a market they may not otherwise be able to afford, could possibly fulfill their wants with an REO property. The financing options may not be as attractive;however a second home purchaser is probably in a much different financial situation than the first time home buyer.
Purchasing a property now, at a significant discount to comparable properties, will allow the second home buyer to rehabilitate the property immediately with funds available or they may wish to protract the process and do the rehabilitation themselves at their leisure or as finances dictate. Either way, a purchaser has the opportunity to afford a property now instead of maybe years down the road when prices could be even higher.
Most of these scenarios sound promising and potentially profitable. That may be the case. However, there are inherent risks with any major purchase and those risks should not be weighed lightly. But, with proper due diligence, a clear understanding of what the purchaser wishes to accomplish, and the assistance of qualified professionals, anyone could benefit from the opportunities available in the REO (foreclosure) market.
Times are tough and nobody wants to lose their home.If you are in a situation where you may be facing foreclosure you don't have to go through it alone. Please review the material on this page. I would be happy to answer any questions you may have. I can also meet with you one-on-one to discuss your options. Call Yvonne at (928) 205-9060 for help.
The following section outlines many popular options a lender will offer to a borrower in default. It is important to remember that the lender may not want to work with a borrower.
Forbearance-Forbearance is an agreement between the lender and the borrower that reinstates the delinquent loan through the payment of a lump sum or a schedule of payments over a period of time. If a borrower is behind in his or her payment by $2,000, for example, the lender may allow the borrower to pay the money back through installment payments over six months. The lender may decide, on the other hand, to allow the borrower to pay a reduced monthly payment until the borrower has an opportunity to get back on his or her feet and pay any remaining balance owed in one lump sum.
The forbearance may be an oral agreement or written contract between the lender and the borrower. Generally these agreements will not exceed more than 12 months.
Loan Modification -A loan modification is a change in any of the terms of the original note. This includes decreasing the interest rate, re-amortizing the remaining balance, extending the term of the loan, or other options at the lender's discretion to assist the borrower through a temporary set back.
Generally a lender will consider a loan modification when foreclosure is eminent and the borrower's income has been decreased or the borrower is unable to make the mortgage payments, but will be able to keep the loan current after the loan modification.
Mortgage Refinancing-Mortgage refinancing is an option where the lender would allow the borrower to refinance his or her existing mortgage, wrap in any late payments and fees, and cash out part of his or her equity in the home to allow the borrower to regain control of a debilitating financial situation.
Refinances are generally open to borrowers that face a temporary set back in their financial situation, have shown outstanding credit history in the past, and can prove that he or she can support the new mortgage payment.
Second Mortgage, Line of Credit-A lender may offer a second loan or junior lien to a borrower in order to make up any back payments, late fees and other charges necessary to reinstate the loan. The borrower, in return, will be required to make an additional mortgage payment to cover the principal and interest payments on the second loan. Interest rates often rival credit cards and should be looked at with caution.
A borrower may also be able to borrow money from his or her bank or against a 401K or pension to use to repay the deficiency and reinstate the loan.Conditions may apply.
Sale of the Home-Selling a home is an alternative for borrowers that are unable to reinstate the loan and face eminent foreclosure. This option allows a home owner to try to salvage his or her credit, pay off the loan, and retain any remaining equity in the home. By informing the lender of this option, the lender may delay the foreclosure proceedings in order to allow sufficient time to sell the home.
In certain cases, the lender may allow the borrower to sell the home when the proceeds from the sale are not sufficient to pay off the existing loan. This i s known as a short sale. A borrower should check with his or her lender to discuss this option. Furthermore, the borrower may have to pay taxes on any loss the lender writes off from the short sale. A borrower should consult his or her tax professional before agreeing to a short sale.
Deed-in-Lieu of Foreclosure (DIL)-A deed-in-lieu of foreclosure is a voluntary conveyance of title to the lender. Generally this is a last ditch effort by the borrower to avoid the negative consequences of foreclosure. In return for the voluntary conveyance to the lender, the borrower is often released of any personal responsibility for the mortgage.
In order to qualify for a DIL, most lenders state that there must not be a second mortgage or junior liens on the property. Home owners with market values in excess of the amount owed against the home (including normal closing costs)should consider selling the property before voluntarily conveying the home to the lender.