7 Tips to Get Started Buying Bank Owned REO Properties
by Lex Levinrad
Please note that these tips are only for real estate investors that want to close on a property and NOT wholesale the property. These tips are for rehabbers that want to beat out the competition on an REO property and purchase the property.
Tip # 1 Obtain a Proof of Funds Letter
All offers submitted on bank owned properties are going to need to be cash offers. While some banks might agree to mortgage contingencies most will not. All offers on bank owned properties should be submitted as CASH OFFERS ONLY.
In order to submit a cash offer you are going to need to have a proof of funds letter. This letter lets the bank know that you have the ability to close for cash. A proof of funds letter can be a recent bank statement, brokerage account statement or mutual fund statement. You can also print an account summary from your online bank account or brokerage account showing available funds. Or you can ask your Title Company, Escrow Company or attorney to issue a letter stating that you have funds in escrow.
If you have absolutely no money anywhere, then you are going to need to find someone that does. You will need a statement showing that you have money available or that someone else has money available. Either way, you will have to produce something showing that there is money somewhere. A proof of funds letter is usually good for about three months before they will ask you for an updated one.
Tip # 2 Use the Same Name on Proof of Funds and the Contract
Make sure that the name on the purchase contract matches the name on the proof of funds letter. For example if the purchase contract is in the name Joe Smith then the bank statement should say Joe Smith. If you use online printouts from a bank account summary or brokerage account summary then many times there is no name other than your user name on the printout.
However, this will usually suffice as a proof of funds letter since the date and time is usually stamped on these printouts. If you have a bank statement that says Joe Smith and your name is not Joe Smith then you will probably be questioned by the realtor. You can use land trusts and other entities to get creative. For example if you offer a purchase contract with the buyer as Joe Smith Trustee then you might have a little more flexibility in the name on your proof of funds letter.
Tip # 3 Offer To Close In 7 Days
Banks just want to get rid of these REO properties as fast as possible. If you offer to close in 7 days then you are letting them know that you are a serious cash buyer that canclose quickly. Banks like that and will prefer your offer above other offers that are ready to close much later. Reality is that in most cases the bank would never be able to close anywhere near as quickly as that but the offer looks good and it looks serious.. My experience has been that banks are often quite delayed in getting all their title paperwork in order. If have offered 7 day closings that have taken as long as two months to close. Just because you offer to close in 7 days does not mean that the bank will be ready to. But they will like your offer much more than someone else offering them 60 days.
Tip # 4 Offer a Large Deposit of At Least 10%
Offer the bank at least a 10% deposit. Keep in mind that many wholesalers are offering as little as $1,000 deposit so a larger deposit will have more likelihood of getting your offer accepted. I put down a deposit of $5,000 on a $40,000 house that I plan on closing on. The bigger the deposit the better off your offer will be. Banks like to see big deposits because it indicates a serious cash buyer. If you have already inspected the house and are certain that you want to buy the house at that price then you should have no problem putting down large cash deposits. If you have the cash available it doesn’t really make that much difference but I find that 10% is a nice number that indicates a serious buyer. A typical real estate contract has a 3% deposit so 10% is big enough to get their attention. If you put down small deposits of $10 and $100 or $1,000 you will find that your offers are constantly being rejected.
Tip # 5 Waive All Inspections On Your Offers
Banks are used to seeing REO deals not close. Usually the reason is because the property did not pass inspection and the buyer backs out or changes their mind. The other reason is because wholesalers use the inspection period to market the property and then back out at the last minute and cancel their purchase contract. Banks know this and one of the easiest ways to beat out the competition is to “waive inspections”.
In order to waive inspections you will need to physically inspect the property yourself or hire a professional property inspector to do the inspection. A word of caution – please hire a professional if you don’t know how to do this yourself. Banks love to see inspections waived because this indicates that the buyer will lose their deposit if they do not close. This means that the buyer is a sure thing and the banks want to make sure that the buyer closes. If you are going to do your own inspections please make sure that you know what you are doing.
Otherwise hire a competent professional to do the inspection for you. Also always build in a margin of error in your offer prices. I usually add $3,000 or 10% (whichever is greater) to my rehab estimate for events that are unexpected and might come up. Make sure that you understand what “waiving inspections” means before you do this. What it means is that if there is a major problem the day after you close with the house (think plumbing, electrical, roof) then it is not the banks problem it is YOUR PROBLEM. That is why you need to know what you are doing when you inspect the property or hire someone that does.
Tip # 6 Give Short Deadlines
When you submit a purchase contract, there is a deadline after which the contract is considered null and void. You need to give the bank your offer and you need to give them as little time as possible to respond. For example, if your offer to purchase is submitted on Monday morning, then you should have a Wednesday 5pm deadline. If you do this, then one of two things will happen. Either the bank will not see it in time – in which case your offer is now null and void or the bank will come back quickly with a counter offer.
If the bank comes back quickly with a counter offer you should usually be able to counter them back and close the deal. If they don’t respond on time, then eventually they will respond. If it takes them two weeks to respond then when they do respond you will know two things. Firstly, you don’t have to buy the property since the contract is null and void and secondly there are no other buyers (unless they come back with highest and best). If this happens you should always say that you can’t close at that price anymore and see if the bank comes back to you. If they do, you will usually be able to buy the property cheaper (if you still want to). Do not give the bank lots of time to mull your offer. You will also run the risk of having your offer “shopped around’.
Tip #7 Never Offer Your Maximum Offer Price
Banks will always counter your offer. Whatever your offer is they will usually counter it unless it is a full price offer or very close to or over list price. Also, the realtor might indicate that there is another buyer or buyers and will often come back and ask you for a highest and best offer. For this reason, you don’t want to submit your maximum offer price right away.
If you are planning on offering $40,000 for a house start with an offer of $35,000 and then when the bank counters you can go up to $37,500. If the bank counters again asking for a highest and best then you can say $40,000 final offer. Beginning investors always start too high. Don’t fall in love with the property. I usually drop out of the bidding if there are multiple buyers. There are many properties to choose from. Be selective and wait for the right house to come along. If you really want the house badly decide what the highest amount you are willing to pay is and then start your offer process 10% below that price. If you cannot get the house for the price that you want then walk away. Do not overpay. You make your money when you buy.
And the final tip…
Invest in your education. If you are a beginner and do not know what you are doing, please find someone that can be your mentor and teach you. Amazon and Itunes are also a great outlets for finding good real estate education content.
I wish you the best of luck with your real estate endeavors.
Lex Levinrad has been a full time distressed real estate investor since 2003. He has been involved in buying, rehabbing, wholesaling, renting, and selling hundreds of houses in South Florida.
Lex is the founder and CEO of the Distressed Real Estate Institute, which trains beginning distressed real estate investors about how to find wholesale real estate deals. He specializes in buying foreclosures and bank owned REO homes and offers private mentoring, bus tours, boot camps and home study courses for real estate investors.
Lex Levinrad is an accomplished national public speaker and has shared the stage with some of the countries best real estate speakers. Lex Levinrad has authored numerous books about real estate and is also the the founder of the Distressed Real Estate Investors Association (DREIA) and the co-founder of the Port St Lucie Real Estate Investors Association (PSLREIA).
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