Buy and finance directly with a lender

When a mortgage lender wins the bid at a foreclosure auction, the foreclosed property ends up as an REO. If the lender can't turn the property over to HUD, VA, or other guarantor, it will sell to a homebuyer or investor. As stated a few pages back, most lenders list their REOs with a Realtor, but some will negotiate directly with homebuyers and investors.

The Benefits of Buying Directly from a Mortgage Lender

You can say one thing for certain about an REO: The lender prefers to sell it as quickly as possible. Mortgage lenders loan money and collect payments. They do not want to own vacant houses or rental properties.

As a result, they may provide their REO buyers favorable terms such as low or no closing costs, below-market interest rates, and low down payments.

If the property needs fix-up work, the lender may accept offers at deep discounts from market value. Just as important, prior to closing the sale of their REOs, lenders normally clean up title problems, evict unauthorized occupants, and bring past-due property tax payments and assessments up to date. Some lenders permit buyers to write offers subject to appraisal and professional inspection.

Safer Than Buying at the Foreclosure Sale

To buy direct from a lender typically presents no more risk than buying direct from any other property's owner.9 You can buy an REO much more safely than you could have bought the same property at its foreclosure sale. Depending on the lender's motivation, its internal policies and procedures, and the property LTV at the time of the foreclosure sale, you might buy below market price.

Why a Lower Price?

Let's say the market value of a property at the time of its foreclosure sale was $585,000. The lender's liens against the property totaled $560,000. To win the property away from the lender at the foreclosure sale, you probably would have had to bid more than $560,000—a price that's too high to yield a good buy.

After the lender owns the property and adds up its expected holding costs, Realtor's commission, and the risks of seeing the (probably) vacant property vandalized, it may decide to cut its losses. It might accept an offer within the range of $500,000 to $550,000—especially if you offer cash. (You can borrow this money from some other mortgage lender.)

9 Several exceptions might include: states where the foreclosed owners may have a right of redemption; if the foreclosed owners still retain some legal right to challenge the validity of the foreclosure sale; or if a bankruptcy trustee or the Internal Revenue Service (tax lien) is entitled to bring the property within their powers. Rarely would any of these potential claims be worth losing sleep over; however, prior to closing an REO purchase, you might run these issues by legal counsel.

Finding Lender REOs

In desperate times REO lenders turn to mass marketing and advertised public auctions to unload their REOs. In stable to strong markets, they generally (but not always) play it low key. No lender likes to publicize the fact that it's throwing down-on-their-luck families out of their homes. Absent tough times and mass advertising, you can find REOs in three different ways: Follow up after a foreclosure sale; cold call lender REO personnel; locate Realtors who typically list REO properties.

Follow Up after Foreclosure

Attend foreclosure auctions and you can easily learn of lender REOs. When a bank rep wins the bid for a property, buttonhole that bidder and start talking business. Or, schedule an appointment to see the officer who manages REOs (usually called loss mitigation). Show the lender how your bargain offer will actually save or make money for the bank. Then you'll be on your way to closing a deal.

Beware of the stall. Financial institutions are run by standard operating procedures, management committees, and other precautionary rules that can work against sensible decisions. If you crash into a bureaucratic stone wall, persevere. Persistence pays off in two ways: (1) You eventually make the deal; and/or (2) you build personal relationships that will open the bank's doors for you in future transactions.

Cold Call REO Personnel (Loss Mitigation Departments)

Every mortgage lender experiences at least a few defaults. No underwriting system can perfectly weed out every loan applicant who might fail to pay. So, all mortgage lenders end up with REOs—even if eventually they pass them along to HUD, VA, or some other guarantor.

Sometimes, too, lenders accumulate REOs without foreclosure. During the last major real estate downturn, lenders would open their mail to find the keys to a house, a signed deed, and a personal note from the distressed owners, 'We're out of here. It's your problem now."

To find REOs that lenders have acquired through foreclosure or deed-in-lieu transfers, cold call mortgage lenders. Ask for a list of their REOs. However, this technique seldom turns up much. For various reasons, lenders may keep a tight hold on this information.10 Nevertheless, you should still ask. Remember to show evidence of your buying capacity and credibility.

Until you establish relationships with REO personnel, the following approach might help: Rather than ask for a full list of REOs, focus. Describe what you're looking for in terms of neighborhood, property size, price range, floor plan, condition, or other features. In that way, a lender can answer your request without disclosing all of the properties within its inventory of REOs.

As you see from the discussions in this chapter, you can acquire and finance properties without ever applying and qualifying for a loan in the traditional way. I have put together many deals using the techniques presented in this chapter. With perseverance (and some luck), you, too, can succeed as a homebuyer or investor with one or more of these approaches.

When someone advises you, "Go down and get prequalified for a loan so you will know exactly how much you can borrow," you must realize that such advice omits many other possibilities. Indeed, you now understand that even when you choose to buy and finance in a traditional manner—if the word traditional still has any meaning when it comes to mortgages—no one can tell you any "exact amount." To a much greater degree than most borrowers realize, it is you—not any given lender or loan program—who determines the amount of property that you are able and willing to buy.

10 Most lenders don't want to waste time with those investor "wannabes" who have just read a "nothing down" book or "graduated" from a foreclosure guru's "no cash, no credit, no problem" seminar.

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