How to Steal a House – 4 Steps to Buying an REO

Photo (cc) by Casey Serin

The housing market is a depressing subject for homeowners but exciting for those looking to buy.

“In 30 years, I’ve never seen a market like this,” says Denny Grimes, an agent in Fort Myers, Fla. Thanks to a glut of foreclosed properties, here it’s possible to buy a house for $70,000 that three years ago might have sold in one day for $250,000. While some would argue that these homes were never worth their bubble-era prices, there’s no argument that these houses are now selling for significantly less than it cost to build them.

And the party’s hardly over. According to real estate website RealtyTrac, there may be even more foreclosures in 2011 than last year. And in places like Fort Myers in Lee County, Florida, nearly one in three houses are still empty.

But getting a steal isn’t as simple as it might sound. It requires additional, well, homework. It also requires something that isn’t part of the traditional home buying process: speed.

Money Talks recently visited Fort Myers to learn how to bottom-fish in one of the nation’s worst – or best, depending on your point of view – housing markets. Watch the video below, then read on to learn how to “steal” a house.

Now let’s explore two options for buying houses super-cheap. Each has different hurdles.

Judicial foreclosure auctions

As Stacy mentioned in the video above, buying a foreclosure at judicial auction (as opposed to the heavily-advertised public auctions you see at sites like auction.com) will often net the lowest price. But buying this way isn’t anything like the typical process.

  • Auctions often require a 5 – 10 percent deposit before you can bid.
  • Once you win, you need to pay in full, typically within 24 hours. Which means, of course, there’s no time to get a mortgage. And if you don’t show up with the money? Kiss your deposit goodbye.
  • It’s often impossible to do more than a drive-by inspection. Many homes sold at foreclosure auctions are still occupied, so there’s no opportunity to even see the inside, much less do a thorough inspection of the roof, foundation, heating and air conditioning, etc.
  • Depending on the state where the auction is held, you may face hidden mortgages or liens. You can read about how one woman almost paid $14,000 for a foreclosure property that came with an outstanding $140,000 bill in our story How NOT to Buy a Foreclosure. You can avoid this by paying $50-200 for a title search on the property before you bid, but that’s more money up front with no guarantee of winning the house.
  • The competition for these houses is often fierce. You could be bidding against well-heeled investors with a lot more time, expertise, and cash than you’re bringing to the table.

Check out our story How to Buy a Foreclosure to learn what the pros do. RealtyTrac has advice on buying homes at auction too. But it’s full of self-serving “advice” suggesting you need to pay them for their information: You don’t. To learn more about the auctions you see advertised on TV, see Real Estate Auction Warning.

Real estate owned properties (REOs)

When a bank assumes ownership of a house through the foreclosure process, it becomes what’s known as a “real estate owned” property, or REO. Since banks are in the business of lending money, not managing property, they often want to get rid of these homes fast. They sell their houses the same way you’d sell yours: They hire a real estate agent and list it. Unlike the way you’d market your home, however, the bank often does nothing to fix it up. They list it as-is, and to facilitate a quick sale, sometimes price it well below the market.

This is the market we talked to Fort Myers agent Denny Grimes about. As he explained in the video above, the REO market can net you a steal, but you can’t approach it with the same slow, methodical process you’d use in the traditional home-buying process. How it’s done:

  1. Learn to spot a deal when you see one. Buying a home cheap means knowing what “cheap” is. When a below-market REO comes on the market, you’re going to have to make a snap decision. So learn values beforehand and find an agent that’s plugged in to the REO market that can help.
  2. Be pre-approved for a loan. Be ready to pay for a bargain when you find one. That means having financing pre-approved. See our story Follow These 3 Steps to Save Thousands on Your Next Mortgage.
  3. Be ready to pounce. “If it’s new on the market, it’s not something you can look at on Friday, sleep on it, and think about making an offer on Monday,” says Grimes. “By then, there will be several offers and it’s a bidding war.” If you think you’ve found a bargain, Grimes suggests putting in an offer immediately because “it’s important to control the property before worrying about the details.” If the bank accepts your offer that includes a clause making it contingent on an inspection, you’ve “locked up” the property without being on the hook. Grimes says, “Once you get it locked up, you can go through due diligence and if you think you overpaid you can back away.”
  4. Bid as high as you’re willing to go. The rules for buying an REO are nearly opposite those for buying a home the traditional way. Grimes says, “It’s not about how much under asking price you should offer, it’s really how much over asking price you should offer,” because the competition for bargain homes is fierce. How high do you need to go? “I was working with a buyer last week. We went 10 percent over asking price and thought we were good, but we were outbid,” says Grimes. “The bottom line is the buyer has to make their strongest offer first.”

So, can you find a housing steal? Depending on where you’re looking, absolutely. But this isn’t your parent’s house-buying process. As Denny Grimes says, “You don’t steal in slow motion.”

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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