Buying bank owned properties
There is a lot of interest in buying bank owned properties these days. The greater Austin area is fortunate to not have a great deal of foreclosures on the market but there are some.  A lot of information, some good and some bad, is floating around.  Often the information offered is for sale, with the promise that you can make a lot of money with little effort once you know “the secret formula”.  The fact is that there are no secrets, and to make money does require effort.  There is a reason the property went to foreclosure and did not sell. Oftentimes the property is not marketable because of the owner's lifestyle and property condition.  I took the photo at left of an REO in Leander.  It is fairly representative of the condition owners leave a property in when they move out.  Messy and dirty is very common.

What’s an REO?
REO stands for “Real Estate Owned”.  These are properties that have gone through foreclosure and are now owned by the bank or mortgage company.  This is not the same as a property up for foreclosure auction.  When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees accumulated during the foreclosure process.  You must also be prepared to pay with cash in hand.  And on top of all that, you’ll receive the property 100% “as is”.  That could include existing liens and even current occupants that need to be evicted.  A REO, by contrast, is a much “cleaner” and attractive transaction.  The REO property did not find a buyer during foreclosure auction.  The bank now owns it.  The bank will see to the removal of tax liens, evict occupants if needed and generally prepare for the issuance of a title insurance policy to the buyer at closing.  Do be aware that REO’s are exempt from normal disclosure requirements.  The property pictured to the right at 9108 Magna Carta in Austin, was a foreclosure that I sold in 2008 that was in better condition than most.

Is it a bargain?
It’s commonly assumed that any REO must be a bargain and an opportunity for easy money.  This simply isn’t true.  You have to be very careful about buying a REO if your intent is to make money off of it.  While it’s true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it.  When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale.  The bargains with money making potential exist, and many people do very well buying foreclosures.  But there are also many REO’s that are not good buys and not likely to turn a profit.  Sometimes major expenses are hidden behind a fresh coat of paint such as this REO I sold at 2702 Cypress in Cedar Park. The solid wood just crumbled when mild pressure was applied to the exterior siding.

Ready to make an offer?
Most banks have a REO department that you’ll work with in buying a REO property from them.  Typically the REO department will use a listing agent to get their REO properties listed on the Austin multiple listing service (MLS).  Before making your offer, you’ll want to contact your agent and find out as much as you can about what the listing agent knows about the condition of the property and what the banks process is for receiving offers.  Since banks almost always sell REO properties “as is”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it.  As with making any offer on real estate, you should expect to provide a pre-approval letter from a lender.  Most Austin area lenders won't even look at your offer without it.  After you’ve made your offer, you can expect the bank to make a counter offer.  Then it will be up to you to decide whether to accept their counter, or offer a counter to the counter offer.  It helps to have a not to exceed price in your mind going into the negotiations that takes into account your purchase expenses, repair expenses, vacancy costs while repairing. The photo to the right shows a Cedar Park REO property in need of sheetrock repair.  This is actually a fairly minor expense.  Having a handyman/contractor accompany you to the property before you decide on  your offer price can help you develop a realistic repair budget.