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5 Things to Know About Buying REO

When it comes to selling REO (or "real estate owned") properties, banks have one simple goal---they want to minimize their losses. This generally means that they want to close deals as quickly as possible, for the highest possible price, with the buyer assuming all of the risks.

Because banks are dealing with large inventories and thousands of deals at any given time, they have very little attachment to any single deal working out, and buyers have very little leverage when it comes to negotiating favorable terms. Potential investors, then, need to be prepared to act decisively in making attractive offers, while also having systems in place to protect themselves from disaster. With this in mind, here are five things you should be prepared to do when buying REO:

1. Hire a lawyer.

Because you can bet on the banks structuring all contracts in their favor, you should strongly consider hiring a lawyer to sort through the intricacies of the terms. Quite a bit of specialized knowledge is needed to parse the details and ensure that you're adequately protected, and buying REO properties is risky enough without failing to enlist the services of trained legal counsel.

2. Have rock-solid financing in place; the more cash, the better.

The last thing a bank wants to worry about while doing an REO deal is a buyer's financing falling through at the last minute. If there is any question at all about your ability to pay the purchase price when the time comes to sign on the dotted line, your deal likely won't go through. You should be ready to offer as much cash as you possibly can (if this seems intimidating, consider whether you might be able to refinance soon after the deal goes through), and pre-qualify for any loan you might need. If you don't have a large down payment ready to go, you many need to consider offering a fast close to remain competitive.

3. Get an appraisal and an inspection.

Just as you would in a typical house purchase, be sure to get an appraisal and an inspection done by professionals you trust. Many novice investors assume that all bank-owned property is bargain priced, when that's not always the case---an appraisal will give you a solid idea of the house's true market value. By the same token, while it's true that REO property is sold "as is," buyers are typically allowed an inspection period during which they can call off the deal. Hiring a property inspector you trust is particularly important, since banks are not required to make any disclosures regarding its condition.

4. Purchase title insurance.

Title insurance protects you in the event that someone comes forward claiming ownership of, or legal right to, the property you just purchased from the bank. When buying an REO property, the bank doesn't do a standard title transfer---instead, they deliver a "Standard Warranty Deed" which holds them accountable only for any title issues that originated during the short period they owned the property. Previous title issues are not their responsibility, so it's a good idea to buy a comprehensive policy.

5. Close quickly.

Part of making a competitive offer is letting the bank know that you're willing to move quickly. All other factors being roughly equal, the investor who can close the fastest will generally win the sale. In a competitive market, offering to close within a week is not unheard of. For the best chance of submitting the winning bid, have your appraiser and inspector lined up and ready to go within a day or two of submitting your offer.

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