1st timer, found a great REO property...now what?

Quote from CbusGuy : Hey everybody, looking for some help here. My fiancee and I have been "window shopping" the neighborhoods near us for some time. Nothing has really been that appealing, so we've continued renting while we keep our eyes open. We finally found a house in the last couple of days that we REALLY like. Beautiful historic home, sold a decade ago for $240k. Great style, great history, great neighborhood. Big enough that we would never need to buy another house again for space reasons. Bank foreclosed on it about a month ago at 150, listed it REO at 180, and a few days ago dropped to 165. I am fully aware that it is far from a perfect indicator, but things like Zillow's black-box "Zestimate" peg value at around 220, which seems plausible when considering the recent comps in the neighborhood. Applying the recent price/sqft numbers from recent sales in the neighborhood gives roughly 200-300k valuation depending which number you use, so I accept the Zillow number as at least "not terrible". Beyond the typical 1st homebuyer advice, are there any particular concerns we should have or things we should know about regarding REO deals? What kinds of special financing issues are there? If the house does appraise at 200+ and we buy it at 165 or less, is that reflected in how the LTV is calculated? I think I'm very financially literate, but I freely admit that I am still very new to real estate which is its own culture with its own language and rules. I'm a quick study, but I need to study this issue and I thought the SD community might be a good place to start. Help a real estate noob out! I will monitor the thread actively and provide follow up info if it is needed to give better advice. Thanks everybody!

1) banks are notoriously slow at accepting offers. Make sure you have the personality (and time) to go weeks/months without hearing about anything.

2) is the house vacant? just because its REO doesnt mean it's abandoned.

3) get an awesome inspector or three. oftentimes when people get kicked out of their homes they take it out on "the man" by taking it out the walls, pipes, and anything that's not bolted down.

4) can you break your rental lease at any time?

Don't worry about investment values if you can see yourself living there for awhile. You can sell if the right moment strikes and you can use it to assure yourself you're probably not getting a "bad" deal but it's still a (sometimes) volatile market and one that you can't predict with any particular accuracy. But if the house makes you happy and the condition is tolerable, go fpr it.

Watch HGTV and DIY network to get an idea of what types of projects you can do or have done on houses and how much they cost (appx).

Have you been inside the house? If it's historic, it may need a lot of expensive updates like electrical, plumbing, heating/cooling and major updating. I've seen historical homes around here that need $50k+ in work right away. There is a historical house on hud around here that has went under contract 3 times so I imagine the inspections have revealed a major problem - maybe a foundation problem or something.

I'd say it is worth looking at if you like it, but don't go for it with rose colored glasses...have it checked out by several people including a roofer, electrician, plumber, etc. You may even need to call in a contractor that specializes in historical homes.

Avoid falling in love with a house before you buy it, or you'll oftentimes overpay for it.

Try not to let emotion drive the deal. Keep the emotion at bay and think primarily about the numbers. Your best tool in negotiation is your willingness to walk away. This willingness is in inverse proportion to the level of emotion you have towards the house. So, less emotion makes way for more willingness to walk away which will lead to you getting the best deal on a house in the end.

I do not get into bidding wars because you always lose even if you win. The loser is the winner because he doesn't overpay, and the winner is the loser because he does overpay.

Quote from bonkman : 1) banks are notoriously slow at accepting offers. Make sure you have the personality (and time) to go weeks/months without hearing about anything. 2) is the house vacant? just because its REO doesnt mean it's abandoned. 3) get an awesome inspector or three. oftentimes when people get kicked out of their homes they take it out on "the man" by taking it out the walls, pipes, and anything that's not bolted down. 4) can you break your rental lease at any time? Don't worry about investment values if you can see yourself living there for awhile. You can sell if the right moment strikes and you can use it to assure yourself you're probably not getting a "bad" deal but it's still a (sometimes) volatile market and one that you can't predict with any particular accuracy. But if the house makes you happy and the condition is tolerable, go fpr it. Watch HGTV and DIY network to get an idea of what types of projects you can do or have done on houses and how much they cost (appx).

1 and 4) I'll take these 2 together. Our current rental lease runs through August of this year, so we have plenty of time to wait if waiting is required. If we had to move more quickly, we could get out of the lease. Our apartment community is probably the nicest in our specific area, and there is a waiting list to get into the big 2BR unit style that we have. So for me, I am not concerned with timing.

2) The house is empty now. I spoke with the bank's realtor to set up a showing and he confirmed this.

3) Yeah, I've definitely heard about this one. I'll be interested to see what we find out at the showing, or the inspection if the showing goes well.

Quote from eddiehaskell : Have you been inside the house? If it's historic, it may need a lot of expensive updates like electrical, plumbing, heating/cooling and major updating. I've seen historical homes around here that need $50k+ in work right away. There is a historical house on hud around here that has went under contract 3 times so I imagine the inspections have revealed a major problem - maybe a foundation problem or something. I'd say it is worth looking at if you like it, but don't go for it with rose colored glasses...have it checked out by several people including a roofer, electrician, plumber, etc. You may even need to call in a contractor that specializes in historical homes.

I have a showing scheduled for Monday. This is my biggest concern, that perhaps the home would have some major structural problem. If it needs TLC, I am good with having a minor project going on all the time, but a major structural problem would cause me to back out as I don't have the background or the desire to tackle a major rehab. We have a family connection to an inspector who is known in the area for being particularly ruthless and nitpicky, so that helps, but I like the idea about having several specialists come through. Thanks.

Quote from Brian1 : Avoid falling in love with a house before you buy it, or you'll oftentimes overpay for it. Try not to let emotion drive the deal. Keep the emotion at bay and think primarily about the numbers. Your best tool in negotiation is your willingness to walk away. This willingness is in inverse proportion to the level of emotion you have towards the house. So, less emotion makes way for more willingness to walk away which will lead to you getting the best deal on a house in the end. I do not get into bidding wars because you always lose even if you win. The loser is the winner because he doesn't overpay, and the winner is the loser because he does overpay.

Good point. I negotiate regularly as a part of my day job and it's true that whoever is willing to walk away has the leverage. If you NEED the deal, you always overpay. I wonder if the bank must want this gone quickly based on them cutting their ask so quickly.

OK, so an update. Went and saw the house. It's very impressive in person, but there are some clear concerns. Without an inspection it will be difficult to assess just how much we would be looking at in possible repairs/deferred maintenance.

1) Steam heat. Boiler in the basement will likely need to be replaced. Associated with this, I saw that asbestos was used and may need to be cleaned up.

2) The outside is part brick, part wood. I noticed some smallish areas of deterioration in some wooden portions of the outside of the house. NBD if it's a cosmetic fix, but combined with some visible moisture and given that the house has wood floors and construction everywhere once you get inside. I would definitely want to check for termites.

3) All of the copper is still in place, but some historic light fixtures were stolen while the property was vacant for about the last 6 months.

4) Water heater is 10 years old, doesn't look bad but probably due soon and would look at doing it simultaneously with any other plumbing repairs.


To run through the math and the story:

-House sells at $240k in 2002
-Owner gets an appraisal during the go-go years for nearly $400k, takes out the HEL to the max.
-House drops into foreclosure sometime in 2011/2012, owner vacates in summer 2012.
-Bank takes possession for $150k in December 2012, puts it on the market at $180k immediately.
-Last week the bank cuts price to $165k.


I'm certainly more wary of the property now post-showing than before I saw it. I have a couple of questions now:

1) I do not mind having a repair or project going (e.g. windows, new kitchen, etc.), but I don't want to deal with structural integrity concerns. To me, termites is a big one. I've never dealt with termites or asbestos before. Can someone talk about those kinds of concerns? It's easy to google for the textbook answers, but what's it like to actually deal with this? One time fix or ongoing battle?

2) Let's say things work out reasonably well on the inspection and this is worth pursuing. Hypothetically, the house could get $220k on appraisal/the open market but the initial mortgage is for the lower REO price of $165k. Is your LTV calculated at the purchase price or the appraisal price, or perhaps at the purchase price until you have an appraisal done? I'm trying to get a sense of what the down payment would be measured against. Really, I'm trying to get a sense of whether I can essentially get to an 80% or better LTV and avoid PMI partially on the basis that there may be a decent chunk of equity off the bat. Like I said, I'm new to this!

Trying to think of other questions, but I'd appreciate any feedback. Even if I don't pursue this house, this has been a great learning experience. Thanks!

Quote from CbusGuy : 2) Let's say things work out reasonably well on the inspection and this is worth pursuing. Hypothetically, the house could get $220k on appraisal/the open market but the initial mortgage is for the lower REO price of $165k. Is your LTV calculated at the purchase price or the appraisal price, or perhaps at the purchase price until you have an appraisal done? I'm trying to get a sense of what the down payment would be measured against. Really, I'm trying to get a sense of whether I can essentially get to an 80% or better LTV and avoid PMI partially on the basis that there may be a decent chunk of equity off the bat. Like I said, I'm new to this! Trying to think of other questions, but I'd appreciate any feedback. Even if I don't pursue this house, this has been a great learning experience. Thanks!

the LTV is based on the lower of the purchase price or appraised value.

There is nothing wrong with asbestos . . . so long as you don't drill into it, cut it, move it, touch it, breath on it, or look at it funny. Depending on what is entailed with removing and installing a new boiler, the asbestos may get disturbed. In which case, any smart company won't even go near the place til you have it removed. Removal is expensive, check your local area for basic quotes.

Termites, get a professional out there. If they are definitely there, the only way to see how bad the damage is . . . start pulling out boards and check behind them.

There was some Canadian home inspector/contractor show that was on for a while. One episode was about termites. Holy crap. Initial look, eh, not too bad. Once the real crew got there and started pulling crap out . . . wow. Looked like a bomb had gone off inside the wall.

Quote from travathian : There was some Canadian home inspector/contractor show that was on for a while. One episode was about termites. Holy crap. Initial look, eh, not too bad. Once the real crew got there and started pulling crap out . . . wow. Looked like a bomb had gone off inside the wall.

Holmes Inspection!

OP, you can get a termite inspector to come take a look, in addition to any other inspections you might have. They won't be able to pull boards back or open up walls or anything, but they can look for signs of termites or termite damage, as well as signs of previous treatment. Not perfect, but it should give you an idea of what's going on.

Quote from travathian : There is nothing wrong with asbestos . . . so long as you don't drill into it, cut it, move it, touch it, breath on it, or look at it funny. Depending on what is entailed with removing and installing a new boiler, the asbestos may get disturbed. In which case, any smart company won't even go near the place til you have it removed. Removal is expensive, check your local area for basic quotes.

This is true, but I'd be sure I also know where all the asbestos is. When you have to do home maintenance it'll jack up the price of the repairs if the contractor finds some when they didn't expect to.

Quote from CbusGuy : Hey everybody, looking for some help here. My fiancee and I have been "window shopping" the neighborhoods near us for some time. Nothing has really been that appealing, so we've continued renting while we keep our eyes open. We finally found a house in the last couple of days that we REALLY like. Beautiful historic home, sold a decade ago for $240k. Great style, great history, great neighborhood. Big enough that we would never need to buy another house again for space reasons. Bank foreclosed on it about a month ago at 150, listed it REO at 180, and a few days ago dropped to 165. I am fully aware that it is far from a perfect indicator, but things like Zillow's black-box "Zestimate" peg value at around 220, which seems plausible when considering the recent comps in the neighborhood. Applying the recent price/sqft numbers from recent sales in the neighborhood gives roughly 200-300k valuation depending which number you use, so I accept the Zillow number as at least "not terrible". ...

Quote from CbusGuy : ... To run through the math and the story: -House sells at $240k in 2002 -Owner gets an appraisal during the go-go years for nearly $400k, takes out the HEL to the max. -House drops into foreclosure sometime in 2011/2012, owner vacates in summer 2012. -Bank takes possession for $150k in December 2012, puts it on the market at $180k immediately. -Last week the bank cuts price to $165k.

A decade? Am I taking crazy pills? The housing bubble started way before that. What was the price in '97/'98 or the nearby comps back then?

Price - immediate repairs (1-3 years) = bid that

Quote from sd444 : A decade? Am I taking crazy pills? The housing bubble started way before that. What was the price in '97/'98 or the nearby comps back then? Price - immediate repairs (1-3 years) = bid that

I probably didn't phrase that well. "During the go-go years" is more accurately "just before the crash begins". I'm guessing it's a purchase at 240 in 2002, get monster HEL in 05/06.

Considering the problems that asbestos inherently has (when it's in a home, it tends to show up where it's not supposed to be and not where it is supposed to be, causing more and more destruction to remove it all beyond just the simple cost) as well as the distinct possibility of termite and mold damage, I would suggest skipping this one unless you are prepared for extensive remodeling/cleaning costs and years of a half finished/dangerous home. Sorry to burst your bubble but some things are better left alone

The bank that has the house up for sale may want you to get pre-qualified with them, but you do not have to go with them.

If you get the mortgage with a different bank, the bank who owns the house now doesn't even have to know what it appraised for. It is none of their business and the appraisal is purely for your bank to see if it is worth the money you want to borrow. The selling bank has already done their appraisal, thats how they came up with the price.

Depending on the bank, it shouldn't be too long to close. They have got their game together and have set up special departments or outsourced the job to other companies. What bank owns it? And what area is it in?

Your probably going to have stuff like asbestos in most historical buildings.

Termite treatments depend on your location. I believe in places like California they use tents, whereas in AZ we just spray. If termites are a problem, you can get warranties from most termite treatment companies. And if there is signs of termites, be sure to check for damage. If they have been coming and going for the past century something might need replacing.

And be sure to check out Home Warranties. They run around $400 and will cover things like AC, water heaters, plumbing etc. This will vary from company to company and possibly location too. Your Realtor should know about this and if he/she doesn't fire them now.

And as others have mentioned, get a home inspection.

If you do buy, do a final walkthru a few days prior AND the day before or of closing. Don't rely on the Realtor. Check everything, inside and out. That may be your last chance to make a claim for anything missing. The house should be in the same condition and have the same features etc as when you saw it and made an offer. If its not, you might want to get them to stomp up some cash.

Oh, and avoid giving notice on your place until you have successfully closed. Things can fall through at the last minute and then you could end up homeless. I was suppose to close in March, we ended up closing in August!