INVESTING IN FORECLOSURES FOR BEGINNERS LEX LEVINRAD
Buying at the courthouse can be frustrating since foreclosure auctions are often cancelled at the last minute.
Auctions can be cancelled because one or both of the parties was not served correctly, the owner has filed
bankruptcy or the owner has negotiated a loan modification with the bank. Doing a lot of research on properties
and paying for title searches and inspecting properties and then watching 80% of them get cancelled at the last
minute can be very time consuming, costly and frustrating for new real estate investors. For this reason I
encourage new investors to stay away from investing at the court house unless they want to make a business
out of it.
Usually the bank is prepared to let a property get sold at the courthouse for 80 to 90 percent of its market value.
Depending on economic times, this number can be higher or lower. It is a myth that foreclosures get sold at the
courthouse for pennies on the dollar. In reality, the bank representative will protect the bank’s interest by bidding
up to the amount they are willing to sell their property for.
The bank simply makes a calculation as to the cost of disposing of a property via listing it on the MLS with a
realtor, or selling it at the courthouse. If the property is in good shape then the bank will not let the property sell
for less than 90% of fair market value. If the property is badly damaged then the bank will be willing to sell the
property for less, since it will be more difficult to sell via listing with an REO agent. If the bank is the highest
bidder, then the property goes back to the bank and becomes a bank owned or REO property.
REO
Real estate owned, or REO properties, are properties that are owned by the bank. Since banks are not
landlords, the first thing they do with a property that comes back to them is to try and sell it. They do this by
using “asset managers” or asset management companies, which are companies that represent the banks in
dealing with their REO properties.
These asset managers submit their REO properties to pre-
established realtors that are listing agents that only work
with REO properties. These realtors give their asset
managers a “brokers’ price opinion” (BPO), which lets the
bank know at what price the realtor thinks the house
should be listed. Usually bank owned properties are listed
at competitive prices, in order to facilitate a quick sale.
REO properties are cash only deals meaning any potential
buyer needs to be pre-qualified by the bank and needs to
show a “proof of funds” like a bank statement.