I’ve been in the distressed business my entire career. I’ve seen a lot of transactions close, but I’ve also seen a lot of transactions fall apart at the 11th hour. The thing that I’ve seen cause the most transactions to be cancelled is financing.
In today’s tight credit markets, lenders are constantly pulling out final conditions, or things that must happen before they fund a loan, such as needing something repaired, or needing something on your credit report explained. In other situations, appraisals come in too low and buyers are unable to perform when loans are involved.
The owners of REO’s, primarily large commercial banks, know that loans complicate transactions!
There are a few primary ways that deals are financed today, in the REO world. Note: There are always different ways to finance a deal. These are just the most popular ones. The array of loans to acquire real estate is just as diverse as the real estate itself. Talk to a loan officer to find out what options you have.
Examples of REO Financing Options:
- VA Loan – Buyers can put down 0%. Property and buyer must be approved by VA. Buyer must be a veteran or active military. Property must pass appraisal and inspection.
- FHA Loan – Buyers can put down as little as 3.5%, and credits or gifts can be given to cover the 3.5%. Property must be approved by FHA. Mortgage insurance is required. Property must pass appraisal and inspection.
- Conventional Loan – Buyers put down anywhere from 10%-60% (20% being the most common). Property must pass appraisal and inspection.
- Cash – No loan involved to close the escrow.
As I mentioned, the owners of REO’s understand how difficult certain properties can be to finance. Many REO’s need repairs and/or have illegal conversions/additions. If these issues exist in one of their REO’s, rest assured they know most lenders will not lend on it, unless the owner rectifies the concerns with the property. Furthermore, most owners of REO’s are not willing to spend substantial money to repair a property. Therefore, offers with loans are much less attractive to REO owners.
In addition to increasing the likelihood of closing the transaction, loans also decrease the amount of money a buyer has to put up to purchase a property. Like it or not, the more money a buyer puts up, the more serious they appear to a seller. This works in distressed sales and traditional sales. Sometimes it’s not even the actual case. A buyer with 3.5% down on an FHA loan may be much more serious than a 100% cash offer, but the perception is that the cash buyer is more serious; money talks.
Unfortunately, most buyers cannot pay cash. Loans will always be involved in real estate, its too expensive for most buyers without a loan. You can still make a very serious offer using a loan. Here are some tips to making a strong REO offer with a loan.
- Have a pre-APPROVAL letter not a pre-QUALIFICATION letter – A pre-approval letter is a tentative commitment to fund a loan from a specific lender; a pre-approval requires you to give income and expense documentation to your lender. A pre-qualification is essentially an estimate of what you can afford, with no commitment to lend you any money.
- Offer list price, or even a little above – Most REO owners do lots of homework before listing an REO for sale. In fact, most times they price it correctly in order to have a quick sale or to get bidding wars going. Low-balling an offer can rub an asset manager the wrong way; they may not want to work with you after that.
- If repairs are needed, wrap them into your offer – If you do not have the money to pay to repair an REO just add the costs into your offer. If the property is listed at market price, offer market price. Have a contractor give you estimates to make any of the repairs you need to make (these are not upgrades, these are repairs! Don’t ask for new granite counter tops if the counter tops that are there are in good shape). Include the repair estimates in your offer as back up. Ask for a credit or ask the lender to pay your contractor at closing.
- Be honest – Nothing is worse than getting into escrow with a buyer and finding out they cannot perform. Only go with the best intentions, be transparent about everything.
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