What You Need To Know About How to Find, Buy, or List Bank-Owned Properties
This definitive guide offers an overview of where, how, and why to source bank-owned property. For more in-depth information on how to source bank-direct distressed assets, check out our free training webinar.
In this guide, we’ll cover:
How A Property Becomes Bank-Owned
Bank-Owned Properties as Investments
How To Find Bank-Owned Property
Bank-Owned Property Search
Bank-Owned Property Database
How to Get Bank-Owned Property Listings
Buying Bank-Owned Property
How Does a Property Become Bank-Owned?
Real estate becomes bank-owned property when borrowers become delinquent and default on their financial obligations. A bank effectively repossesses the property, and it is held classified as “Other Real Estate Owned” (OREO) or “Real Estate Owned” (REO).
The most obvious reason for a bank to repo a property is late mortgage payments. This can arise when a borrower becomes consistently late on monthly payments or when they miss maturity deadlines (on balloon mortgages).
Lenders, banks, credit unions, and servicers may also seek repossession if it is necessary to preserve their investment from other claims or when there is another type of breach of contract. This might include due-on-sale clause provisions and discovery of mortgage fraud.
3 Ways Properties Become Bank-Owned:
- Through foreclosure proceedings
- At auction
- Via deed-in-lieu of foreclosure
Commercial Bank-Owned Property
Commercial mortgage loans are not subject to the same regulation as owner-occupied residential real estate loans. This means that lenders can often execute “Acceleration Clauses,” and begin the repossession process in as little as ten days.
This has created a massive pool of commercial, multifamily, construction, and land REOs. It is also why so many US banks and mortgage lenders have stopped lending to residential borrowers that intend to live in their properties.
These lenders may loan on residential homes and multifamily apartment buildings, but only for commercial business (investment) purposes. This allows them to operate more freely, with less regulation, and with more security for their capital.
Bank-Owned Properties as Investments
Bank-owned properties remain the best type of real estate investment for brokers and agents, corporate acquisition specialists, savvy real estate investors, and even end buyers. They offer the potential for better deals and better returns with less competition.
Contrary to some media hype, bank-owned properties are widely available. In fact, there are billions of dollars worth of these real estate assets across the U.S. The key is learning how to buy REO property, honing in on where to find it, and obtaining attractive loans for bank-owned property.
Below we’ll show you exactly how to find residential and commercial REO, walk you through the steps to listing or buying it, and provide resources for financing bank-owned property.
How to Find Bank-Owned Property
Finding bank-owned homes and commercial properties for sale isn’t always easy.
It is critical to be able to quickly and efficiently pinpoint which banks have REOs to conserve time. Then investors, agents, and other buyers must understand how these financial institutions decide to sell.
Watch this video to learn how to find bank-owned property:
Bank-Owned Property Search
There are numerous ways to search for foreclosures and bank-owned property, including:
- Searching bank-owned property websites
- Working with real estate agents
- Contacting bank branches
- Various types of foreclosure auctions
- Bank-owned property databases and software
Bank-Owned Property Database
BankProspector Features Include:
- Real-time data on credit union and bank REO holdings
- Tools to quickly identify “sell” indicators to find banks that can sell REO
- Contact information for bank decision-makers
- Comprehensive training
- Investors and funding sources
Learn how banks report Non-Performing Notes (NPNs) & REOs:
How Do You Find Out Which Banks Have REOs?
There are thousands of banks in the United States, in addition to credit unions, hedge funds, loan servicers, and other mortgage companies.
Walking into these institutions or calling and emailing around isn’t likely to produce results, even if you target the right organizations and companies.
The few bank-owned homes for sale are usually publicly advertised and often grossly overpriced.
BankProspector provides instant insight into exactly what U.S. banks have on their books.
This database and bank prospecting tool even allows real estate brokers and buyers to get ahead by tracking the data on delinquent and non-performing loans before they officially go into foreclosure and become bank-owned property.
Detailed data from BankProspector provides in-depth access to not only identify which of the thousands of banks and lenders out there have non-performing loans and REO, but how much, and what type.
This allows you to target the right institutions for bank foreclosures right away.
How Banks Decide to Sell REOs
A bank’s decision to sell foreclosure properties depends on:
- Its legal and financial ability to do so
- Having the resources and expertise to advertise REOs for sale
- The borrower making the offer
- The terms of the offer
What most may find surprising is that accounting and paperwork burdens can prevent lenders from selling properties sometimes, even if they’d love to get rid of the dead weight.
Anyone with any experience working with a bank knows that it is rarely simple, whether it’s applying for a small business loan, making a mortgage application, or trying to negotiate a loan modification. These organizations can be faced with billions of dollars of REO, which isn’t their main line of business, and that can make for an odd process to buy property.
Investors new to buying bank-owned property may find it challenging – if you don’t know what you are doing. The process can be greatly simplified and streamlined. You just have to understand lender mindsets, limitations, and operations.
Accessing data that provides a detailed picture of a bank’s current financial strength and recent REO sales history will put you ahead of the game.
Now, let’s dig into how to get REO listings and negotiate with banks.
How Do You Find Bank-Owned Properties for Sale?
Five ways to find distressed properties for sale:
- Knocking on doors
- Cold calling
Pounding the pavement, “dialing for dollars,” knocking on doors, and their equivalents are rarely efficient or effective. Try it out and see. Just make sure you have this page bookmarked in your browser because you’ll want to come right back.
Real estate agents can be a source for bank-owned home listings. Commercial real estate brokers can find listings for multi-family, retail, office, land, and industrial REO properties.
A skilled and experienced agent with great relationships may be a valuable ally in identifying and negotiating bank-owned property deals. Some banks, servicers, and lenders have even developed their own departments for selling distressed assets. However, many are held off-market as exclusive or “pocket” listings.
Pocket listings are generally only available to a broker’s tight list of most qualified, fastest-acting friends. Others are advertised at or above market prices. This arrangement obviously eliminates the advantage of this type of property.
Foreclosure and bank auctions are tricky and have yielded results in the past. But, their popularity and lawsuits involving rigging in recent years have rendered them useless and unprofitable. Wikipedia points out that there are often lien and location issues with these properties.
Distressed Pro and BankProspector enable buyers to target the banks holding REO property, the lenders that are ready to sell more of them, and help buyers get ahead of the competition to secure attractive bargains. This is critical for investors, agents looking for REO listings, and end buyers that demand real value.
How to Get Bank-Owned Property Listings
Bank-owned property can be incredibly profitable for real estate agents and brokers. Once listed, these properties can sell fast, and proven success can lead to a consistent stream of highly profitable listings.
So which banks will list their foreclosure inventory with realtors? And how do they select which realtors to give their business to?
Watch this video to learn how to get bank-owned property listings:
Which Banks List Their Bank-Owned Properties with Realtors?
Most small to mid-size banks hire realtors to sell REO property. Often the smaller regional lending institutions don’t have the workforce and budget to handle REO sales in-house and haven’t yet created systems for liquidating this inventory.
Thousands of U.S. banks and credit unions still need help. They are often the best source for bank-owned property deals. Working with them may also be the easiest way for agents to start selling REO. They need your help, you want to help them. It’s a win-win.
Some of the largest national and international banking giants like HSBC and Bank of America have already developed their own departments to handle bank-owned properties in the wake of the foreclosure crisis. Others have long-established relationships with other real estate firms. Trying to take this business away from them may be counterproductive and more time-consuming than profitable.
A few minutes on Google and an hour networking with other members of your local Realtor association will likely clue you in on where not to waste your time. Focus on the other banks with REOs that need and welcome your help.
How Lenders Choose Realtors to Sell Bank-Owned Property
So what qualifications do you need to sell bank-owned homes and commercial real estate? Probably less than you thought.
Everyone wants to work with a proven specialist. Additional training, certificates, and accreditation can help, and sometimes, they’re necessary. For example, agents who want to sell HUD homes need to be, or work under, a HUD-approved broker.
Lenders choose realtors based on three main variables:
- Ability to do the job
- Ability to net them the most money
- Industry connections and relationships
If you’ve proven you can move these properties in a way that matches their processes, you’re on the right track.
Keep in mind that when it comes to banks selling OREO, it is really all about the net sheet.
How will you put more money in their pocket on each property than the competition?
The big challenge is connecting with the decision-maker who has the power to grant you the listing. Then you can build a relationship and the “know you, like you, trust you” framework for landing all of their listings.
BankProspector is the best way to find decision-makers at banks holding REO property and obtain their contact information.
Buying a Bank-Owned Property
So, how do you buy a bank-owned property?
After identifying which lenders are holding them and which can, want, and need to sell them, what’s the next step? How does the process work?
Purchasing a Bank-Owned Property
Purchasing a bank-owned property isn’t much different from buying any other real estate. However, the process varies a bit depending on the property, lender, and market conditions, but for the most part, the steps are pretty standard.
8 Steps to Buying Bank-Owned Property
- Find banks with REOs.
- Find bank-owned property available for sale.
- Identify and connect with the decision-maker.
- Make a purchase offer.
- Get contracts signed.
- Complete due diligence.
Getting a Bank-Owned Property Under Contract
The mechanics of purchasing a bank-owned property really aren’t any different from other real estate transactions.
What is different is you’ll be dealing with a seller that wants to do things their way, on their terms, and they only really care about one number.
Be prepared to hurry up to wait, and then hurry up again to wait. It’s well worth it for the potential profits and discounts on bank properties, though.
To successfully get a property under contract:
- Know how to negotiate with the bank.
- Understand what can and cannot be negotiated.
- Make a clean offer that checks all the lender’s boxes.
- Present yourself as a strong buyer.
Negotiating a Bank-Owned Property
In spite of the myths, you can negotiate with banks, especially if you are reaching them first before they are advertising REO property for sale.
Expect the bank to demand you purchase “as-is.” Expect they will want to use their own title company or real estate attorney. Anticipate having to provide proof of funds or a mortgage pre-approval letter with your offer.
Items you can negotiate include:
- Who pays which costs
- Right to inspect the property
- The closing date
How Much to Offer for Bank-Owned Property
Price is one of the easiest factors to negotiate when it comes to purchasing bank-owned property.
Buyers can fail by not understanding the most important number to the bank. How much the lender will net is what they care about most, and it’s the figure they use to compare offers.
Always provide a net sheet. This document breaks down all of the closing costs so that the bank will see how much they will ultimately net from the sale based on your offer. Your real estate agent, title company, or real estate attorney can assist with this.
The bank will already have a rough idea of what they think the property is worth. They will normally have obtained a Broker’s Price Opinion (BPO) already.
However, you can still justify your offer based on property condition, the local market, and comparable sales and pending foreclosures they may not be aware of. Document everything in detail.
If you will be buying bank-direct without a realtor commission involved or if your realtor will reduce their commission for volume business, you may get an additional edge on the competition.
Showing that you are the easiest buyer to work with will also buy you a bigger discount. It hasn’t been uncommon for lenders to approve offers 30% or $100,000 less than competing ones, just because they see it as the fastest and most reliable option.
Don’t be afraid to ask for a discount. But don’t burn your bridges either.
This part of the process is where relationships and direct contacts come into play. If you build and cultivate a strong lender network, you can make awesome offers that get accepted all the time.
Financing a Bank-Owned Property
Contrary to some misconceptions, buyers can use financing to buy a bank-owned property.
Investors intending to pay cash for their purchases will be required to submit a “proof of funds” letter from the institution where the cash is held with their offer to get an offer accepted.
Never state you are a cash buyer unless you will be using cash.
All buyers should expect to make a cash earnest money deposit at the time of making their offer. As with any other real estate transaction, it is safest to deposit this money with your own real estate attorney or title company. Your real estate broker can also hold deposits in their escrow account.
If you’ll be financing a bank-owned property, your offer won’t be entertained unless accompanied by a mortgage pre-approval letter. Some banks will offer financing on their own REO properties. This gives them more confidence in you as a buyer and provides them with more control and another way to make money on the transaction.
There are a wide variety of financing options for bank-owned property. The right choice really depends on your purpose for buying.
You may be purchasing bank properties for use as a personal residence, as a second or vacation home, or purely as an investment. Bank-owned property can be wholesaled, fixed and flipped, rehabbed and rented, or redeveloped and repurposed.
Types of Mortgages for Financing Bank-Owned Property:
- Transactional funding
- Hard money loans
- Private money mortgages
- Interest-only loans
- Fixed and adjustable-rate conventional mortgages
- Stated income loans
- VA, FHA, and USDA homes loans
- Blanket mortgages
- Commercial mortgage loans
- Construction loans
- Mini-perm loans
Where to Get Loans for Bank-Owned Property
- Best Transaction Funding
- Pacific Private Money
- Alternative Mortgage Group
- Rental Home Financing
- Firstkey Lending
- Capital One
Additionally, borrowers can obtain financing from their own bank, the bank selling the property, or even leverage real estate crowdfunding portals for fundraising.
No matter what type of loan you hope to get and where you plan to get it from, it is essential to start the process early, and keep on top of your lender throughout the process.
Bank-Owned Property Closing Costs
The closing costs associated with purchasing bank-owned property or other bank foreclosure assets are really not too different from buying any other home or piece of real estate. The line items are essentially the same. But there has been some controversy over which party pays individual closing costs.
The best way to calculate closing costs is to enlist the help of your mortgage lender and title company. Your mortgage lender must provide you a Good Faith Estimate. The title company or closing real estate attorney will provide an estimated HUD-1 Settlement Statement.
Closing Statement items include:
- Real estate transfer taxes
- Recording fees
- Title insurance
- Interim mortgage interest
- Closing fees
- Title search fees
- Prorated property taxes
- Any applicable Homeowners’ Association (HOA) fees or condo dues
If financing is being used, and depending on the loan type, there may be lender underwriting fees, appraisal fees, property insurance, and more.
Buying bank-owned property can become more complicated when it’s time to determine who pays for which costs.
Lenders will often want the buyer to cover all of the costs, even those customarily paid by the seller in that state or county. They have even asked buyers to settle liens and other past-due third-party bills.
Keep in mind that these details are all negotiable. But there is no guarantee the particular bank you are working with will negotiate specific items.
Bank-Owned Property Auctions
You can also buy bank-owned property at auction. There are several types of auctions where these properties may show up, including:
- Initial foreclosure auction
- Later bulk auctions by REO holders
- Delinquent properties seized and auctioned off by local authorities for past-due property taxes
- Auction services selling pre-foreclosures
- HUD home auctions
Bank-Owned Property Auctions: How to Bid
Foreclosure auctions are publicly advertised in the local newspaper. These live auctions normally require substantial cash and quick closings.
The competitive and emotional nature of these events can sometimes cause real estate investors to bid up and overpay for REO property. It is wisest to conduct your due diligence in advance, determine your highest viable number before you walk in the door, and stick to it.
Other types of auctions happen in blind sealed bidding or are online auctions.
Never assume that you have to overbid. Do your numbers and make an offer that is profitable for you.
Buyers are often surprised at the low offers they get accepted. If buyers are close, the auctioneer or bank can always counteroffer.
Properties also often go unsold for two or three rounds of bidding. Those ready to tackle these properties and their flaws that turned off other investors may find they can bid very low and score some great deals.
However, it is critical to point out that public auctions have run into rigging scandals and that any highly competitive retail environment can lead to properties being overpriced.
Investors looking for the most value may be far better off getting in touch with the bank directly when properties are not being advertised and actively bid on by others.
Foreclosure vs. Bank-Owned Property
With the challenges that foreclosure auctions bring, many investors want to know the advantages of purchasing a home before it goes to auction. When properties go into default, they can be bought at various stages and in different forms, including:
- Non-performing mortgage loan notes (NPN)
- Short sales
- Via tax liens
When the foreclosure crisis of the early 2000s began, foreclosures became very attractive to investors and regular buyers for their perceived discounts.
However, as the real estate market progressed and marketers and sellers caught on, many properties have been advertised as “foreclosures” even though they might not have technically been so. Not every “foreclosure” is deal or sold at a bargain price.
These properties can be found direct from sellers via real estate agents and at various auctions. At one point, the best discounts could often be found earliest in the process.
Now that lenders have been more inclined to repossessing properties versus granting loan modifications or short sales, many of the best deals are found directly from the banks and their bank-owned property.
The one exception to this may be non-performing notes which haven’t accrued the costs and fees associated with going to foreclosure.
Short Sales vs. Bank-Owned Property
A “short sale” is a transaction in which the lender agrees to accept less than the balance owed.
For example, if a property has an outstanding balance of $1M, banks have been known to take anywhere from $300,000 to $700,000 in exchange for quickly exiting a non-performing asset.
How much they will accept under the balance owed really depends on the institution, the current local market, property value, and the offer being made.
A short sale traditionally occurs prior to going to foreclosure auction and is purchased directly from the borrower-owner with the bank’s approval.
Technically, most bank properties end up being sold short if purchased by savvy investors.
The pros of buying short sales before they become bank repos are that they are usually in better condition, and other fees and liens haven’t accrued. However, short sales can still take very lengthy periods of time to be negotiated and approved versus buying directly from the bank.
Bank-Owned Property Maintenance
Bank-owned properties have developed a notorious reputation in the media for their maintenance needs and poor conditions.
Financial analysts once estimated that 90% of bank foreclosure homes required some form of repairs and improvement before they could be considered livable.
Banks have simply lacked the infrastructure and motivation to maintain properties once they are repossessed. In many cases, old owners remain in their properties long after the bank repossesses them.
In other cases, squatters have moved in. Some real estate scams have involved con artists renting out homes that weren’t theirs. Left abandoned and vacant for many months and years, many of these properties have been vandalized and gutted by thieves and opportunists.
Even reality TV show star and musician Vanilla Ice was caught allegedly raiding materials from empty properties to renovate others.
The end result has been local authorities bulldozing thousands of these properties, most notably in parts of New York, Michigan, Ohio, and Nevada.
Armando Montelongo of A&E’s reality TV show Flip This House was once featured in an episode which saw the house-flipping couple purchase a property only to discover it had already been slated for demolition. They had already begun renovations.
These potential scenarios make it critical for buyers and investors to do as much due diligence as possible before buying properties.
Ideally, buyers will know who, if anyone, is occupying the property, what kind of condition it is in, and any liens or actions pending against it.
Once purchased, the new owners need to ensure they maintain their real estate to code and keep it secure.
Top 25 Banks with the Most Bank-Owned Assets
|JPMorgan Chase Bank, National Association||Columbus||OH||3,025,285,000,000|
|Bank of America, NA||Charlotte||NC||2,258,832,000,000|
|Wells Fargo Bank, National Association||Sioux Falls||SD||1,767,808,000,000|
|Citibank, N.A.||Sioux Falls||SD||1,661,507,000,000|
|U.S. Bank National Association||Cincinnati||OH||544,774,160,000|
|PNC Bank, National Association||Wilmington||DE||463,097,309,000|
|TD Bank, N.A.||Wilmington||DE||401,511,800,000|
|The Bank of New York Mellon||New York||NY||386,515,000,000|
|Capital One-National Association||McLean||VA||363,521,558,000|
|Charles Schwab Bank, SSB||Westlake||TX||342,023,000,000|
|STATE STREET BANK AND TRUST COMPANY||Boston||MA||311,181,000,000|
|Goldman Sachs Bank, USA||New York||NY||271,652,000,000|
|Fifth Third Bank, National Association||Cincinnati||OH||203,174,120,000|
|HSBC Bank USA N.A.||Tysons||VA||197,980,343,000|
|Citizens Bank, National Association||Providence||RI||183,365,970,000|
|MORGAN STANLEY BANK, N.A.||SALT LAKE CITY||UT||175,627,000,000|
|THE NORTHERN TRUST COMPANY||CHICAGO||IL||169,571,085,000|
|KeyBank National Association||Cleveland||OH||168,974,607,000|
|BMO Harris Bank, N.A.||Chicago||IL||154,260,389,000|
|First Republic Bank||San Francisco||CA||142,502,134,000|
|Manufacturers and Traders Trust Company||Buffalo||NY||142,219,684,000|
|AMERICAN EXPRESS NATIONAL BANK||SANDY||UT||132,754,617,000|
Quick Tips for Buying a Bank-Owned Property
- Learn the foreclosure and bank repo process.
- Find and get pre-approved with a mortgage lender.
- Decide which method you will use to search for bank-owned property.
- Identify which banks and credit unions sell REO.
- Obtain the contact information for decision-makers and reach out.
- Identify specific pools of properties or specific bank-owned properties to buy.
- Make great offers.
- Negotiate with confidence.
- Complete your due diligence.
- Complete your purchase and repeat.