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Guide to Purchasing Bank-Owned (REO), Foreclosure,
Short Sale and Other Investment Properties

The information contained here is specific to REO, short sale and other investment properties located in Maryland. While the processes may be similar in other states, you need to check with appropriate experts in each jurisdiction. DMS Properties, LLC ... Residential Real Estate Services is a full-service real estate company licensed in Maryland. As such, we can help potential sellers of homes that may be distressed, as well as those that are not (standard sales) ... in addition to our REO business.

Obviously, the strategies for purchasing properties vary depending upon whether or not you are buying a principal residence or an investment property. If you are considering an investment property, you need to know the return on investment (ROI) for the property. We can help you determine this for any property in Maryland that you plan to buy. First, though, some basic information about REO and other potential properties.

DMS Properties, LLC ... Residential Real Estate Services is in the process of purchasing properties ourselves. We have a specific strategy that we use. We would be happy to help anyone who wishes to create a portfolio of investment properties that could potentially generate a healthy stream of income. If you have an interest in investing in residential real estate in Maryland, but don't feel you have sufficient knowledge or funds to accomplish it on your own, contact us so we can discuss a potential partnership.

The information below does not make any reference to the process of purchasing a short sale property. That will be addressed separately and we can discuss it with you as it pertains to purchasing investment properties.

What is a Bank-Owned (REO) Property?

Bank-owned homes are the same thing as REO homes ... REO stands for “Real Estate Owned” and simply means that it is "real estate owned by the bank.”When a borrower misses payments, the trustee is authorized by the Deed of Trust (or mortgage or Security Instrument) to conduct a foreclosure. This terminates the borrower’s ownership of the property. The property is then sold on the courthouse steps in a foreclosure auction.

Many "investors" will attend the foreclosure auctions hoping to buy a property at a bargain price. Unfortnately, this doesn't work well most of the time and carries some risks to potential buyers. That's because the properties generally are not viewable before the sale, so a potential purchaser may be buying a home "sight-unseen" and not have any idea what type of damage may have occurred. In addition, the purchaser would need to hold onto the property until the foreclosure sale is ratified and then proceed with any eviction that must occur. This can take months (sometimes over a year). During the foreclosure auction, then, unless the bank receives a bid is that is higher than the minimum that the note holder has requested, the property becomes an asset of the Bank.

In the past few years, banks have gotten better at managing their REO portfolios and realized that they can retain the properties and sell them through the MLS. Today other companies, called Asset Management Companies, are facilitating the sale of real estate for mortgagors (usually banks) and are the mediators between the buyers and the sellers. Many times, you will see listings that show the owner as “owner of record.” This is usually because the process of recording the deed after a foreclosure sale is cumbersome and if all of the paperwork isn't done properly, it will slow things down even more.

Corporate Owners (banks and asset management companies) don’t transact sales in the same was as individual owners. They may not appear cooperative during the process and they may not agree with the buyers' assessment of the property’s value. Some may be in the process of bundling properties for a service center to transact the sale or auction so the subject property may be in some state of transition. The listing agent and asset manager working for the corporate owner are key to how the transaction will progress.

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As-Is. What does this really mean?

All bank-owned (REO) properties are sold “as-is, where-is.” This means that the bank makes no guarantee as to the condition of the property or the property on which it sits. A couple of years ago, it was almost guaranteed that they would make absolutely no repairs to the property before it was listed or once it is under contract.

Today, though, many REO properties are being repaired before they are listed. Banks are making the repairs because that helps the values of the properties to remain stable. Many times, the market value of the home will increase by more than the cost of the repairs.

With mortgage financing the way it is today, many buyers are using FHA and VA loans to purchase homes (sometimes first homes). The financing almost always requires that certain conditions are met and repairs made before the sale can be completed. Banks are now more likely to make at least some repairs, especially if it leads to a successful transaction.

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Inspections. Can they be done?

Home Inspections: Even though the property is being sold “as-is, where is,” the bank will allow the purchaser to perform a home inspection for informational purposes at their own expense. Most banks will allow the purchaser up to 7 days after acceptance of the contract to perform the inspection. If the inspection is done within the 7 days, some banks will allow the purchaser to void the contract based on the findings. This policy differs, however, from bank to bank and it is imperative that you ask this question up front. If a bank does not allow for the above-mentioned “inspection period,” it would be in the best interest of the purchaser to bring a home inspector along to inspect the property when great interest exists.

If the utilities are off, you may need to have them turned on in your name for only the day of the inspection so that the inspection can be completed. If the home is winterized, you will need to de-winterize it before the inspection and re-winterize it until settlement. Read on to understand the process of winterization.

Termite Inspections: Some banks will pay the $45 to $60 for the termite inspection (this is negotiated during the submission and acceptance of the contract). Other banks, however, will not pay for this inspection. Most banks will not pay for any termite treatment or damage due to termites on the property.

Radon Inspections: Just like home inspections and termite inspections, you can request a radon inspection, but the “as is” clause will dictate that the cost of remediation will be the responsibility of the purchaser.


During the winter months in areas where the weather is typically cold, the property is usually winterized. This means that the water is turned off and all pipes are drained to prevent the pipes from freezing. In this process, air is blown through the pipes to determine if there are any leaks. A leak would be discovered if air can be heard escaping and/or if the pipes don't hold pressure. Winterization does not guarantee that there won’t be leaks when the property is de-winterized.

The initial winterization is paid for by the bank. The property is typically not de-winterized until after settlement (at the purchaser’s expense). If the purchaser chooses to do a home inspection for informational purposes and wishes to have the water turned on, the purchaser will need to pay for the de-winterization and re-winterization of the property. The approximate costs for these services are $300 to $400. Many times now, the banks will pay for de-winterizing and re-winterizing the home because they have their own contractors do the job, so they can control the quality of the work.

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Writing the Contract -- Is it the same?

Most banks will accept a contract that is written on the MAR (Maryland Association of Realtors) Residential Contract of Sale. Most banks, though, will also require certain addendums to be signed by the prospective purchaser upon contract submission. 

These bank addendums ALWAYS supersede the contract, so prospective purchasers should read them carefully.

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Earnest Money Deposit -- Who holds the check?

As with any contract for purchasing residential real estate, an Earnest Money Deposit (EMD) for roughly 1% of the purchase price will be required at the time the offer is written. In some cases, a more substantial EMD will be required, but that depends upon the bank. Most EMD checks are written to the listing brokerage or, more often, to the Seller's (Bank's) Title Company and are held in their escrow account until settlement.

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Financing -- Are there any differences?

Purchasers of REO properties need to pre-qualify with a lender in order to write the offer for purchasing a property. You also may need to pre-qualify with the Bank that owns the property. You will not be required to accept their loan, but they can require you to speak with their loan officer. Some Banks offer incentives to encourage you to use their programs. The same loan programs available to all buyers are available to buyers purchasing REO/Bank-Owned Properties. Some government programs may require the seller to pay specific costs or make specific repairs … and that is okay. Your lender will be able to give you more information about the loan programs.

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Response Time -- Do they take forever?

Typically, a Bank will respond to an offer within 24 to 72 hours. There are some banks that do not respond as quickly. Patience is the key to this game!

Purhcasers also need to be aware that there are many, many things that can go wrong with a Bank-Owned or REO sale that can delay settlement ... sometimes for months. There can be deed issues, unpaid utility bills (particularly water/sewer charges) that are liens against the property.

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HOA/Condo Documents and Inspections -- Do I get these?

Under Maryland law, the Bank is supposed to supply the purchaser with the re-sale packet for the HOA or Condo association. The purchaser then has five days to review these documents and either proceed to closing or void the contract. If the Bank does NOT supply the documents, then the purchaser, at their own expense, may need to purchase the re-sale documents. 

If a buyer wants the property, they need to be prepared to purchase these documents themselves, if necessary. The documents contain important information regarding the association finances, rules and regulations and any violations that may exist on the subject property. If you choose to NOT get the documents and the bank has filed to give them to you, your HOA contingency will expire at settlement. Some “as is” clauses and/or addendums include the obligation of obtaining the property owners documents as the buyer's responsibility. HOA and Condo Association documents can cost up to $375.

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Settlement -- What do I need to Know?

For Banks to sell the property to a purchaser, they need to convey “clear and equitable title” … just like any other seller. Due to the foreclosure status of the property, this may take longer to get than it would in a normal situation. All liens and judgments against the property need to be released prior to the property being sold to the new owner.

This can be a sticky situation with REO properties. Most of them strongly request that you use their title company. The RESPA law, though, allows the buyers to choose their settlement company. Many times the bank will link closing costs or owner’s title insurance to using their title company. Investigate using your own local settlement attorney. You may find that you get more representation and the costs may equal the savings. It is in your best interest to use a title company that is reputable and knowledgeable when it comes to purchasing real estate.

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When You Find a Property You Really Like …

  • Be excited, but also be patient.
  • Be diligent by working with your agent to review current market conditions and sales of comparable properties to present a competitive offer.
  • Be pre-qualified.
  • Be sure to read all of the documentation … especially the addendums.
  • Be prepared to spend a little extra money.
  • Be thorough … do all of the inspections that you can.
  • Be in contact with a reputable title company.
  • And lastly, be glad that you did your homework!

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