How to Effectively Bid on Bank Owned Properties (REOs)

One of the biggest secrets to successfully bidding on REOs, as a savvy real estate investor, is having a mechanism that provides for the ability to submit a lot of offers and an understanding of the process. I believe the process follows 4 Stages.

In a normal week, we'll submit more than 600 offers on bank owned properties (Stage 1) in a given high-inventory area. Obviously a system is needed to reach and maintain this level of activity. Note: we tried to do this manually at the beginning and it was a bad experience. Also note, that if original offers are based upon a percentage of list price, we've noticed that each area seems to differ on what that percentage is.

Of course most of our offers are too low to go anywhere. However, that does not mean that we learn nothing from the feedback. The first information we learn is which properties are under contract (pending) and which properties have much higher offers than ours (retail buyers). This may include as much as 90 percent of our "investor" offers that are submitted.

However, 10 percent of the offers remain (Stage Two). In this stage, we move into the realm of possibly purchasing. The listing agent in this stage normally requires further documentation, etc. After getting the documents in order, the formal package is then submitted to the seller.

Stage 3 consists of two basic possibilities: First, the offer is countered by the seller and then we revisit our offer and make adjustments, as appropriate. Second, the offer is verbally approved and the listing agent forwards purchase amendments to sign and we move toward the close.

Stage 4 occurs when both parties have signed all of the documents. The investor must send a certain amount of earnest money to hold the property to close. These monies are at risk during the closing process, so care must be taken. The key points in Stage 4 are the number of days in the inspection period and the scheduled closing date. During the inspection period, the investor can back out of the deal and get their earnest money returned. After the inspection period is over, the earnest money is not refunded if the investor does not close--for any reason.

After years of doing these calculations by hand, my partner and I have developed an online real estate software to make our lives much easier. We can now crank out offers and determine the exit strategy in seconds.