Bank Owned Properties (REO)

My Opinion
I have reached a point where I have shown my last foreclosed money pit. Peeling lead paint, disintegrating asbestos floors, thick black mold, rusted out boilers, windows that don't open, insect and rodent damage, flooding.... I have shown about 250 foreclosed homes and sold 0. In fact, with all my resistance, clients still blame me for obeying their request and showing them such a dilapidated piece of real estate. It is hard enough getting past inspection, so why torture yourself with something that needs $40-100K in repairs. I am starting to realize that most of these properties may have been left to the bank because of these major problems. The owner could not make the numbers work, and the investors and contractors that have picked through the place for the last several months could not make the numbers work either, but you can? More than likely the answer is no. Save your time and effort, there are too many "what if's" and the price to repair may or may not correctly reflect the damage. 

Problems With the Property

The most important thing to understand before jumping into the foreclosure market is that these properties were given up by owners who couldn't afford their mortgage payments anymore. In these cases, the house is often poorly maintained – after all, if the owner can't make the payments, he or she is likely falling behind on paying for regular upkeep as well. Also, some people who are forced into foreclosure are embittered by their situations and take out their frustrations on their home before the bank repossesses. This often involves removing appliances and fixtures, and sometimes even outright vandalism. After the occupants leave, foreclosures sit abandoned, often inviting criminal activity.

Maintenance and Condition
Maintenance and condition can be a problem in foreclosed properties because of the circumstances under which the previous owners moved out. The previous homeowners right of redemption period, court proceedings, etc, cause these homes to sit for well over a year. In New England, that means disaster with freezing burst pipes in Winter and mold in Summer. Some of the main concerns include:

  • Lack of Cleanliness
    Bank-owned properties are sometimes disgustingly dirty because of time spent sitting empty, intentional neglect by the previous owners or occupancy by vagrants. When the place is locked up with no air circulating for months, built-up dirt can cause the entire home to smell.

  • Bad Renovations
    The previous owners may have made changes to the home without getting the proper permits. A common example is converting the garage into living space so more people can live in the home. These changes may be undesirable to future owners or create headaches for the new owners with city government officials. If the previous owners started to improve the home but then fell on hard times, there may be partially finished work in the house. The bathrooms may be redone while the kitchen has not been updated in 40 years, or there may be new floors in the living room while the bedrooms still sport ancient carpeting. Also, if any repairs were made, they may have been done by the owners themselves or by unlicensed professionals – in other words, people who may not necessarily have done the work correctly.

  • No Electricity
    Banks will not turn on or even let you turn on electricity for inspections in case of fire. With no one living in the home, the electricity may be off unless the bank has intentionally kept it on. With no light, it can be hard to see what you are buying in some rooms, particularly basements and windowless bathrooms.

  • Water Damage
    Banks will not turn on or even let you turn on water for inspections in case of burst pipes. A small leak under the kitchen sink can lead to a mold problem, and a roof leak or burst pipe can lead to major water damage. With no one around to take care of issues as they occur, small problems can turn into big ones and big ones can turn into disasters.

  • Lack of Basic Maintenance
    If the previous owners couldn't afford their mortgage payments, you can bet that they also could not afford to repair leaks, termite damage, a broken garbage disposal or anything else.

  • Dead or Overgrown Grounds
    Depending on the climate where the home is located, the lawn and landscaping may be totally dead or extremely overgrown. Banks usually do not pay for gardeners to maintain the yard.

  • Personal Property Left Behind
    Sometimes foreclosed homeowners get locked out of the property before they can move their belongings, and in some cases, they do not take everything with them. Many real estate-owned (REO) properties contain furniture, trash, clothes and other items that you will be responsible for disposing of when you become the property's owner.

  • Vandalism and Neglect
    Damage is not uncommon in foreclosure properties, and it may be caused by vandals or the former owners.

  • For Investors Only
    The prices on most of these properties reflect the amount of damage done. Investors have deep pockets, they come in with the cash, crew, and connections to repair or replace anything in weeks. Many times they are coming in highest and best. If a property has been on the market for a while, investors have already seen it, do the math, and do not see the value.  

  • Bank Approval of Offer
    Banks don’t like contingencies on the sale of a home. Negotiation is math and policy, most won’t entertain the idea of certain buyer loans, especially with competing with cash offers. This is just my opinion from my experience, every bank is different. It seems like banks are making up the rules as they go along so not take a loss in any way.

  • De-Winterization
    All bank owned properties are winterized, heat and water is off and pipes are filled with antifreeze. You can not de-winterize or activate utilities for inspections, leaving inspections limited to structural and termite damage. A damaged septic can cost up to $30k and you wouldn’t know until after closing. If you can get a bank to agree, de-winterization and winterization can cost $600 with pressure checking the pipes.

  • Short Sales
    Very similar story. Banks rules step in and negotiations usually fall apart resulting in the buyer walking away.

If you still want to move forward,

knowing the RISKS, this is how it is done!

FHA 203(K)

  • Standard 203(k) Loan: For Repairs and Improvements Up to and Over $35,000

  • Limited 203(k) Loan: For Repairs and Improvements Up to $35,000

  • Contingency funds for unforeseen repairs, refunded to the mortgage if not used

  • HUD consultant will make repair decisions so the job finishes correctly

  • Cost of HUD consultant can be rolled into the mortgage

  • Take HUD consultants plan and secure contracts from licensed contractors to complete the work

  • Immediately take contracts to the lender, they need it for appraisal

  • Once the loan is approved, the closing will be scheduled

  • No funds distributed at closing for renovations

  • Work must start within 30 days of closing and finish within 180 days

  • It is the contractor's responsibility to obtain building permits

  • HUD consultants will be with you to make sure contractors do their job

  • RI Housing only pays contractor when the job is inspected by HUD consultant

  • Payments only made to approved contractors at the time of application

  • Notify RI Housing of septic and/or well if applicable

  • This has a slightly longer processing time from application to loan closing

What is a HUD Consultant?

Each FHA 203(k) customer benefits from a consultant approved by the U.S. Department of Housing and Urban Development (HUD). Your consultant’s job is to help you make sound decisions about the work you plan to do.

Your mortgage expert will provide a list of Rhode Island approved HUD 203(k) Consultants.  The role of a consultant is required for the Standard 203(k) option and strongly encouraged for the Limited option. The Consultant conducts onsite visits, creates a detailed work plan with project specifications according to FHA 203(k) guidelines. The Consultant monitors the progression of work completed, inspects all completed work prior to issuing a loan disbursement and works with you and the contractor for all changes.

Rhode Island Housing offers two types of FHA 203(k) loans to homebuyers:

  • Standard 203(k) loan: enables borrowers to finance improvements greater than $35,000

  1. Selected for more involved projects

  2. Involves HUD-approved Consultant

  3. Allows up to 5 disbursements during the improvement phase

  4. Work completed in 6 months or less

  • Limited 203(k) loan: for those properties requiring less than $35,000 in improvements.

  1. No structural improvements allowed

  2. Allows 2 disbursements to Contractor

     -The contractor can receive up to 50% of work to be completed at closing to allow for ordering of materials

  1. Work completed in 6 months or less; improvements cannot prevent you from occupying the home for more than 15 days.

  2. HUD consultant recommended but not required

Both options offer:

  • A fixed 30-year loan with established guidelines and procedures.

  • Allows you to take advantage of today’s real estate buying opportunities

  • A single mortgage that covers both purchase and improvements

  • 3.5% Downpayment; down payment may be a gift or, if eligible, a second mortgage from Rhode Island Housing.

  • Closing cost assistance is available for eligible borrowers.

  • Expert assistance, every step of the way

Eligible Repairs Over $35,000 for Standard 203(k) Loan

Completed in no more than 6 months

  • Structural alterations and reconstruction, such as repair or replacement of structural damage, chimney repair, additions, installation of the additional bath(s), repair of foundation

  • Connecting to public water and/or sewer system

  • Installation of a well and/or septic system

  • Lead-based paint stabilization

  • Eliminate health and safety hazards

  • Create accessibility for a person with disabilities

  • Make energy conservation improvements

  • Mold remediation

Ineligible Repairs

  • New swimming pool

  • Gazebo

  • Addition or alteration for commercial use

  • Hot tubs/saunas

  • Satellite dishes

Eligible Repairs up to $35,000 for Limited 203(k) Loan

Completed in no more than 6 months

  • Repair/ replacement of roof, gutters, and downspouts

  • Repair/ replacement of flooring

  • Minor remodeling, such as kitchens and bathrooms, which do not involve structural repair

  • Create accessibility for a person with disabilities

  • Make energy conservation improvements

Ineligible Repairs

  • Major renovations or remodeling, such as relocation of a load bearing wall

  • New construction, such as a room addition

  • Rehabilitation of structural damage, such as damage caused by termites

  • Landscaping (not including removal of landscaping that is compromising the structural integrity of the house)

Step 1: Pre-Approvals

  • Current pay stub

  • Last 2 years W2s

  • Last year’s tax returns with all schedules (2-years if self-employed)

  • Two months of bank statements of all types of accounts (all pages)

  • Upon approval, a Pre-Approval Letter is issued specifying the loan amount you qualify for.  

Step 2: Work with your Realtor

Share with your realtor that a 203(k) loan may be an option for you.

Step 3: Get the Home Inspected

A professional home inspection will identify any problems with the home and necessary repairs to make the home safe and ready for you and your family to live in. If the home needs repairs, your FHA 203(k) loan will cover the initial purchase of the home as well as the money to complete repairs or improvements.

Step 4: Seek Estimates and Work with your HUD Consultant

Once the initial inspection is complete and repairs are identified, the required repairs will determine if an FHA 203(k) Standard or Limited loan is the best financing option for you. You will then work with a HUD Consultant, if a Standard 203(k) is selected, to determine what repairs and changes you would like to make. These changes will include addressing any problems identified by the initial inspector (i.e. roofing, plumbing, heating, etc.), as well as any other home improvements you would like to make (i.e. kitchen or bathroom remodeling). Your HUD consultant will then provide you with a detailed work plan for all the repairs.

Step 5: Select a Rhode Island Licensed Contractor

Once you receive the HUD Consultant’s final work plan, you will need to select a Rhode Island licensed contractor. When selecting a contractor:

  • Obtain a written estimate specifying all work, materials, and labor

  • The estimate should be on contractor’s letterhead

  • Request a copy of contractor’s license

  • Request and verify all references

Step 6: Work with your Mortgage Expert to Finalize your 203(k) Loan Package

With your contractor's estimates in hand, along with the HUD Consultant’s plan (not required for Limited 203(k)), it is time to work with your lender to finalize your loan package.

It is to your benefit to get the estimates as soon as possible. Lenders will not order the home appraisal until they receive the HUD Consultant’s report (if required) and the contractor’s estimate(s).  Any delay can impact your ability to close on time.

Step 7: Close on Your Home

Once your loan is approved, the loan processor working with your Mortgage Expert will coordinate your loan closing.  At the time of closing, funds are disbursed to the sellers, and you get the keys! Rhode Island Housing establishes an escrow account for the improvements/repairs. After the closing, work with your HUD Consultant and/or Contractor to ensure all improvements/repairs are completed on schedule and are done properly.

  • Call and confirm with your contractor: schedules, the scope of work, guarantees and pricing prior to closing.

  • Work must start no later than 30 days from loan closing.

Step 8: Let’s Get to Work!

Now that you’ve closed on your loan, it’s time to get to work and make the improvements as planned.

  • Contact Rhode Island Housing to verify Rehab Account.

  • Review disbursement schedule with HUD Consultant/Contractor

  • Schedule work to begin in 30 days, complete within 6 months

  • No changes to estimate allowed without Rhode Island Housing approval

HUD Consultant List

Consultant Name

Consultant ID

Address

Phone

AUBE, KATHLEEN M

P1705

PO BOX 1273

WEST WARWICK, RI 02893-0697

(401) 258-1984

AUBE, RICHARD F

P0031

PO BOX 1273

WEST WARWICK, RI 02893-0697

(401) 827-0459

AUGER, MICHAEL E

P1729

51 HOLLYWOOD AVE

WARWICK, RI 02888-3312

(401) 578-4878

CAMPAGNONE, ERNEST

P1504

258 ROCKLAND RD

N SCITUATE, RI 02857-1928

(401) 647-5989

CATELLI, RUSSELL A.

P0150

114 MILLARD AVE

WARWICK, RI 02888-5520

(401) 739-1155

CRAVEIRO, JOHN K

P1515

51 RANKIN PATH

NORTH SMITHFIELD, RI 02896-9586

(401) 714-7833

DECELLIO, ALBERT C

P1643

14 CHANDLER ST

NORTH PROVIDENCE, RI 02911-2224

(401) 639-5134

EASON, STANLEY

P1642

150 FIRST AVE

WOONSOCKET, RI 02895-4011

(401) 761-0993

Ext: 0203

GRUDZINSKI, DAVID M

P1599

23 PRESTON DR

CRANSTON, RI 02910-1822

(401) 935-6547

JENKINS, RALEIGH M.

P0439

276 SPRING GREEN RD

WARWICK, RI 02888-5342

(401) 463-9883

LYNCH, JOHN W

P0535

114 MILLARD AVE

WARWICK, RI 02889-5520

(401) 739-1155

LYNCH, KENNETH A

P0536

114 MILLARD AVE

WARWICK, RI 02888-5520

(401) 739-1155

MARABELLO, GAETANO D.

P0555

114 MILLARD AVE

WARWICK, RI 02888-8290

(401) 739-1155

MARTINO, ROLAND A.

P1481

PO BOX 19713

JOHNSTON, RI 02919-0713

(401) 349-2105

MASTERSON, JAMES S

P1490

CERT.BLDG INSPECTOR/CONSULTANT

6101 POST RD TRLR 25

NORTH KINGSTOWN, RI 02852-1842

(401) 398-7841

PIETRYSKI, DANIEL

P0702

114 MILLARD AVE

WARWICK, RI 02889-5520

(401) 739-1155

RAINONE, JOHN

P0729

6 ARROWHEAD TRL

SMITHFIELD, RI 02917-2108

(401) 949-1489

SCHULTZ, ROBERT C

P1714

8 S KILLINGLY RD

FOSTER, RI 02825-1345

(401) 864-3370

SEMPER, CHRISTOPHER

P1806

335 BROADWAY

PROVIDENCE, RI 02909-0000

(401) 256-8864