Ilyce Glink–the award-winning, nationally-syndicated real estate columnist–recently put together a Q&A REO properties for Inman News that I thought would be good to share here:

Question: I have put an offer on a single-family residence at $2,000 over the asking price. The property is a short sale and the bank has already received seven offers on it. The deadline to accept or deny my offer was 5 p.m. last Wednesday. Instead of accepting or rejecting my offer, the bank contacted the agent saying they are waiting until Monday to make a decision. What are my options and what are they trying to do?

Answer (from Ilyce): Here’s what’s happening: The bank is trying to make a decision in a timely manner and your attempt to force the issue isn’t working. (Nice try, but no dice.) So, you have a choice. You can formally withdraw your offer or you can let it sit and see what happens.

Each lender has a process by which it has to evaluate each of the offers that has come in for an REO property to see which one is the best — best isn’t always the highest offer, by the way. It could mean they’re looking for the strongest buyer or one who is able to use the bank’s financing (which is another way for them to recoup their investment.)

I’d have your agent stay in touch with the lender to smooth things along and make sure the lender has all the information he or she needs to make a decision. It’s possible the lender will come back to you (and everyone else) on Monday to ask for another round of bidding. Or, the lender might simply come back and say, yes or no.

Unless you formally withdraw your offer, at that time you can decide whether to agree to purchase the property if you’re given the opportunity.

By the way, I hope you’re using a real estate attorney. Foreclosures and short sales are tough purchases and I’d hate to see you get caught because you didn’t have anyone representing your legal interest in the deal. Unless your broker is also a real estate attorney (and even if he is, he can’t be both to you in the same transaction in some states), you should hire a real estate attorney.

Then, later in the piece, Ilyce fields this question:

Q: My son and his wife are interested in purchasing a foreclosure property as their primary residence. They’re looking for a townhouse because they can’t afford to pay the full cost for a single-family home. Can you tell us what percentage of the foreclosed loan the former owner’s private mortgage insurance covers? When will that be paid and to whom is it paid? Can my son and his wife expect a significant reduction in the sale price of a foreclosed home if the private mortgage insurance kicked in?

A: Private mortgage insurance (PMI) covers the portion of the mortgage that exceeds 80 percent of the purchase price of the home.

For example, if a home buyer gets a mortgage for 90 percent of the purchase price of a home (or for 90 percent of the appraised value of the home if the owner is refinancing) and the purchase price or value is $100,000, PMI would cover the top 10 percent of the loan.

PMI will protect the lender in case the lender forecloses on the home and then sells the home for less than $90,000 but more than $80,000. If the home were to sell for less than $80,000, the lender would have the PMI protection coverage on $10,000, the difference between $80,000 and $90,000, but would take a loss on the sale if the sales price is less than $80,000.

In another example, if the first mortgage is for 100 percent of the purchase price of the property, PMI would cover the lender against a loss over the top 20 percent of the mortgage.

You have to keep in mind that most loans that exceed 80 percent of the purchase price of a home have PMI, but in many cases they do not. If a homeowner obtains a first mortgage for $80,000 on a home purchase valued at $100,000 but gets a second loan for $10,000, this purchase or refinance would not involve PMI coverage.

How does this play out in practice? Right now, all of the companies that sell private mortgage insurance are reporting enormous losses from 2007, due to short sales and foreclosures. Most of these publicly traded companies are reporting their first losses ever.

When someone sells a home for less than the mortgage amount, PMI kicks in and reimburses the lender for the portion of the mortgage that was covered by the loan. So if the mortgage lender agrees to accept a short sale for $10,000 less than the mortgage amount and the loan had PMI, the PMI company would write a check for $10,000 (or a portion of that amount) to the lender, making the lender whole.

But I’ve been unable to find a way to figure out exactly how much the lender is reimbursed by the private mortgage insurer. The good news is that information isn’t relevant when making an offer for an REO property. (REO is industry jargon that stands for “real estate owned,” which means the lender has foreclosed on the property and is the current owner.)

The discount you’re going to get from a lender on a piece of REO property depends on a combination of how much the local real estate market has tanked, how desperate the lender is to unload the property, and how much other homes are selling for in the neighborhood.

You may get a substantial discount, but it won’t have anything to do with how much the lender has been paid by the company who underwrote the private mortgage insurance policy.

Your attorney and real estate agent should be able to help you further. For information on how to identify and purchase foreclosures, check out real estate agent Ralph Roberts’ book “Foreclosure Investing For Dummies.” Roberts, who tells me he has personally purchased more than 2,000 foreclosures, does a nice job of explaining how to identify an appropriate foreclosure, negotiate for it, find the financing for it, and close on it.

Thanks, Ilyce, for the recommendation of my book. If anyone reading this post would like to pose additional questions about REOs, feel free to leave a comment below, or see Foreclosure Investing For Dummies for more information.