What’s an REO?
REO stands for “Real Estate Owned”. These are properties that have gone through foreclosure and are now owned by the bank or mortgage company. This is not the same as a property up for foreclosure auction or trustee sale. When buying a property during a foreclosure sale or trustee sale, you must pay cash and take the property “as is”. That could include existing liens and even current occupants that need to be evicted. A REO, by contrast, is a much “cleaner” and attractive transaction. The REO property did not find a buyer during foreclosure auction. The bank now owns it. The bank will see to the removal of tax liens, in some cases evict occupants and generally prepare for the issuance of a title insurance policy to the buyer at closing. Be aware that REO’s may be exempt from normal disclosure requirements. In California, for example, banks are exempt from giving a Transfer Disclosure Statement, in Ohio - banks are exempt from giving a Property Disclosure, both are documents that normally require sellers to tell you about any defects they are aware of.
Is it a bargain?
It’s commonly assumed that any REO must be a bargain and an opportunity for easy money. This simply isn’t true. You have to be very careful about buying a REO if your intent is to make money off of it. While it’s true that the bank is typically anxious to sell it quickly, they are also strongly motivated to get as much as they can for it. When considering the value of a REO, you need to look closely at comparable sales in the neighborhood and be sure to take into account the time and cost of any repairs or remodeling needed to prepare the house for resale. The bargains with money making potential exist, and many people do very well buying foreclosures. But there are REO’s that are not good buys and not likely to turn a profit. It is wise to use an experienced REO agent to help you!
Time to make an offer?
Some banks have a REO department and most use an outsourcer such as an Asset Management company to sell their properties. In either case they will most likely use a listing agent to get their REO properties listed on the local MLS. Before making your offer, you’ll want to contact the listing agent or if you already have an experienced REO Buyer’s Agent and find out as much as you can about the property and what their process is for receiving offers. Since banks almost always sell REO properties “as is”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it. As with making any offer on real estate, you’ll need to include documentation of your ability to pay, such as a pre-approval letter from a lender and have an earnest money check. Banks won't even look at offers without those items. If the bank is asking that you get preapproved with their preferred lender it is wise to do this in advance. This will make your offer stronger and in most cases the preferred lender has special financing and incentives for these properties. |