REO/Bank Owned Explained

Real Estate Owned properties - “REOs” refer to properties owned by a lender or "Bank Owned"and acquired through a Trustee Sale, Lawsuit, Foreclosure or other method. As soon as the lender takes possession of the property, it is listed on their books as “REO” and categorized as a non-performing asset. 

What are the different kind of distressed properties?

Short Sale is still owned by the seller. The property may be going through the foreclosure process, or the
owner may have just begun to become delinquent in paying the mortgage, or the seller may not be in
default at all. The bank ultimately agrees to be paid “short” on the “sale” of the property (i.e, the bank
agrees to accept less than what the seller owes on the property).

Foreclosure is the process whereby the lender takes possession of the property. Foreclosures are NOT
sold by REALTORS®.

Real Estate Owned property, REO is a home that goes back to the mortgage company after an
unsuccessful foreclosure auction. This property can then be listed by an agent hired by the lender.
Lenders want these sold quickly.

Buyers may think the only way to get a deal is by purchasing a distressed property. However, the term
“distressed properties” does not always mean cheap and the cost of fixing the property only adds to the
bottom line.

Know your facts before getting involved with REOs.

• Most REOs are listed with a real estate broker. These properties usually sell for more than
comparable short sale properties because of the cost incurred by the financial institution in acquiring
the property.

• REOs tend to be in disrepair and are sold “as is.” Also, the condition can worsen prior to
settlement as a result of theft, acts of nature or vandalism.  Sample As Is Addendum

• Disclaimers on REO properties are not available from the lender because they cannot represent
the condition of the property or neighborhood information.

• The average REO listing is for 90-days.

• REO purchases are less risky than buying at a foreclosure auction, but contain considerable
more risk than short sale properties.

• REO properties can usually be purchased faster and with less red tape than short sale properties.

• REO properties are usually priced to sell. Making ridiculously low offers can be a waste of time
and may not elicit a counter offer.

REOs have their issues. Here are some you may encounter with REOs:

• Sabotage. The previous homeowner could have sabotaged the property. For example, perhaps
the former owner left the water running throughout the property to destroy it - including placing a
running hose in the attic.

• Mold.

• Neglected properties. If homeowners don't have money to pay their mortgage, they typically
could not keep up the month-to-month maintenance needed to maintain a property.

REOs aren't for Everyone

From the outside the property looks charming. The home is in a good area within a decent school district. You may say this is the property for you because of the location, and most importantly, the price is right, but many times after the cost of fix up the property is much more expensive than a higher priced home in good condition.  Many times a REO is more suited for an investor than a typical home buyer.

Good News about REOs

Though not for everyone, there are benefits to buying a REO.

REO purchases are less risky than buying at a foreclosure auction, but contain considerable more risk than short sale properties.

REO properties can usually be purchased faster and with less red tape than short sale properties.

REO properties are often priced to sell. Making ridiculously low offers can be a waste of time, and may not elicit a counter offer. However, a solid offer may be successful.

Not so Good News

REOs are sold “As Is”.

You should expect multiple, competing offers.

If the lender is not well organized, there may be delays at closing or during the purchase, but hopefully not.

Primary REO Buyers
 
Investors: Many investors want better deals than they can typically get from REOs because they are looking for deep, deep discounts. Let your investors know they can miss good deals if they offer too low a price resulting in them getting outbid. Good REO deals depend on the market the investor is dealing in.

First-time Home Buyers: Many new home buyers are also interested in REOs. If they have a specific location in mind, they know it's easier to change the house than the location, making a REO a good option. Don't forget that these buyers of REOs need a cash reserve available to make the needed repairs.

Purchase and Renovate Loans

Two primary types are:

203K FHA Loan

Wells Fargo Purchase & Renovate Loan

Both offer money for the purchase of the home as well as for renovations needed at the time of purchase.

Benefits to these Loans

The borrower has only one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property.

The mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work.

The interest on the cost of the property improvements may be tax-deductible.

Buyers using these types of loans have the luxury of being able to begin renovations immediately.

A REO is Sold "As Is"

Many buyers don't understand what it means when REOs are sold "as is". Typically with REOs the lender will not be fixing up the property, which may or may not need repairs.

Buyers also often misunderstand the "as is" concept and incorrectly assume:

The potential buyer will not get an inspection on the property.

The property has serious issues.

A buyer almost always has the right to an inspection of the property, usually within 10 days of an offer being accepted. The buyer can then cancel the offer if something out of the ordinary is discovered during the inspection such as a damaged foundation or anything else severe that was not previously known about the property. REOs tend to need work, but there may or may not be serious damage.

How Banks Sell REO's

Each lender has a different process, yet all lenders want to get the best price for a REO and have no interest in getting rid of their properties cheaply. Generally, banks have an entire department set up to manage their REO inventory.

Once you turn in your offer, banks may present a counter-offer. It may be at a higher price, but lenders have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible.

The offer will then have to be reviewed and approved by several individuals and companies. Even after an offer is accepted, the bank may insert wording like “...subject to corporate approval with 5 days."

The REO Process

The Offer: The Lender will require that you sign an addendum. Lenders generally won't allow revisions to the addendum and require it be accepted as written except for a counter offer regarding price. In this addendum lenders sway the terms and conditions in their favor including the right to sell the property to another buyer even though the buyer is under contract with them. Buyers need to know this is a potential problem upfront and must be emotionally ready for another buyer to come along and take the property just prior to closing.

Escrow Deposits: It is not unusual for the lender to require the deposit to be held by an attorney, Title Company or an escrow company.

Title Search and Due Diligence: Start the process early. Make sure the lender has legal possession of the home and that there are no outstanding liens that could become your clients’ problem.

The Auction Process: Buyers should be aware of the process of buying at auction. Review the pros and cons.

Maintain Loan Commitment: Sometimes it becomes necessary to update your loan commitment due to unforeseen delays in closing. This is a stressful, annoying situation, but I emphasize that it is part of the process.

Obtain all Releases at Closing for Clear Title: Even after closing, the buyer of a foreclosed home can be liable to outstanding liens of the previous owner. Do some due diligence in making sure that the home conveys with a clear title. This can be alleviated by having an attorney handle the transaction.

Buyers of REOs

Before you consider the purchase of an REO property, make sure you have:

Patience: Closings could take extra time if the lender is not organized. If the seller has multiple loans on the property, expect the closing to take a little longer.

Stamina: The offer(s) you make could be out-bid by a higher offer, beat by a lower priced cash offer, beat by an offer from a buyer who is using the same bank for their new financing, or beat by an offer with some terms the bank finds more acceptable.

No interest in the home's background: With REOs, there is usually little information about the property and no seller disclosures. The previous owners and occupants have been removed. The bank likely has no details about the condition of the property or any problems that need to be remedied. This is a risk with REOs.

No phobias about gross stuff: Who knows what was living in the REO. There could be birds or wild animals building nests in the attic or garage. If you don't mind a big mess, that's a good thing. REOs are sold "as is".

A knack for fixing stuff: The physical condition of REO properties tends to be worse than short sales.

Extra money: REO buyers are so focused on getting a deal that they don’t think past the aspect of saving money on the acquisition of the property. This is a huge pitfall of buying these types of distressed properties, and unfortunately, far too many buyers have seen the “profit” they made at the time of purchase devoured by the cost of fixing the property. Purchase and renovate loans are a good option and an inspector may be able to uncover additional costs.

REO Buyer’s Checklist

 

Use the checklist here to make sure you are a good candidate for placing an offer on a REO. You’ll want a “YES” for every question listed here.