What is a REO

At the post-foreclosure, the property has been foreclosed and taken back by the lender. These pieces of property are known as “real estate owned” or REO. The easiest way to buy foreclosed property is by buying REOs. These “real estate owned” homes always have a clear title, which saves time, expense and general worries about foreclosures. Also, the lender or bank will most likely pay the property taxes in arrears (an unpaid debt). The lender may either repair the property or give a discount to the buyer to make repairs.
We have all seen late night infomercials joyfully telling us how to buy foreclosed properties from banks. They explain how the banks are so eager to rid themselves of this property that they are willing to sell for much less than market value. You will supposedly be helping the bank with their real estate problems and make a “killing” in the process. Happy millionaire couples are then shown in their mansions or on their yachts which they supposedly purchased with the real estate profits they made from the banks.
Real estate property owned by banks (REO) refers to a property that has gone through the foreclosure process. The bank or loan company has foreclosed on the property and it has reverted back to the lender. Any attempt to sell at pre-foreclosure or foreclosure auction has failed.
When the bank owns the property, there is no longer an existing mortgage loan. If the property is still occupied, the bank will handle the eviction process. However, if you buy the property and wish to allow the previous owners to remain as rent-paying tenants, you are free to do so. The bank will also pay off any amount due to homeowners associations. In addition, they will negotiate with the IRS for removal of taxes owed.
However, REO purchases should not be considered free of risks. The bank may make some minor repairs but in the majority of situations, the property will be sold in an “as is” condition meaning it will remain in the condition it was in when initially repossessed. Considering that the prior owners obviously had financial difficulties for at least three months, potential buyers of REO should keep in mind that any major repairs needed would not have been done during this time.
Consequently, it is important to have the property inspected by a professional to find out its actual condition and market worth. A comparison market value should be carried out. You should also keep in mind the amount of money renovations will cost you to add to the amount of the purchase price to the bank.
Do not be fooled by the myth that REO’s are great bargains! Banks have to answer to shareholders and have no desire to quickly get rid of a foreclosed property at a low price.
If you are satisfied with the information provided by the home inspector, now is the time to make an offer to the bank. It is important to include a Section 1 – Pest Certification – to be sure there is not a termite problem on the property. The bank will probably not pay for it but if all inspections are not completed by the time you make your offer, your offer should include a contingency clause that allows you to terminate the sale if unanticipated damages are found – within a specified period of time – that the bank will not correct.
Additionally, banks do not usually provide financing on their REOs. However, it would be especially helpful to obtain bank funding if there was extensive damage to the property they are selling “as is”.
If, based on the information you have received from inspection reports, you are satisfied that the market value of the property meets your expectations and you have made an initial offer to the bank, be prepared for them to provide you with a counter-offer. The usual procedure for the industry is for the bank to ask you for a higher price than you have offered. If you are willing to pay the higher price and accept their offer, the bank will then draw up a contract. As with all legal documents, it is important to have the contract checked by your attorney.
Remember that banks are closed on evenings and weekends. They usually have a department of 3 to 4 people devoted especially to REOs and decisions are not made as quickly as we would like.