Foreclosure in Sonoma>Question Details

Jonathan, Home Buyer in San Francisco, CA

What does REO mean and what do I need to be careful of?

Asked by Jonathan, San Francisco, CA Wed Feb 2, 2011

I am looking at this property and concerned about the REO description. It looks like it just fell out of contract, and that it has sold like 4 or 5 times in the past 10 years.

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8
Hi Jonathan, I just bought an REO property in Sonoma. It was priced aggressively, they received multiple offers in the first week and I ended up buying it for about 4% over asking. If done correctly, I think it's a great way to get a deal in this market. Here are my recommendations:

(a) Get your financing in order -- sellers are very concerned that your loan is not going to get funded because banks are extremely cautious these days. To allay the seller's fears, I removed the loan contingency and got pre-approved by their lender even though I had my own pre-approval. I still had 30 days to close, so my loan got funded without any problems.

(b) Do your due diligence on price -- you have to know what the right price is for your home. Your agent can help, but it's ultimately your responsibility to protect yourself from overpaying and often agents will encourage you to increase your offer. You need to know the market and know the comps. Just walk away from a bidding war that goes beyond the price you want to pay. It should also go without saying that you need to find a great agent whom you trust.

(c) Do your due diligence on condition -- not all REOs are money pits, especially these days when there are so many on the market. I had three inspectors examine my house after the seller accepted my offer (one general inspection and two specialists). Spend the money on a thorough inspection because like others have said, you are getting the house "as-is" with no disclosures. Since there have been so many previous owners, one of them may have attempted some short-term fixes that may not be up to code.

(d) Do your due diligence on history -- you can go and visit the assessor's office in Santa Rosa where you can do some investigation on the history of your home. Who were the previous owners, how much did they owe on their loan, who is the lender, when did it go into foreclosure, were permits filed, etc. Also, you can talk to the neighbors -- they will know a lot more than you think!

Best of luck!
Dan
1 vote Thank Flag Link Fri Apr 1, 2011
Hi Jonathan,

You may be overwhelmed with responses to your question by now, but I'd love to chime in on this one. I wrote a no-nonsense article on this a few months ago. You can find it at http://lisathomas.com/re-radar/reos if you'd like. While I agree with many of the comments made by my colleagues I do not agree that these are necessarily condition-challenged properties or best for contractors, or even that you can't negotiate a significant discount off asking prices.

There are some excellent deals out there in bank owned properties, some of them are in quite good condition and REO pricing 'leads the market', i.e. is typically at least a little bit better than 'standard sales' (homes sold by a person who has equity in their home). Sometimes the deals are substantially better. Certainly you do need to have your eyes open and make very careful investigation of property condition. Each property must be evaluated as to its real market value, in light of its condition. And often the banks are not really savvy to how they should be priced.

Banks will usually pay for 2-3 Broker Price Opinions (BPOs) and take that advice, along with the listing agent's recommendation before setting the price. If you're looking at a standard residential home in a neighborhood, or a tract house, this usually gives a result which is pretty close to market value. When it comes to country property, this is NOT always the case. Sometimes the BPOs on these properties are way off base. Country properties are harder to value; agents who provide BPOs only get paid about $50 for their valuation. That is not a lot of money for the amount of work which needs to be done to accurately assess value on a country property. I have seen spreads of up to $300,000 on a single country property. In a case like this, your agent needs to be really expert in justifying the price you want to pay and a strong negotiator to get you the best deal.

Regarding a property that's fallen out of escrow and sold multiple times in the recent past... you really do want to find out why. Your agent can research the prior sales and speak with the agents who represented previous buyers to find out if there is anything ''scary" to watch out for. Sometimes, there really isn't a problem but this one sounds like one you should be very careful about.

Just proves that if you ask 10 people, you get 10 different answers, doesn't it?!

Best of luck with your purchase,

Lisa Thomas
707-579-LISA
0 votes Thank Flag Link Wed Feb 2, 2011
Hi Jonathan,
Let me Know if you want a list of REO properties, I am a RealtyTrac Broker with access to all REO properties nationwide.
Sincerely,
Pete Brocco
RealtyTrac Broker
(707) 571-8213
petebrocco@comcast.net
0 votes Thank Flag Link Wed Feb 2, 2011
Hi Jonathan: As Rachel said, REO stands for Real Estate Owned. It's an odd sounding term but it's what banks call properties that they are selling. I think buyers need to be aware of three major things. First, REOs are sold pretty much "as-is" with few exceptions. A significant number of buyers looking for good deals jump in without this understanding and when they realize that a given property is in very bad shape, they bail. That's why REOs sometimes go in and out of escrow before they sell. In many cases the best buyer for an REO is a contractor as many of these properties need a lot of work. The second thing is the banks are looking for quick sales of these properties and if you are a cash buyer with no lender financing who is able to close the deal in a week or two you have a good shot at making the purchase. The third thing...and probably the most important...is banks price these properties to generate a lot of interest...and as many offers as possible. So...it makes little sense to offer less than asking because your are in a competitive situation and the winner will be paying all cash, with a quick close, at a higher than list price. Hope this helps. I'm a Sonoma agent and if you want to chat you can reach me at 707.337.1182.

Best,

Kirsten Lindquist
Pacific Union International
109 East Napa Street
Sonoma CA 95476
0 votes Thank Flag Link Wed Feb 2, 2011
An REO is a bank owned property, a property that in all likeliness was foreclosed upon.
The pitfalls of these properties are usually the condition they are in. There is more than likely a good amount of deferred maintenance on the property. Often they have been stripped bare by previous occupants and in some cases vandalized. A prudent buyer will have any and all available inspections done on such property.
Another pitfall of REO's is that because they are usually priced very competitively for the market area, they often generate several offers, causing the final sales price to be a higher than the listed price.
Pitfalls aside however, these properties are great opportunities and a great place for many first time home buyers to get into the market where they are able to put in some sweat equity.
If you are looking at REO's in Sonoma Valley, I would love to discuss the pitfalls and and the opportunities with you in depth and in person so please feel free to call.
Ally May
Frank Howard Allen

allymay@winecountrygroup.com
0 votes Thank Flag Link Wed Feb 2, 2011
Jonathan,

REOs are properties that the bank now owns. These are different than short sales because the bank has already taken the loss, so if the property is listed the offer/buying process is similar to a regular sale, although there are some nuances to the process that you would be well-advised to have representation from an agent/broker who has done these kinds of deals. Also, these properties are exempt from many of the required disclosures in "normal" sales, so it is particularly important to have inspections.

Because banks are less likely to negotiate down for repairs, save major issues uncovered in the inspection(s), you'd be well advised to have an agent/broker who understands construction and can point out potential issues so you can incorporate those into the offer price as opposed to driving the price down later.

We do our own development projects and I used to own a construction supply company and several on my staff have experience as well, so if you want a consult on a particular property or just to get some more insight to the process our contact info is below. (although sonoma is not an area we regularly do business in we recently negotiated several hundred thousand dollars off a property there).

Best Regards,

Lance King/Owner-Managing Broker
lance@fixedrateproperties.com
415.722.5549
DRE# 01384425
0 votes Thank Flag Link Wed Feb 2, 2011
Hi Jonathan,

REO means Real Estate Owned, in other words, that it is owned by the lender. Usually lender-owned properties are priced well compared to recently sold properties that were traditional sales. What you should be concerned about is that oftentimes the lender will not honor repair requests, however your home inspector will alert you to any problems so that you are well aware of issues that you may need to address.

Another thing to be aware of is that lenders typically do not provide seller disclosures, as they never lived in the property. Again, your home inspector should be able to point out potential defects or issues that need to be addressed.

Other than those issues you should have a pretty standard transaction with REO properties.

Best of luck,

Rachel LaMar, J.D.
LaMar Real Estate, Inc.
Web Reference: http://LaMarRealEstate.org
0 votes Thank Flag Link Wed Feb 2, 2011
It appears my link got deleted. It was this property:
http://www.trulia.com/property/10424344-18762-Gillman-Dr-Son…
0 votes Thank Flag Link Wed Feb 2, 2011
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