Foreclosure and REOs can often be very tricky transactions. Here are some tips:
It used to be that you could barely get your hands on lenders' foreclosure lists. But these days, everyone is trying to sell REOs.
The people that are being marketed by these REO sellers are mainly first-time and minority potential homebuyers. Fannie Mae works with many companies to help these types of homebuyers realize the American Dream of owning your home using reasonable and affordable loans. There has been a shift in the industry from marketing REOs to those who "flip" houses to first-time homebuyers. The dramatic increase in foreclosures has left many lenders with high inventories of REOs, resulting in potentially advantageous opportunities for individuals who never has access before, to gain access to the real estate market. Additionally, the number of foreclosures is allowing simple real estate investors to diversify and expand their portfolios.
There are many laws regarding foreclosures and the process. Mainly, when the property is in the pre-foreclosure and auction stage, the bank (owner) is only legally entitled to its losses and expenses. This is to say that the bank (owner) is not entitled to gain a profit from the sale. This changes however, after the property has been foreclosed on it becomes an REO.
REOs are often considered to be fabulous starter homes because the sales prices for these properties is generally lower than that of a similar non-REO property. In today's market however, this may not always be the case. This is mostly due to the fact of the number of such properties in the market. Even though a property is an REO, it does not mean that the owner will not make a profit off the sale. Remember, after the foreclosure process, the REO owner is now allowed to make a profit, which may affect the sale price. A buyer will generally be more likely to get a lower price when purchasing a home in the pre-foreclosure or auction stage.
Let's say now you've decided you want an REO. You should know there are risks associated with this "great deal" you are getting. When considering your REO purchase, make sure you have access and contact information for various experts who will guide you in the inspection process.
You will need a Realtor, who can protect your interests and make sure you get the best deal possible. Your Realtor will be able to generate reports for you showing comparable sales prices which will enable you to assess whether the asking price for the REO you are considering is appropriate. There are some statistics that show the average price of an REO is 15 - 30 percent lower of comparable sales prices. However, there are REASONS for this.
REOs are sold AS-IS. This means that what you see is what you get. You will need a qualified home inspector to guide you with this step of your REO purchase process. Only a qualified inspector will be able to reveal latent flaws or issues that you will need to consider before you purchase the REO. You will need to factor in the costs of potentially repairing, replacing or rehabilitating the necessary sections of the property into the price you will be paying.
REOs take longer. When purchasing an REO, you are not dealing with Joe and Jane Smith homeowner, you are dealing with either a Bank or an Investment Company. The decision making and sale approval process in a business takes much longer than with individuals. It could take weeks to get an approval on your offer. Additionally, even though most banks will remove tax liens and occupants (if need be) from the property, in order to protect yourself, you should perform a title search. Now you may not personally be able to do this, which is why you will hire a company to perform such a search for you, and the results may take up to a week to review. Another potentially time-consuming process is getting an appraisal. As a buyer, you should not trust the seller's appraisal blindly, get your own! Any time or money you spend beforehand may well be worth it in the long run. You want to know that you are getting what you are paying for!
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Here are some specifics in regard to what we as home inspectors run into on foreclosed properties that are special to those types of properties:
1. It's common that the services are off at the property so we show up and cannot do a full inspection because of a lack of water or gas or electricity. Be sure to verify that the services are on before the inspection to avoid wasting a visit to the site and paying for an inspector to return another day.
2. Poorly maintained and deteriorated properties are found commonly. This is usually because the previous owners had run out of money and had no choice but to allow their property to go into a state of disrepair.
3. Sabotage and vandalism to the property are found many times. It is common to find holes deliberately made in the walls, torn up carpet, damaged kitchen cabinets and appliances, broken windows, doors, etc. Additionally toilets, garbage disposals, drains and sewer lines have been found to be deliberately clogged with concrete, gravel and other debris.
4. Components have been removed from the property. Costly items such as light fixtures, appliances, toilets, cabinets, decorative tiles, water heaters, air conditioning systems and pool equipment are taken. Copper water pipes and electric wiring have been stripped out of houses, apparently to sell for scrap.
5. Houses left vacant create special issues. Faucets in sinks, tubs and showers can become clogged with rust flakes and debris restricting the flow of water. Also, the rubber washers and seals in unused faucets tend to dry out and crack, so they often leak when turned on after sitting for extended periods of time. Sewer lines can clog soon after a family moves in because the hair, debris, toilet tissue and roots in the line that normally remain soft due to the daily flow of water through the drainpipes become hard and dry from non-use which causes slow draining and clogs when they are put back into service. Mold also is a common problem found in these homes.
I hope that this gives you some insight to the type of issues that you may run into. Keep in mind, that we do not find these in every case, but they are more and more commonplace.
feel free to check out my website to find out more about LaRocca Inspections and give me a call if you have any further questions that I may be able to help you with.
One other thing that I didn't see in the previous answers is that the Seller (the bank that owns the property) acquired the property through foreclosure, has no prior knowledge of the property history and is therefore exempt from providing the usual seller disclosures. The full burden of proof is on the buyer's shoulders.
I hope this is additionally helpful info!
San Diego Real Estate Specialist
Residential Sales and Appraisal
I would consider the cost to fix up the property as most foreclosures are not in the best condition. Be prepared for fast contingencies and a fairly harsh bank addendum (always good to use an agent experienced in foreclosure sales... I am in escrow on 3 foreclosures currently, and hopefully a 4th in the next few days). I'm happy to answer any questions you have regarding foreclosures and receiving updates about them in the area.
Keller Williams Realty