What is an REO? REO means Real Estate Owned. Everyone is talking about REOs these days. But before you consider buying one, there are a few things you should know about REOs. These properties are generally owned by banks, credit unions, mortgage companies and sometimes private companies. It has become increasingly common for the news to report foreclosure issues and homeowners losing their houses and other effects of the mortgage crisis. As a result there have been dramatic increases in the marketing of REOs to the general public. 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!
With the right amount of patience and knowledge and the care of a Crestico Agent, buying an REO will seem like a breeze. We have agents that specialize in purchasing REOs. When you work with a Crestico Agent, he/she works for you to get all the experts you need! From inspectors, to title searches to appraisers, your Crestico Agent takes care of it all for you!! Call us today!
I like many others these days have a great many buyers looking for "foreclosures" these days, but that term doesn't really mean much. What they're really looking for are "deals" and as many bank owned and short sale homes are being sold at deep discounts this often leads buyers only to look for distressed properties. Bank owned homes, or REOs, fall within this foreclosure or distressed category. Unlike short sales, or notice of default situation, REOs are fairly straightforward with the bank acting as a seller would in a more traditional sale. As this is the case REOs don't generally take nearly as long as short sales and can be great opportunities to find a good home at a great price. The downside is that a bank will generally require that you sign something stating that they know little to nothing about the house and they will provide you with no disclosure information so it's entirely up to you and your realtor to do all of the necessary investigations and inspections to make sure you're comfortable with the home.
Please see below Q & A regarding REO transactions published by California Assocation of Realtors Legal Department.
Q 1. What is an REO?
A An "REO" is a commonly-used acronym for "real estate owned" by banks. Instead of an individual person or persons owning the property as in a typical resale transaction, a bank owns the property instead. The bank typically acquires title to its REO properties through the foreclosure process. However, REO properties may also be acquired through other means, such as a deed-in-lieu of foreclosure, tax sale, or corporate housing.
Q 5. What are the general characteristics of an REO transaction?
A Providing the general characteristics of an REO transaction may be a disservice to REALTORSÂ® because there are always exceptions to the rule. However, providing a general understanding of REO transactions may help REALTORSÂ® manage their expectations. Some of the major distinguishing characteristics of an REO transaction are as follows:
Â· Lower Price: First and foremost, an REO property tends to sell for a lower price than other comparable properties, depending on local market conditions. That?s precisely what generates so much public interest in REO properties. Some experts, however, consider the discounts to be limited, especially given the possible distressed nature of REO properties (see Question 7).
Â· Bank Representatives: The seller in an REO transaction, the bank, acts through its employees and representatives. An REO lender may outsource the management and disposition of its REO properties to asset management companies (see Question 6). Unlike other sellers, the REO employees and representatives have not occupied the properties, and have no emotional attachment to the properties they are selling. The REO properties may be generally characterized as unwanted assets, although the banks want to demonstrate to their investors that they sold these assets for the highest prices possible. Indeed, because REO lenders and their asset management companies have a lot of inventory to sell, they possess certain leverage when negotiating listing and sales agreements.
Â· Timing: An REO transaction is generally more cumbersome and takes a longer time to process compared to other resale transactions, from negotiating an accepted offer to closing escrow. Whereas other resale sellers may be able to answer questions instantaneously, a question posed to an REO lender may have to go through the asset management company and several levels of approval at the bank. And they don?t work evenings or weekends.
Â· Transactional Features: An REO listing or sale has many transactional features that differ from other resales. For example, an REO lender may want to use its own forms, such as its own status reports or sales agreements (see Questions 40 and 43). An REO sale has its own set of disclosure requirements (see Question 30). An REO lender may offer attractive loan terms to help its buyers finance their purchase transactions.
Q 7. Why are REO properties sometimes characterized as distressed properties?
A Some REO properties are no different than other properties for sale. However, REO properties may be distressed as a result of simple neglect, intentional vandalism, or both. As for neglect, before an REO lender even takes over a property, the previous homeowner was likely to be experiencing financial difficulties, and thus also likely to have foregone ordinary maintenance and repair of the property. As for intentional vandalism, when some homeowners lose their properties through foreclosure, they have been known to take their anger and frustration out on the property. They may strip a property of its fixtures, cabinets, appliances, and even copper plumbing, as well as damage the property by smashing out the walls, breaking window panes, pouring cement down the toilet, or flooding the property by leaving the faucets on.
Things may not improve when the bank takes over the property. An REO property may sit vacant for many months with the utilities shut off, which makes it susceptible to further neglect and vandalism. Even absent any neglect or vandalism, there is the possibility that a piece of property posed such serious issues for the previous homeowner (e.g., significant structural defects or neighborhood problems) that, coupled with market conditions, the previous homeowner purposely decided to get rid of the property through the foreclosure process.
You should consult with a local realtor to assist you of a REO transaction.