I am considering buying an REO foreclosure home. Do REO foreclosure homes sell for less than regular homes?

Asked by Ali, 94087 Fri Feb 27, 2009

I am considering buying an REO foreclosure home. Do REO foreclosure homes sell for less than regular homes? If yes, how much less do they sell for?

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17
Voices Member, , Benton County, OR
Fri Feb 27, 2009
Some do, Some don't. Shop!!! Don't worry about %, worry about financing, getting what you want, time to buy/not time to buy, market, mortgage rates, price declines and being sure you end up in a better place than you started.

When you find your place, now/later come back and tell us what % worked for you and why..........

You might want to read this.....http://www.fhfa.gov/webfiles/1282/4q08hpi.pdf
From this site which you might want to review often if you want current housing market information...
http://www.fhfa.gov/
Good luck, Dunes
1 vote
Grace Hanamo…, Agent, Cupertino, CA
Thu Apr 9, 2009
Hello Ali and thanks for your question.

As of this date (April 9), there are 38 homes that are currently in distress in the 94087 zip code. None of these 38 homes are REO or bank owned properties. 9 of the homes are set to go to auction if the homeowner does not pay for the delinquent portions first, and the other 29 homes are all "preforeclosure" meaning that a notice of default has been filed against the homeowner.

Regarding your question about pricing, a bank owned property or REO home does LIST for less than the comparable homes in the area. How much less depends on several factors: 1) condition of the home, 2) comparables and 3) current inventory of foreclosures in the vicinity. There have been only a very few foreclosure properties in the better parts of Sunnyvale, Los Altos, Cupertino, Santa Clara, and West San Jose, but it has only been a few. In most cases, the homes sold for pretty close to market--I know because I have a client who is convinced we'll find huge bargains in REO properties in these areas, so far, we have not.

Outside of Santa Clara County proper, however, in areas such as Morgan Hill, Communications Hill in San Jose, Coyote Creek and parts of Milpitas, the pricing is a LOT more competitive, I recently negotiated a 20 percent DISCOUNT on the price of REO property in Morgan Hill and my clients are thrilled as they run around this enormous house!

The good news is that the homes in even the best neighborhoods have seen a drop in pricing of between 10-18 percent from the previous year, so there is every possibility of finding a great home in 94087 without having to find and then fix up an REO. I've recently blogged about what an REO buyer might have to experience in purchasing an REO home--it's a bit more difficult than purchasing a home from the homeowner and there are additional expenses involved that might not make an REO such a great bargain.

For more information, please talk with your real estate professional, and happy house hunting!!

Sincerely,
Grace Morioka, SRES, e-Pro
Area Pro Realty
0 votes
Erica Glessi…, Agent, San Jose, CA
Sun Apr 5, 2009
Dear Ali,
Here's the only rub with your search -- few homes in 94087 foreclose. It is a highly desired area with either Cupertino schools or Cherry Chase/Cumberland elementaries and Homestead High, for the most part. Much of it borders on Los Altos or Cupertino.

Foreclosures are caused when a seller falls far behind on payments and cannot or chooses not to sell. I recently sold a short sale home (where the seller was six months behind) in 94087 (1278 Parkington) and my listing had the dubious distinction at the time of being the ONLY short sale on the market. It sold within a few days.

I have clients now searching in 94087, we've been looking hard since Thanksgiving. One foreclosure went on the market since that time for their specs (about 1800+ square feet) and it sold for well into the $900K range over in the nice area behind 85.

Here is the breakdown of current foreclosures in Sunnyvale (for homes and condos)
1-One available in 94087 on Dawn. Only cash for this duet of homes with one built fully w/o permits.
2-5 in 94086, many of them condominiums
3-7 in 94085
4-5 in 94089
Plus 4 mobile homes in various zips that I didn't integrate, and a few commercial offerings.

This a pretty common scattering although I was surprised by the number of foreclosed apartments or condos in 94086, a very nice area except Santa Clara Unified is not as desired as Cupertino or 94087 elementary and high school districts.

Good luck!

Erica http://www.EricaNelsonEstates.com
408-416-7090 http://www.EricaNelsonEstates.com
408-416-7090
0 votes
Crestico Rea…, , Los Angeles County, CA
Sat Apr 4, 2009
Dear Ali,

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!
Web Reference:  http://www.crestico.com
0 votes
Norman Aless…, Agent, San Jose, CA
Sat Feb 28, 2009
Hi Ali,
The other realtors have given you the answers to your questions I would like to add that in order for you to really know the answer to that is to set up 2 searchs one for reo's one for regular sales and also a 3rd search for sold homes in your price range and area (you can easily do this on my web site). This way you will see for yourself and when a good deal comes along you will KNOW IT and can move with speed, other wise you wouldn't know it was a good deal and pass it up. I've had my buyers do this with very good results and happy clients.
Hope that helps, feel free to contact me with any questions.

Regards,
Allyson
(408)705-6578
allyson@homesbyallyson.com
0 votes
David Allen…, Agent, Sunnyvale, CA
Fri Feb 27, 2009
YES they do. The banks wants these homes off their books as soon as possible. Usually priced at a better than fair price. Remember trying to low ball a REO will almost always get you no where.
If you would like to have a list of foreclosures email me at the site below. I can help if you wish. If you just have questions about the stages of foreclosure please ask me. I can assist you without any obligation to use my services. I also was born and raised in Sunnyvale so I know the area like the back of my hand.
David Rivas
ultimaterequest@sbcglobal.net
(408) 431-7202
0 votes
Marcy Moyer, Agent, San Ramon, CA
Fri Feb 27, 2009
Ali,
In general banks do list their properties lower than comps in order to generate offers. The problem is that it often will generate multiple offers as CJ said. Getting into a bidding war has drawbacks as far as price goes, but there are other issues as well. Banks will often counter with onerous terms, like shortening the time for inspections to unrealistic lengths, or charging very high per diem penalties if you can not close on time. So if you do buy an REO home it is important that you understand not only the price of the home, but all of the terms of sale as well.
If you go to my website http://www.marcymoyer.com and click on the link Distressed Property Sales you can read an article I wrote about the basics of these types of sales.
Web Reference:  http://www.marcymoyer.com
0 votes
David Chambe…, , Saint Petersburg, FL
Fri Feb 27, 2009
You need to find the value for the individual home you are buying, not just a perceived value. Do your homework and pick a good value if it turn out to be an REO then be prepared for that type of transaction.

David Chamberlain
http://www.floridadreamloans.com
https://www.floridadreamloans.com/LoanModifications
0 votes
Andrea Wince…, Agent, Milpitas, CA
Fri Feb 27, 2009
Typically, REO's sell for less. REO's and short sales make up the majority of homes listed today so that's most of what you will have to choose from. The banks have been discounting their properties for months, one of the reasons why home values have deteriorated. The average "normal" seller must then discount his property accordingly as the REO's are a major competitor. Be prepared to do a lot of work on the property. Although discounted, they can have major deferred maintenance and some problems. Just make sure you have an inspection contigency in your offer and get a good home inspector to check out everything thoroughly.
0 votes
Arn Cenedella, Agent, Greenville, SC
Fri Feb 27, 2009
Ali
lots of useful answers and i agree.
REOs will sell for less. I always recommend my buyers go after REOs as opposed to short sales or normal sales.
as Dave noted, condition of these house is often poor and REOs do not provide typical seller disclosures.
as long as you take that all into account in your pricing decision you will be fine.
i think it is an excellent time to buy as long as you buy within reaosnable financial limits - do not over-extend yourself.
0 votes
CJ Brasiel, Agent, San Jose, CA
Fri Feb 27, 2009
Ali -

The agents below have given great answers. To add another perspective on why REO...

The answer is YES, in general. Listing agents for banks tend to price aggressively and lower the price consistently until they find a solid offer. The more important strategy is how you and your agent will manage the offer if there are multiple offers. You have to be clear on what you see as the "value" of the home and set your limits clearly with the help of your agent. I have seen buyers get into bidding wars for many emotional reasons and end up paying more for the home then they might ought have. But if they are happy? Then does it matter?

Whether it is a short sale or REO, patience and the clearest view of value wins out. The market is very dynamic and it takes homework, and a strong negotiator, on your behalf, from your agent. I would also add that if you find a private owner with equity, you can many times get a lot more for your dollar (repairs, closing cost paid, etc).

One of the first priorities to establish - are you looking for a deal or a home? From there, go shopping. You may change your mind either way about what is ultimately important. I believe there is a lot of pressure on buyers when their friends ask about their recent home purchase. Everyone wants to be able to come off as a savvy purchaser, taking advantage of a down market, and reply, "Yeh, I got this great house for X dollars under market!" It is possible, but not always true.

Good luck!
CJ
Web Reference:  http://www.TalkToCJ.com
0 votes
Vinicius Bra…, Agent, Cupertino, CA
Fri Feb 27, 2009
The simple answer is yes. REO homes do sell for less than regular listings for the various reasons that my colleages have stated below. You have to remember the reason why property values have dropped so much is due to the pricing preasure and inventory of REO homes. So depending on which area you are considering buying there may not be many REO homes to choose from and therefore the deal may not be as good as you probably hoped.

Plus REO's are exposed on the open market and MLS and it will more often sell for what the market will bear, sometimes in multiple offer situations. Although you get a better price, its not the steal that buyers initially expect.

What I am noticing now is if you can deal with the wait and uncertainty of a short sale you can most likely get a better deal from buying a short sale. Many agents are still steering their clients away from them, and they are becoming more viable as banks are being pressured to prevent foreclosure.

Be sure to read this post about buying an REO it will show you what to expect:
http://santaclaravalleyliving.com/listings/bank-owned/so-you…
0 votes
Bill Eckler, Agent, Venice, FL
Fri Feb 27, 2009
Ali,
Several years ago buyers found sought our FSBO properties because they were identified as opportunities that offered buyers savings.

With the market changes that have been occuring saving opportunities are now realized in transactions that involve "short sales" and "foreclosures."

So generally speaking, you should expect to be able to identify substantial savings when dealing with a REO property purchase. The support of an experienced agent will insure you clearly understand local property values relative to the current market, making sure you get the value you are looking for.

Good luck
0 votes
Bill Mccord, Agent, San Jose, CA
Fri Feb 27, 2009
Good morning Ali,
Just one thing to add to the concerns raised by Dave. There will be no Seller disclosures as the Bank has no experience of the condition of the property, or of neighborhood problems. Therefore it is more important than normal to be working with a good Realtor who can make sure you have all relevant inspections done, and will explain help you understand the implications of signing the Sellers Contract and addendums.
Given that the property will almost certainly need work before moving in you will also probably need help estimating the costs of such work.
Often the work required is such that your appraisor makes note of it in the report. In this case your Lender may require it be fixed before making your loan. The Seller will not be willing to do this, so you will need to find a loan that allows for such a situation. The only one I am aware of is the FHA 203K program. You should certainly investigate this type of loan if the property is in bad shape. In such a case you will need to be sure your Loan Agent is experienced in doing Government Mortgages which may take as much as 60 days to complete.
None of this should put you off the REO strategy but be sure you are working with an experienced Realtor, and Loan Agent.
Good luck, Bill
0 votes
Caryn Becker, Agent, Colorado Springs, CO
Fri Feb 27, 2009
HI Ali, every area is different. I guess from your zip code you are west coast. In Colorado Springs, bank REO's sell about 10% below market. You didn't mention whether you are using financing or all cash. That matters as well. If you are buying cash, you can get an even better deal. If you need help finding a good Realtor in your area to answer that question, let me know, I can help. REO's do sell for less because banks are in the business of loaning money, not owning real estate. Keep in mind that the inspection process is more expensive because the house is winterized. And, most important, banks will not make repairs.
0 votes
The Medford…, Agent, Fremont, CA
Fri Feb 27, 2009
Ali:

Good question. The answer is “maybe.”

Banks want to get rid of REOs (foreclosed homes) within 30 days, so they incentivize the price. In addition, many REOs are distressed in some way and therefore will automatically be sold for less than a property in stellar condition.

Whereas a bank wants to cut its’ losses and move on, normal homeowners tend to want to get as much as possible for their homes. Therefore, most normal sales tend to go on the market higher than REOs. BUT … you have to keep in mind that most normal sales are in way better condition than REOs, so the market price may actually not truly be “higher” once you factor in condition.

To add confusion to the entire mess, you have to factor in short sales. Whereas a bank wants to dump an REO very quickly, they want to retain short sales on their books. Short sales can take up to six months to complete and may, in fact, never close. For this reason, listing agents for short sales tend to put their short sale listings on the market at prices significantly under market value to entice potential buyers to “bite.” These artificially low prices affect everything else on the market. REO listings will sometimes use short sale listings as comps to justify a market price and will come on the market lower than the short sales.

Once an REO comes on the market AT ANY PRICE, that’s the new price point any normal seller has to compete with if they want to sell. If a normal seller does not compete with REO pricing, their home will typically sit there a long time. The dilemma for normal sellers comes from the fact that even if they get an offer much higher than a comparable REO, an appraiser will use local REOs for comps to establish an appraised value. In other words, the appraiser WILL NOT discount REOs on their appraisals – they view them as s sale, period. If a normal sales gets an offer above the local market value (regardless of how the value was set – REOs, short sales or normal sales), the home may very well not appraise and the price will have to be lowered down to market value.

Bottom line, even if a normal seller wants to list their house higher than REOs, it’s not the seller who ultimately sets the price: it is the buyer and the appraiser. Smart sellers know this and will price accordingly. Lastly, whereas you can never negotiate repairs with a bank for an REO (always purchased "as-is"), motivated normal sellers will often provide repairs to sweeten the deal.

Here are some links that may clarify things for you:

http://www.trulia.com/blog/carl_medford/2008/11/what_do_reo_…
http://www.trulia.com/blog/carl_medford/2009/01/lookin_for_a…
http://www.trulia.com/blog/carl_medford/2008/12/when_does_a_…
http://blog.homegain.com/home-improvement/no-stage-no-play/

Hope this helps.
.
Web Reference:  http://www.carlmedford.com
0 votes
David Blockh…, Agent, Los Altos, CA
Fri Feb 27, 2009
A bank owned home typically sells for less than what was owned on it before it went into foreclosure. The bank ended up taking it back and then has to resell it. Banks usually want to get the home off their books quickly so they tend to sell at a discount when compared to a regular listing on the MLS.

But they also have their problems. They are typically sold "as-is" and the banks may require the buyer to use the banks contracts (which are not buyer friendly). The houses can also be in disrepair.

There is no set amount "below market" that they sell for because each property is unique.
Web Reference:  http://www.losaltoshomes.com
0 votes
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