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.