Now that you know short sales, let’s get you up to date on the other popular distressed sale, REO’s.
What is an REO?
REO stands for Real Estate Owned. This means it is real estate owned by a bank or lender. REO is essentially the last step in the foreclosure process.
In California, trust deeds are used as opposed to mortgages. When a borrower falls behind on their payments to the lender, the lender starts the foreclosure process. After proper notice and time, an appointed trustee holds an auction to sell the home, the proceeds of which will be used to pay the lender back.
If the property does not sell at the trustee’s sale, the lender takes ownership and the property becomes Real Estate Owned by the lender, or REO.
Pros of Buying an REO
- Price – REOs can be an incredible value. REOs can be priced well below market value.
- Bank Owned – Foreclosure is complete so the approval process will be much quicker (as opposed to a short sale).
- Liens – The foreclosure process will wipe out almost all liens, except tax liens which will be paid for by the bank.
Cons of Buying an REO
- You Get What You See – REOs have typically been neglected for years by a delinquent homeowner and could possibly have been sitting empty for many months. Properties fall into disrepair quickly. Banks are typically unwilling to make repairs to the property, so what you see is what you get.
- Hidden Expenses – Normally, when homes are sold, the sellers have to disclose all known defects of the home. However, when the seller is a bank, the manager of which has probably never been to the home, they cannot disclose these material facts. There may be significant unknown defects of the home or troublesome neighbors that could lead to some unknown expenses. Make sure and get a home inspection so you know what you are getting into.
- Competition – REOs are becoming few and far between and most buyers want them. This can drive up the price or create bidding wars. We recently listed an REO that brought in nearly 20 offers and sold for more than $20,000 above list price.
- Occupied Properties – If the property is occupied, it could be costly and timely to get them out
Still Considering Buying an REO?
Do you think the pros of buying an REO outweigh the cons? If you do, then you are like a lot of people out there. Make sure you consider everything before buying an REO. Work with an experienced REO Real Estate Broker. These brokers know the banks involved, they know the systems they use and more importantly, they know how to get the REO deals done.
Banks like REO deals to be clean and simple. They do not want to see an offer full of contingencies and with little money down. They have already lost a lot of money on the property and want out with as much cash down as possible. Your broker will be able craft an offer that is attractive to the bank, while still looking out for your needs.
Make sure you get a home inspection. REOs are exempt from some of the most important disclosures, the Transfer Disclosure Statement (TDS) and Seller Property Questionnaire (SPQ). These documents disclose everything about the property like if there is a leaky roof, if the plumbing is shoddy, if there is a bug in the electrical system, if the HVAC is constantly malfunctioning, etc.
Get a good home inspection done. It’s unlikely that the bank will do anything about it, but at least you will know all the issues you need to repair after you buy it. Knowing is half the battle, because it at least allows you to plan for the expenses.
➡️ Chapter 32: Not All Distressed Property Sales Fit The Stereotype