The Popular Word in real estate investment today is REO (Real Estate Owned), or Bank Owned Properties. The supply is great; the buzz is hot; there must be fortunes to make! It’s true that great deals can be made by buying bank owned properties but there are some things you might want to consider before running headlong into the REO market.

When are REOs the Right Choice?

 The basic markets for buying real estate include ·         The traditional owner-buyer contract·         Mortgagee (lender) auction  – Foreclosure·         Sheriff’s Auction (for property that is delinquent in property taxes most often)·         REOs-buyer contract·         General Auction

REO vs. Foreclosure

An REO is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. These days foreclosed properties rarely have the equity to satisfy the loan. If there was enough equity the owner would probably have sold the home and paid it off. Instead it ends up in a foreclosure or trustee sale. At the sale the mortgagee (or trustee) sets a minimum bid that includes the loan balance and other fees, charges, and interest. So the starting bid can often be cost prohibitive. Additionally, the property is purchased in “As Is” condition meaning any defects, violations or liens attached to the property can become the responsibility of the winning bidder.Since the amount of the opening bid is usually higher than market and since there are significant risks in acquiring property at auction, foreclosure auctions rarely result in a successful sale. In the case that the auction does not culminate in a sale, the property “reverts” to the bank. It becomes an REO, or “real estate owned” property.

REO Properties For Sale

 Once the bank owns the property the mortgage loan is removed. The bank will prepare the property for sale by evicting any tenants, addressing (as possible) any liens and violations, and sometimes even making repairs so that the purchaser of the REO property will be able to finance the sale, inspect the property, and purchase a title insurance policy. The list price of an REO is usually set by the bank based on the opinion of the listing broker and the broker’s price opinion that was completed on the property before listing. While the price can be lower than market it might not be the amazing bargain you might expect. The bank must demonstrate to its investors that it took measures to get the highest price possible for the property.It is crucial that you research the price by gather information about nearby similar properties that have sold recently and adjust that amount by any repairs/renovation that must take place. If you are looking to buy, renovate, and sell this property you also need to consider closing costs of the purchase, AND the sale including tax stamps, legal fees, commissions, etc.

The Bid-Buy ProcessOnce you make an offer to purchase, the listing agent/bank representative must present the offer to the REO officer of the bank who usually makes a “counter-offer.” Negotiation can then continue until an agreement is made or either party stops the process.Your offer or counter-offer will be scrutinized as will your financial wherewithal to obtain financing. It can take several days and even then the acceptance can include an approval contingency like “subject to corporate approval with 5 days.”Inspection and Negotiation IssuesThe bank will almost certainly sell the property “As Is” but you still have the right to inspect the buildings for defects. It is important, therefore that you include inspection contingencies in your sale agreement. While the bank is not likely to agree to any repairs/improvements, you will have protected your right to rescind your offer if the inspection uncovers issues that make your purchase cost-prohibitive. I have had some success in getting banks to lower the purchase price to address major defects but the buyer must be prepared to cancel the sale if no such offers are made.

Making an Offer

The offer process for an REO is rather impersonal so it is essential that you anticipate any objections that the bank may have with your offer – ·         Include a pre-approval letter from your bank/mortgage company·         Remove or limit the number of contingencies in your offer ·         Offer the soonest closing date possible (confer with your financer to determine this date). 

You should also gather the following information from the listing agent:·         Has the bank done (or are they going to do) any repair work on the property·         Are there any inspection reports available?·         What kind of title is being transferred?

·         How long does the bank take to respond to an offer?

The Last Word 

This brief overview of REO properties and the process of purchasing them is designed to give you enough information to determine whether it might be an option for you. To continue your research, contact your Real Estate Agent or email me anytime!