For those of you that are still wondering what an Reo is, here's some education.
REO stands for Real Estate Owned and is the term used to denote a property which is technically owned by a mortgage company usually after a failed foreclosure auction. REO properties are numerous since most foreclosure auctions do not get any bid. The reason behind this is that foreclosed properties are low in equity which is the reason why they are foreclosed in the first place. If a property has enough equity, then the owner would have had sold the property and just paid off the mortgaging company.
Foreclosure auctions are not so popular for a reason. A property being auctioned off starts with a minimum bid covering the loan balance, accrued interest and other costs that may arise from the auction process. This means that in some cases, you will be forced to buy a property for more than its worth. Another thing about foreclosure auctions is that if you won the bidding, you will get the property in an "as is" condition meaning anyone still living in the property is now your responsibility. This also covers any liens or claim on the property.
With most properties having less value than what is owed a mortgage company, they more often than not result in no-bid auctions. These properties then go back to the bank or any mortgage company as "real estate owned" properties.
REO Properties For Sale
After the property "reverts" to the lending company, they would have to get the most out of it by selling them off. To make it more attractive to buyers, banks take certain actions like evicting squatters if necessary, and even make some minor repairs if also needed. They could also settle any liens against the property. This means that a buyer purchasing an REO property would get a better deal than what they would have had if they won the same property in a foreclosure auction.
You should keep in mind that bank owned properties are not bargain properties. Therefore, it is always important that you cover all the bases and check all things in connection with the property. When doing the check you should also include what you would spend for renovation if necessary. Make sure that the money you will pay is commensurate to what you will be getting. Do not be misled by the old myth that foreclosed properties are great bargains.
How Banks Sell REO's
Obviously, banks or any lender for that matter would try to get the most money out of any property. After all, they are in the business to make money. Although they have different methods, the goal is to make the most out of any REO property. This means that they have no intention whatsoever of bargaining off any property if they can help it.
When you make an offer for an REO property, bear in mind that the bank will more often than not have a counter-offer. This is because they want to get the most out of the sale of the property. Thus, it is important that you be ready with your own counter-offer.
Any offer made will be scrutinized not only by a person in the mortgage company. Several individuals will look into it and that is the reason why lending institutions have a dedicated team working on REO inventory. Remember that even if your offer is accepted at once, most companies would subtly add terms pointing out that said acceptance is still subject to corporate approval.
Property Condition
Since banks want to make the most money out of a property, they would likely sell an REO in an "as is" condition. This means they would not be shelling out funds for repairs or to settle any liens against the property. If you include in your offer that they provide a Section 1 pest certification, most would give it to you. Banks would also allow you to inspect properties but at your own expense. Do not expect though that they would agree to shoulder some repairs before selling you the property.
To cover your bases, you should submit an offer with a clause that would allow you to back out of the sale if upon inspection you find unexpected damages which the bank will not agree on paying for repairs.
If you agreed that you will buy the property as is, take time to allow banks to pay for repairs. There would be times when banks would eat up a small loss to save the transaction than putting the property back in the market again. This is usually in the cases of properties which have been in the market far too long that its value is getting lower and lower.
Most banks would not want to see numerous proprietary disclosures. And since they are exempted from the California Seller's Transfer Disclosure Statement, real estate agents working either for them or for you, said agents are required to give you disclosure statements.
If you are planning to ask a bank for financing on REO properties, do not get your hopes to high. They usually don’t provide such service. In some cases though, it could happen especially if you are purchasing a property with extensive damage they are not willing to pay to be repaired.
Making An Offer
Prior to making an offer for an REO property, you should cover your bases which includes the following:
- Inspection reports, whether they the bank can provide them or not.
- Repairs that the bank will shoulder
- If the bank offers a special deal for "as is" properties
- The time it takes for the bank to reply to an offer
- The manner of which the offer is delivered to the mortgage company
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