Questions About REO's

*Below are questions and answers to some of today's real estate terminology and market questions:

Q: What is an "REO" or bank owned foreclosure?
A: An REO (Real Estate Owned) is real estate owned by a lender. Many buyers consider REO properties to be great opportunities. Lenders are in the business of loaning money and don't want to own properties any longer than they absolutely must. Therefore, they generally place REO properties on the market at liquidation prices. This creates fabulous opportunities for people wanting to purchase a home at a great price or for investors looking for the chance of obtaining a great return on their investment. Not every REO is a good deal, but when you look at an REO you’ll commonly find that there is a lot of money to be made. 

Q: So, is an REO a foreclosure?
A: Technically speaking, the home was foreclosed on because the owner of the home failed to make their scheduled payments. The bank set up and went through a public auction, but was unable to find a successful bidder, so the bank took title of the property. Yes, the home was foreclosed on, but an REO is well past the foreclosure process. The lender is not in the real estate business and vacant homes lose value quickly. Banks are generally anxious to sell REO properties.

Q: Advantages of REO vs. Property in Foreclosure
A: There are many distinct advantages in purchasing an REO over attempting to buy a property that is in the foreclosure process. One of the biggest advantages is that the property can be purchased on the buyer's schedule. There is no waiting for the auction date, which may or may not happen--sometimes the current owner of the property will bring their loan up to date prior to the auction. Other issues are; large cash deposits are required at most public auctions and the balance of the sale price must be paid within one or two business days. This alone eliminates many potential buyers, since most lenders take several days if not weeks to fund approved loans. Even for cash buyers this can create problems. A single day’s delay in obtaining funds could cause the forfeiture of the bidder's deposit. Nearly all properties being auctioned are sold "as is." Scheduling inspections is difficult and expensive, especially when a bidder has no assurance that they will be the successful buyer.

The biggest advantage to purchasing an REO is that time is allowed to have the property inspected before the contract is finalized. Purchasing an REO is very much like buying a home from any other property owner. That is, there are inspection periods and time to arrange and fund loans. Generally the banks owning the REO takes longer to respond to offers, since the offer has to be approved by an organization and not a single person. Most of the time, decisions on REO purchase offers are made within a couple of business days. Normally banks sell REO properties “as is.” They assume the repair costs are built into the asking price. However, when serious problems are discovered during inspections the repairs may be negotiated.

There are many different types of foreclosure and the answers above are not intended to cover them all. For example, Judicial and Tax Foreclosures can be very complex and require years before exclusive title may be granted. *See disclaimer below.

Q: Does the Lender Owning Make a Difference When Purchasing an REO?
A: Short answer--Yes.

The type of loan used originally to finance the REO can be very important. An REO originally purchased using a conventional loan will often sell at a lower price and with a much simpler process than FHA and VA loans. The federal government backs FHA and VA loans. For Federal agencies there is no sense of urgency for getting their capital back into circulation. Dealing with the government can be a slow frustrating process.

On the other hand; conventional lenders earn their income from lending money and making loans and not from investing in real estate. They want to sell properties they own as quickly as possible so that they can get their capital back into circulation. There is also the consideration of mortgage insurance claims, which may not be settled until the property is sold by the bank. Keep in mind, a bank can loan up to ten times what they hold in capital reserves. This means that for every dollar they have is reserve they can loan and earn fees and interest on ten-dollars. This is why they want to sell real estate holdings as quickly as possible. This urgency to convert real estate to cash often equates to bank owned properties being priced at a fraction of their market value, meaning that they can make very attractive pricing for a home buyer or an investor wanting to make a lot more money.

Q: Buyer Beware: REO’s that Should Not Be Purchased?
A: Just because the bank owns a property does not make it a good deal. In fact, most REO properties are likely to have some problems. Did the previous owners damage the property because they were upset by the system that caused them to lose their home—did they take their frustration out on the home? Did they take some or all of the fixtures and appliances? Has there been vandalism? Has the landscaping died due to neglect? Is the pool green and filled with mosquitoes? These are just some of the questions that come to mind when considering purchasing an REO property. There can be many types of problems that may go undetected in a property that sits vacant before and during a long foreclosure period. Questions about known damage must be asked, but more importantly REO properties must be inspected by professionals to determine seen and unseen damage. What looks like a good deal on the surface could be a disaster waiting to happen.

Investors planning to fix-up and re-sell properties must be very sensitive to location and local market conditions. Renovating a property has no assurance of increasing market value. This is especially true in a market flooded with lender owned properties. Keep in mind that many government and private insurance companies will not insure loans in areas with high foreclosure rates. Without this insurance, loans are very expensive, hard to get or even in some cases impossible to get. Be sure to know the area and market being invested in. Remember the old saying that real estate is all about three things; location, location and location, but don't forget about financing...

Q: Are REO's Still a Great Buy?
A: The answer is yes. With not much more effort, risk or expense than would be required in the purchase of ordinary properties, there is an unheard of once in a life time opportunity for many to purchase properties at below market prices.

This unusual market will not last forever. In fact, there has been some evidence that the market has bottomed. Now is the time to take advantage of this extraordinary market. Call me now: Dave Moore at 831-247-1327.

*Disclaimer: The answers given here are for informational purposes only. The issues in each of the cases discussed above can be very complex. Please consult with your legal, financial and or tax advisors for more complete details of risks.

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