What is an REO property?
Have you ever heard people talking about homes listed as “REOs” and wondered what they were? An REO (Real Estate Owned) property is real estate owned by the bank. It is different from a foreclosure property in that the bank has already tried to sell it at a foreclosure auction and has had no luck getting bids. As a result, the bank is now the owner of the property. This is how it works.
After the bank takes possession of the property, the mortgage loan disappears and the bank deals with any items owed by the prior borrower, such as homeowner association fees. They also try to get the IRS to remove any tax liens against the property. The current owners are usually evicted and often repairs are made to damage on the property in order to make it more attractive to potential buyers.
The best parts of buying a REO property are that buyers have significant leverage and may be able to turn the property around quickly, making money by speculating on above average returns. Banks are trying to get the maximum return when they sell an REO property directly. They want to sell them quickly for two main reasons: first, they don't want to tie up their money in capital reserves they are required to set aside for a foreclosed property, and second, the management of such properties is a headache they would rather not have.
The selling process starts when a potential buyer makes an offer to the bank, which is gone over by its management. Often, the bank will make a counteroffer, and the buyer may respond with another offer. After they have agreed on the price, terms, and conditions, a contract for the sale can be made.
When preparing to make an offer, a potential buyer needs to look at what comparable properties in the area are worth, along with the cost of any needed repairs. Thus having the help of a licensed real estate professional would be a great benefit. Banks usually sell such properties as-is, which makes the buyer's inspection very important. If they discover damage that they did not anticipate, which the institution will not repair, they can then cancel the transaction.
The benefits of buying an REO can be substantial and include: savings up to 30% off the market value of the property; immediate access by buyers to the property for home inspections; a simpler way for first time homebuyers and experienced investors to buy properties; all back taxes and liens will be removed and the bank will evict the tenants for you; buyers can negotiate the rehab costs, interest, closing points, loan amount, etc.; the purchase can be almost 100% risk free; and many banks will accept a less-than-normal down payment.
As a result, an REO purchase could be a great deal for an investor or homebuyer. But, remember, any transaction is a good as the people handling it. Make sure you have an experienced real estate agent, an excellent home inspector and your financial and legal issues well represented. This year an REO property maybe something you will be talking about.
For more information about REO or any property question, contact Janet today!
