You hear on the tv and the paper that you can get a great deal on an REO. You expect 50% savings off your dream home, after all isn’t this the worst real estate market in history? Sounds great and it might just happen, but first you should take a look at some facts and get prepared.
REO vs. Foreclosure
An REO (Real Estate Owned) is a property that goes back to the mortgage company after an unsuccessful foreclosure auction. You see, most foreclosure auctions do not even result in bids. After all, if there was enough equity in the property to satisfy the loan, the owner would have probably sold the property and paid off the bank. That is why the property ends up at a foreclosure or trustee sale.
Foreclosure sales begin with a minimum bid that includes the loan balance, any accrued interest, plus attorney’s fees and any costs association with the foreclosure process. In order to bid at a foreclosure auction, you must have a cashier’s check in your hand for the full amount of your bid. If you are the successful bidder, you receive the property in "as is" condition, which may include someone still living in the property. There may also be other liens against the property. So you better know what you are buying, and don’t expect your real estate agent to help you out, since foreclosures do not pay commissions.
These days, and the Santa Clara County is no exception, what is owed to the bank is almost always more than what the property is worth, and as a result very few foreclosure auctions result in a successful sale. Then the property "reverts" to the bank. It becomes an REO, or "real estate owned" property.
REO Properties For Sale
The bank now owns the property and the mortgage loan no longer exists. The bank will handle the eviction, if necessary, and may do some repairs. They will negotiate with the IRS for removal of tax liens and pay off any homeowner’s association dues. As a purchaser of an REO property, the buyer will receive a title insurance policy and the opportunity to investigate the property. Much better than buying a foreclosures.
A bank owned property might not be a great bargain. Do your homework before making an offer. Make sure that the price you pay (if you’re successful) is comparable to other homes in the neighborhood. Consider the costs of renovation, including time to complete them. Don’t get caught up in a ‘bidding war’ and pay over market value. Not all REO’s are great deals.
How Banks Sell REO’s
Each bank/lender works a little differently, but they all have similar goals. They want to get the best price possible and have no interest in "dumping" real estate cheaply. Generally, banks have an entire department set up to manage their REO inventory.
Once you make an offer to purchase, banks generally present a "counter-offer." It may be at a higher price than you expect, but they have to demonstrate to investors, shareholders and auditors that they attempted to get the highest price possible. You should plan to counter the counter-offer.
Your offer or counter-offer will probably have to be reviewed and approved by several individuals and companies. Even once an offer is accepted, the bank may insert wording like “..subject to corporate approval with 5 days."
Banks always want to sell a property in "as is" condition. Most will provide a Section 1 pest certification, but not unless you include it in your offer and negotiate the point. They will allow you to get all the inspections you want (at your expense), but they may not agree to do any repairs.
Your offer should include an inspection contingency period that allows you to terminate the sale if the inspections reveal unanticipated damages that the bank will not correct.
Even though you agreed to “as is," always give the bank another opportunity to make repairs or give you a credit after you’ve completed your inspections. Sometimes they’ll re-negotiate to save the transaction instead of putting the property back on the market, but don’t take it for granted.
Banks do not want to see a lot of proprietary disclosures; they are exempt from the California Seller’s Transfer Disclosure Statement (TDS-14). If there are real estate agents involved, either representing you or the bank, those agents are required to provide you their disclosure statements.
Some REO’s are in such poor condition it may be difficult to get a lender to lend on the property. Even the bank who owns the property may not even provide the loan. Some banks will provide financing on their REOs. So you definitely want to have a financing and appraisal contingency.
Making an Offer
Offers are usually FAXED to the bank. The listing agent needs your originals. There is no formal presentation. Keep in mind: nothing happens evenings and weekends since the banks are closed.
In Santa Clara County which by national standards is an active real estate market there are thousands of REO properties. Some localities have more REO’s than others. Where there are fewer REOs, areas like Sunnyvale, Mountain View, Santa Clara, Saratoga, and Cupertino don’t expect to get that great of a deal on an REO property. In areas like South San Jose, East Valley, Milpitas, Morgan Hill, Blossom Valley, and Gilroy, where REO’s and Short Sales make up a large percentage of the total inventory, you will see that prices have dropped significantly. This will include standard homes that are competeing with REO’s.
If you still want to buy an REO, make sure you find a Realtor who knows the market in the area you are looking, and can decipher if its a good deal or not.