What is an REO? REO stands for Real Property Ownership. Everyone is talking about REO these days. But before you consider buying one, there are a few things you should know about REOs. These properties are generally owned by banks, credit unions, mortgage companies, and sometimes private companies. It has become more and more common for the news to report on foreclosure problems and homeowners losing their homes and other effects of the foreclosure crisis. As a result, there have been dramatic increases in the marketing of REOs to the general public. It used to be that you could barely get your hands on foreclosure listings from lenders. But these days, everyone is trying to sell REOs.
The people being marketed by these REO sellers are primarily potential first-time homebuyers and minorities. Fannie Mae works with many companies to help these types of homebuyers realize the American Dream of homeownership through reasonable and affordable loans. There has been a shift in the industry from REO marketing to those who “trade” homes to first time homebuyers. The dramatic increase in foreclosures has left many lenders with high REO inventories, resulting in potentially advantageous opportunities for people who have never had access before, to gain access to the real estate market. Additionally, the number of foreclosures is allowing simple real estate investors to diversify and expand their portfolios.
There are many laws regarding foreclosures and the process. Mainly, when the property is in the pre-foreclosure and auction stage, the bank (owner) is only legally entitled to its losses and expenses. This means that the bank (owner) is not entitled to profit from the sale. However, this changes, after the property has been repossessed, you become an REO.
REOs are often considered fabulous starter homes because the sale prices of these properties are generally lower than those of a similar non-REO property. However, in today’s market, this may not always be the case. This is mainly due to the fact of the number of such properties on the market. Even though a property is an REO, it does not mean that the owner will not make a profit on the sale. Remember, after the foreclosure process, the REO owner can now make a profit, which can affect the sale price. Generally, a buyer is more likely to get a lower price when purchasing a home pre-foreclosure or at auction.
Let’s say you’ve now decided you want an REO. You should be aware that there are risks associated with this “great offer” you are receiving. When considering an REO purchase, make sure you have access to and contact information for several experts who will guide you through the inspection process.
You will need a real estate agent, who can protect your interests and make sure you get the best possible deal. Your real estate agent will be able to generate reports for you showing comparable sales prices that will allow you to assess whether the asking price for the REO you are considering is appropriate. There are some statistics that show the average REO price is 15 to 30 percent lower than comparable sales prices. However, there are REASONS for this.
REOs are sold AS IS. This means that what you see is what you get. You will need a qualified home inspector to guide you through this step of your REO buying process. Only a qualified inspector will be able to reveal latent flaws or problems that you should consider before purchasing the REO. You will need to factor in the costs of potentially repairing, replacing or rehabilitating necessary sections of the property in the price you will pay.
REOs take longer. When you buy an REO, you’re not dealing with a Joe and Jane Smith homeowner, you’re dealing with a bank or investment company. The decision-making and approval process of the sale in a company takes much longer than in individuals. It could take weeks to get your offer approved. Also, while most banks will remove tax liens and occupants (if necessary) from the property, to protect yourself, you should conduct a title search. Now you may not be able to do this yourself, so you’ll hire a company to do such a search for you, and the results may take up to a week to review. Another potentially time-consuming process is getting an appraisal. As a buyer, you should not blindly trust the seller’s appraisal, get your own! Any time or money you spend up front may well be worth it in the long run. You want to know you’re getting what you’re paying for!