subject: All About Bank Owned/REO Foreclosures [print this page] All About Bank Owned/REO Foreclosures All About Bank Owned/REO Foreclosures
An REO (Real Estate Owned) is a property that is taken back by the mortgagor when it remains unsold after the foreclosure auction. Many foreclosure auctions do not receive any bids at all. This is because frequently the amount owed to the bank is more than the value of the property. Hence, the property then goes to the bank and becomes an REO or bank owned property. The bank becomes the owner of the property and has to try to dispose it off in the most suitable manner.
Generally these properties have several liens attached to them. So the bank will attempt to negotiate with the IRS and remove tax liens if any. It will also have to deal with the eviction of the homeowners from the property. As a potential investor in an REO property, you will have the right to inspect the property before making a decision to purchase. The million dollar question is whether REO foreclosures are really good bargains. The general perception is that an REO property may not be the best bargain in the world for a number of reasons. You might need to make some repairs to get the property in ship-shape condition. The repair bill may not be as little as you think. Repairs and renovations can cost you a fortune. Secondly, the market value of the property may not be much compared to the asking price of the bank.
Even though there are no takers for the property at the foreclosure auction, this doesn't mean that the bank will be willing to dispose it off for a loss. Each bank has a different policy and will try to get the highest price they can. Make your offer to the bank and expect them to make a counter offer. If the price is higher than what you expected, be prepared to counter it with another offer. Generally, the bank will take your proposal and forward it for approval before making a final decision.
The trickiest part about getting REO properties is that the bank wants to sell it in an as-is condition. So you stand the risk of getting stuck with something you haven't bargained for. When you make the offer include an "inspection contingency" clause to protect yourself. This way you get a chance to inspect the property thoroughly and withdraw your offer if you come across any unexpected damages that the bank refuses to make good.
Sometimes even though the property has an as-is condition attached to it, you can negotiate with the bank to have them make repairs or foot the bill for the same. Most will not agree but if they are desperate to get the property off their back they might just compromise and meet you half-way. Though this is highly unlikely, it certainly doesn't hurt to ask.
Another drawback of purchasing REO properties is that it's not mandatory for banks to provide a Property Condition Disclosure Statement. However, you can still inspect the property and put in an "inspection contingency" condition in your offer. But if there is a real estate agent representing the bank or you, they are obligated to provide you with a Disclosure Statement.
Purchasing an REO property has a few advantages. You don't have to deal and negotiate with the homeowner as you would in a pre-foreclosure. Secondly, there is no competition from other investors that you would face in a foreclosure auction. You don't have to go through the trouble of evicting the homeowners as they are already evicted by the bank.
But on the flip side, the asking price of REO properties is higher than those in the pre-foreclosure stage. So as an investor planning to put money in an REO property, the real question you should be asking yourself is whether the pains you'll forgo to purchase a property at this stage will be worth the price you pay for it.
