REO vs. Foreclosure An REO (Real Estate Owned) is a property that goes back to the lender after an unsuccessful foreclosure auction. Most foreclosure auctions do not even result in bids. 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 or checks that represent the full amount of the bid. In Los Angeles County you only need 10% of the bid amount at the time of the auction. You will have 30 days to come up with the rest of the amount or the 10% payment is forfeit. If you are the successful bidder, you receive the property in "as is" condition, which may include someone still living in the property or other liens against the property.
Since what is owed to the bank is almost always more than what the value of the property, very few foreclosure auctions result in a successful sale. Then the property transfers back to the bank. It becomes a real estate owned property (“REO”).
REO Properties for SaleA REO is when the bank 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.
A bank owned property might not be a great bargain since the bank often has a full time real estate agent or broker that specializes in REOs and the prices often reflect the market conditions. Make sure to perform thorough due diligence prior to 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. It’s an old myth that “foreclosures” are a bargain.
How Banks Sell REO'sEach bank/lender works often have a different route in selling REOs, but they all have a similar goal. They want to get the best price possible and have no interest in "dumping" real estate cheaply unless the market conditions are really bad such as the early 1980s. Generally, banks have an entire department set up to manage their REO inventory. Keep in mind, however, that banks also do not want to manage the REOs, they are in the business of lending not managing properties.
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. A REO buyer 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." My suggestion is find out who handles the REOs for the neighborhoods you are interested in and then proceed to get to know them. Explain that you are a serious buyer and will have the opportunity to acquire properties quickly should the right opportunities arise. You will be surprised when they do call and have a property a large discount, be sure you will be able to act quickly or they will never call again.
Property Condition 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. The banks with a specialized REO agent might hire a contractor to do some repair work but don’t expect a complete renovation, it will often only be “touch up” type of work.
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.
Most banks will not provide financing on their REOs but it doesn’t hurt to ask. Especially if the property has extensive damage and you are purchasing it "as is."
Making an Offer Before making an offer, have your agent contact the listing agent and ask the following:
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 (banks are closed).
Since there is no face-to-face presentation to the bank, provide the listing agent with a pre-qualification or better yet, a pre-approval letter and buyer biography. Make your offer easy to accept.
Hopefully these tips will manage your expectations. Remember that REO's sell at pretty close to full market value and are not the deals presented on late night television