REO stands for real estate owned, and it refers to homes that have been foreclosed by mortgage lenders and are now owned by the financial institutions that foreclosed. Foreclosed homes may also be listed as “bank owned.”
REO homes are typically priced lower than prevailing market price, and sellers may offer incentives including favorable mortgage terms for financing the purchase of an REO home.
First time buyers - REO properties provide first time home buyers an opportunity to buy a home and get an affordable mortgage. They may also qualify for state, county, and local home buyer funding and assistance.
Real Estate Investment - In spite of today’s market fluctuations, licensed contractors and investors can buy a damaged REO property for pennies on the dollar, rehab it, and rent of sell it at a profit. “Flipping” is not recommended unless you’re experienced and knowledgeable about home renovation and local real estate markets.
REO Bad News - Foreclosed homes can be damaged by former owners, squatters, and vandals. They may be little more than shells, and can attract crime and vermin. Don’t buy an REO property you haven’t inspected.
Neighborhood Blight – Foreclosed homes may sit vacant and damaged for months. This invites further damage and can result in citations by city building departments and health agencies. Be prepared to start work on a damaged REO as soon as you buy it.
Negotiate with Seller – Banks and mortgage companies are overloaded with REO homes. Feel free to negotiate with sellers; you may be pleasantly surprised.
Getting a Mortgage – Many lenders selling REO properties can also provide a purchase money mortgage. Ask about this when considering an REO property; you may receive very good terms on a fixed rate mortgage.
Bank Owned (REO) Buying Tips
Properties that have been taken back by the bank through the foreclosure process are known as “real estate owned” or REO. Buying these bank owned homes can result in some real cost savings, however, there are some different procedures and contractual terms that a buyer should understand. It is very important that a buyer work with a seasoned and experienced professional that understands the REO buying process.
Finding bank owned properties is best done through the multiple listing service (MLS). Banks generally list their properties with real estate brokers just like most Sellers. The bank wants to expose the property to as many potential buyers as possible, and this is best done through the MLS. Locating and making an offer on a property before it is listed is very difficult, and most banks will not entertain pre-list offers.
PRE APPROVED FOR A LOAN
It is absolutely imperative that the buyer be pre-approved for a loan BEFORE, viewing available bank owned properties. Banks take into consideration when evaluating offers: the amount of any down payment, the type of loan and the borrowing strength of the buyer. Some banks may consider a lower purchase price if the buyer will be obtaining a loan through the same bank that currently owns the property. This is especially important when there are multiple buyers making offers on the same property. It is also important to be pre-approved so that as a buyer you’re only evaluating and considering homes that you could actually afford to purchase.
Making an offer on a REO begins with the same contract that a buyer would use when placing an offer on a regular house. In addition to the California Association of Realtors (CAR) Residential Purchase Agreement (RPA), almost every bank has their own set of addendums. Some banks prefer to have the terms all completed on their own forms when making the initial offer, while others prefer to evaluate the offer on the RPA only, and then provide the counter-offer terms on their addendum. Each bank is different on these procedures. Knowing how an individual bank works, and then proceeding along their desired system will increase the likelihood of your offers acceptance. Banks generally take longer to accept an offer than a normal seller. This is especially true when the home is priced low for the area and there are multiple offers. Buyers need to be patient, and understand that when there are numerous people bidding on the same house, that only one will “win”. Having the “Best” offer is not always the highest price. Knowing what the risks are to a bank is very important in a multi-offer property.
When your offer is accepted, the clock for your Due Diligence period starts ticking. Due Diligence is that period of time that the Buyer has to confirm that this is in fact the property he wants to buy. The banks enforce the timeframes very strictly, and most will only extend the time limits for a fee. The Buyer will have between 5 days and 21 days to complete all of the property inspections, review disclosure reports and confirm that their financing is in place. These dates are usually shorter than the time frames contained in the standard RPA. Banks have different time frames that they follow, so it is very important to understand them and make sure you complete each task on time. Working with a Realtor that knows the time limits is crucial to a successful closing. Most banks do NOT want to fix or repair the properties before they are sold. Be sure that the contracts are very clear about who will be paying for Termite inspection and repairs, or who will handle any of the Buyer’s Lender required repairs.
EARNEST MONEY DEPOSITS
One of the biggest differences between a traditional sale and a REO purchase deals with the deposit. The Earnest Money Deposit is the initial money that is placed into escrow by the Buyer. It is intended to show that the Buyer is “serious” about buying the property. Under the standard RPA, the deposit is usually returned to the Buyer if the home does not close because of a financing or other problem that causes the Buyer to change their mind about closing on the home. When buying a bank owned home, the bank’ contract usually allows the bank to keep the deposit once the timeframes for the various contingencies pass per the contract addendum. It is absolutely critical for a Buyer to understand the timeframes, and for them to comply with the dates listed in the bank’s contract. The amount of deposit may also have an impact on the banks evaluation of multiple offers on the same house.
Escrow companies that are hired by larger banks with a lot of inventory are usually paid a lower than market fee. This has resulted in a low level of service from these escrows. Patience is a must when going through a REO purchase. Be ready to move very quickly when the bank asks you as the Buyer for paperwork or information. Also be prepared for the bank as the seller to take a long time with no real reason for them to get back to you with information or signatures. Remember that the bank is dealing in some cases with thousands of properties in the system, so responses from them can take some time. Be patient.
Once you close escrow, you get to move into your new house. Do not discuss in detail the GREAT deal you received with your new neighbors. Be courteous and realize that your “Great Deal” probably just lowered the value of your neighbor’s home. Make exterior repairs like front lawn and weed abatement as quick as you can after you move in. Be a good neighbor, and enjoy your HOME!
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