Buying an REO

Buying a home that has been foreclosed can sometimes be a great way to save some money and get into a neighborhood that you couldn’t otherwise afford. However, if you are interested in buying a bank owned property, there are a few things you should know first about the offer and escrow process.

What is an REO?

When a homeowner fails to pay their mortgage, they receive what is called a “notice of default”, which informs them that the foreclosure process has been started. If the owner fails to pay the amount due within three months after receiving the NOD, a trustee appointed by the bank may issue a Notice of Sale – which gives a set date for the property to be auctioned off to the public. If the sale proceeds, the bank will often purchase the property back, in which case it is referred to as an REO, or “Real Estate Owned” by the bank.

What is the benefit of buying an REO?

Banks need to sell REO properties quickly in order to make back both the money they lost, and the money they paid at the auction. Because of this, these homes are often listed below market value to attract immediate buyer interest.

Unlike short sale escrows, REO sales typically follow a more standard timeline. While there may be delays dealing with banks that have a high volume of sales, the average response time on offers is a week or less – which is much quicker than what buyers experience in the short sale process.

What are the drawbacks to buying an REO?

When homes are priced way below value, they generally attract multiple offers – so the final sales price may end up closer to the appropriate market value.

REO properties have often been sitting vacant for many months, so the homes may be showing deterioration and there could be deferred maintenance issues.

In a standard sale, the buyer is negotiating with a seller who has typically lived in the property and knows the history of the home. REO sales are different – because the bank has never lived in the house, it may have no knowledge about past repairs or issues involving the property, and buyers will receive fewer disclosures from the seller.

REO sales are often “as-is” sales. That means the bank may not agree to make repairs to the property or to pay for items that are usually the seller’s responsibility – such as termite repairs.

Because REO transaction procedure differs from bank to bank, buyers may be required to sign additional paperwork or agree to specific contract terms that would not be included with standard offer paperwork.

And lastly, buyers need to remember that unlike standard sales – in which buyers may be able to forge an emotional connection with the seller that can make negotiations easier – REO sellers are institutions, so they won’t have a personal stake in who buys the home.

If you have any questions about buying an REO or the market in general, feel free to contact me!