REO Properties
REO (REAL ESTATE OWNED) property describes a specific property: A property that has been foreclosed on and has been taken back by the mortgage lender or trustee. A REO is created from an unsuccessful foreclosure sale, where the bank or lender cannot find a buyer for the property in its present condition.
There can be many reasons why a foreclosure sale fails and the property becomes REO, but whatever the reasons the outcome is that the house needs to be sold by the bank, or lender, to generate a profit and a return on their investment. An ideal house cannot generate money for the bank, and so they need to sell it, therefore generating money to invest and increase the banks profitability, share price and other important items.
Purchasing a REO property can be a good acquisition for homebuyers and investors alike, for many reasons. Mortgage lenders promote the fact that purchasing an REO from them is one of 'the safest ways to buy' real estate. This is in fact relatively true for the following reasons: no risk to the buyer, no tenants to evict, and no taxes to pay. Even statistics show that when it comes to buying a home that has been foreclosed on, REO purchases is a more popular method of purchase than any other.
To produce a fast sale bank or lenders tend to offer the following benefits to a prospective buyer:
Savings of up to 20% off home market values Allow immediate access to a property for inspections No back taxes or liens to worry about Flexible rehab costs, interest, closing points, loan amount, etc. Roughly 100% risk-free purchase Cheap down payment
Understanding REO Property
Although there are many benefits with buying a REO property before you go ahead with the purchase you should always be aware of what you are getting into and what you are liable for.
A REO, as explained earlier, is a property that is owned by a bank or lender, as a result of a foreclosure and failed foreclosure sale/auction. As a direct result of this foreclosure the bank now owns the property and the mortgage that was present no longer exists.
In order to remove the property from the banks balance sheet, therefore generating cash for investment (one of the major aims of a lender or bank) the bank will try to make the property as attractive as possible.
The first thing that a bank or mortgage lender will have to do is handle any eviction. The eviction removes any tenants that are squatting on the property that they once owned and therefore frees the prospective buyer of the obligation to remove the tenants themselves. This action usually makes the property more attractive, as the stress and cost of removing the tenants will not be the concern of the buyer,
Also the bank or lender will, if necessary, do some repairs. One of the benefits of an REO is that the buyer is entitled, and capable, of having an immediate appraisal, or inspection carried out on the property.
An inspector is an expert professional that is qualified to use their opinion, judgment and experience to perform a thorough and detailed examination of a home. To perform their examination home inspectors use a variety of tools and techniques, to build up an analysis of what state the home is in. Once they have inspected everything from rooms and fittings to the condition of the water, heating and electricity systems the inspectors will produce a report detailing the complete condition of the home. If the inspector finds that the house is in a bad condition then the bank or Loan Company might be willing to pay for the repairs.
As well as paying for any major repair the bank or Loan Company will negotiate with the Internal Revenue Service (IRS) for the removal of tax liens (a type of financial instrument secured by your property) and pay off any homeowner's association dues. This again makes the property more attractive, and will most likely result in a quick sale.
Due to the actions of the bank or Loan Company, in evicting the tenants, working with the IRS and removing all secured items against the property the purchaser of an REO property will receive a title insurance policy that specifically indicates that they are the actual, and sole owners of the property.
Even though a bank owned property might look like a great bargain on the outside, it is essential that you do your homework on the property before you commit to any contracts.
Comparative Market Value
The first thing that you should look at is what is the comparative market value of the property that you are buying. A real estate agent or realtor will be able to help you out by compiling a report on how the home that you are interested in compares in price to others that are similar and near your location. It is important to make sure that the price you pay for the property is comparable to other homes in the neighborhood.
As well as cost you should investigate the area around the property, its proximity to good schools, doctors, dentists and other important facilities and amenities. Once you are satisfied with the price and location you should then look at the condition of the house, if you have not done so already. A home inspector or appraiser will be able to help you out, although an appraiser will cost around $300, for a $250,000 valued home. Consider the costs of renovations, including time to complete them and look out for any 'bidding wars' that may cause you to pay over market value for the property.
