An REO (Real Estate Owned; bank owned) property is different from a foreclosure property because the bank has already tried unsuccessfully to sell it at a foreclosure auction and has now become the owner of the property. Naturally, the bank does not want to keep the REO any longer than possible, and this makes it a great opportunity for an investor. Not every REO is a good deal, but when you look at an REO you’ll commonly find that there is a lot of money to be made.
Advantages of REO vs. Foreclosed Property:
When buying REO’s you have distinct advantages over short sales or foreclosure auctions. These include:
Banks respond quickly to your REO purchase offer. A short sale acceptance can take months!
An accepted offer is a binding contract. Banks can reject winning auction bids at their discretion
Only one party (the bank) decides acceptance. Short sales must be approved by multiple parties
REO’s are sold with marketable title, meaning you have no past liens to worry about
You can view homes and make offers at any time, not just a scheduled auction date
You can inspect it before you buy. Auction sales are sold “as-is, where is”. Buyer Beware!
Some banks will pay your closing costs and/or other credits from the purchase price
A bank may offer the buyer a very favorable loan rate in order to get the home sold
Few delays: Banks insist on escrows closing on time
Banks sell homes with a professional, non-emotional demeanor
Why does the bank sell an REO below market value?
Banks are not set up to deal with real estate property management. Yes, they give loans to people but are not adequately staffed to buy back, maintain, and sell real estate. Because they are not accustomed with real estate asset management, it takes them time to remove any tenants, repair or secure the property, get an agent to sell the property, and administrate the entire procedure. The bank is losing money while holding the property, and the federal government may penalize them for any REO’s that they acquire. The bottom line is that banks are financial institutions created to do business in finance, not real estate.
Because the bank is losing money on each REO home the longer they keep it, they are willing to sell for less than market value. How much less? Each bank has to decide what their acceptable ratio of loss-to-hold is for them. Some will take a big discount to get the asset off their books now, and some will lower the price gradually until the property is sold. Banks can be as wrong about their price as any stubborn private party homeowner might be, so arming yourself with local, CURRENT market data is the best way to know what kind of offer should be made when buying.
Generally REO's are a great investment as long as you know what you are getting into. The bank will work with any serious offer because they can get the house out of their inventory and stop losing money.
The bank simply wants to get rid of these homes, and if you find the right property and are ready to make the serious investment, it can be a great way to get off and running in the real estate business. Those that dare, win.
REO properties have different sales conditions and requirements that set them apart from typical real estate transactions. Bank acceptance of the offer is initially verbal, with written management approval coming several days or more later. This differs from the practice of written acceptance to create a valid contract. The buyer is expected to perform as though a ratified contract is in place: escrow is opened, buyer’s security deposit is placed in escrow, loan approval, property appraisal, and inspection contingency timelines begin. Failure to begin on time could allow important contract dates to pass by unnoticed and the buyer held liable, with loss of the security deposit the possible result.
Banks will include their own “sellers addendum” which supercedes the purchase offer and is considered the banks final word for selling the property. Several things in these addendums are different from typical sales and must be carefully evaluated by the buyer before moving forward. A banks seller’s addendum may include:
Per Diem monetary penalties for a delay in close of escrow
Shortened contingency removal dates
Passive removal of contingencies
Loss of buyer deposit without recourse for buyer failure to perform
Other proprietary clauses
Successfully purchasing an REO home requires that the buyer know in advance what they are willing to pay for a property and offer accordingly. The ability to realistically calculate your remodeling costs, estimate the property’s physical condition, and being able to walk away from a sale after spending money on inspections are key to purchasing this type of property. The rewards can be great for a buyer willing to accept the challenges, use their resources wisely, and trust their instincts
What to watch out for:
Price and Credit negotiations: In general, banks will not further negotiate with a buyer on price or credits initial agreement and the contract is approved. That means you must get all of you credits and discounts IN ADVANCE. The most likely will not lower the price another $20,000 dollars because of the results of an inspection and considers inspections to be “for informational purposes only” and almost never adjust their price because of them. You must be prepared to either accept the results for the price offered or cancel the contract. This makes it VERY important to take a good look at a property before you get in contract. Take someone who knows properties and the neighborhood with you to help avoid a costly mistake.
Delays in closing escrow on time. Most banks will charge the buyer a per diem penalty for each day past the scheduled escrow closing date. This can range from $50.00 to $300.00 or more each day, and they may also include a one-time penalty in addition to the per diem charge for the inconvenience. Have your loan pre-approval in hand and don’t plan on changing lenders once in contract since the bank often considers a lender switch as breach of contract.
Passive contingency removal: A passive contingency removal means that once a date for removing a buyer condition of sale (loan approval, inspections, appraisal) has passed, it is considered that the buyer has waived that right to cancel the contract based on that condition. This method is radically different from private party home sales where the removal must be in writing (active contingency removal) and the buyer must not let these dates pass without a response or their security deposit may be forfeited under the terms of the contract.
Lack of property disclosures and reports: Banks are not considered to have actual knowledge about the condition of a property and it’s surrounding neighborhood, and they are exempt from providing some information that is required by private party sellers. This because the bank is assumed to have never lived on the property and has accepted the asset sight unseen.