What is an REO?
No, I am not referring to the first name of the old flatbed truck from the early 1900s that was designed by Ransom Eli Olds, or the first name of the 1970s rock band REO Speedwagon, which was named after the old truck. An REO in the context to which I am referring is a real estate owned property, also known as a bank owned property. As I mentioned in a previous article, banks are typically not interested in being in the real estate business. However, when a foreclosed property is not sold at public auction, which usually has a beginning bid price of at least the amount owed on it, the lender will retain the property, listing it as an asset on their accounting records, and attempt to sell it later.
Due to the bursting of the real estate bubble in recent years, there are many bank owned properties available for sale. This is because investors are not willing to pay the amount owed on the property at auction, which by today’s values is likely over-priced. Yes, there are deals to be found at public auctions. However, those deals come with a lot of risks when in an overly-saturated market a patient buyer can find a home listed by a realtor and purchase it by conventional methods, thus eliminating the risks.
So what risks do buyers face when purchasing a property at auction? Liens. A foreclosed property likely has more liens against it than just the one placed by the lender. These liens can range from those placed by probate due to unpaid property taxes to those placed by the city for an unkempt yard or by a worker on said property that was not paid. Condition. In most cases, a prospective buyer can only do a drive-by inspection of the property in which they are interested since most of these homes have someone living in them. If the house is empty, one might be able to get a view through the window, but there is no substitute for feeling of security found only through a thorough inspection such as when working through a realtor.
Funds. As a buyer registers for an auction, he or she must pay a deposit of 10% to 20% of the predetermined purchase price. The winning bidder must be able to pay the remaining balance almost immediately – usually within 24 hours or they forfeit their deposit. So unlike a traditional purchase through a realtor in which you have a period of time to get financing and a high powered realtor who goes the extra mile to help, finances need to be prearranged before the first bid is placed.
Price. Even though auctions have the reputation of producing “good deals”, one can still pay too much if they are unaware of market conditions in the area in which they are purchasing, title issues, probate issues, liens, and condition.
Once the property becomes an REO, a local realtor is usually responsible for handling these for the lending company. While this type of transaction is a bit safer due to the opportunity to inspect, make an offer based on contingencies rather than a bid, and use conventional lending, one must act fast when they find a property that meets their expectations. There are numerous agencies and websites, such as TheOfficialForeclosureList.com, which publish or advertise these properties for quick sell. So, expect stiff competition if you are in a competitive market, and expect to pay more than the asking price if the property is in fair to good condition, is in a good location, or is just a good project for flipping. While you may be purchasing for your own use or simply as an investment, if the property is in the ballpark of a even being somewhat close to a good investment, there will be many others making offers.
So unlike a traditional home shopping experience where you and the buyer are kicking offers and counter-offers back and forth at a moderate pace, once you find an REO that peeks your interest, you need to place your best offer first because you may not get another opportunity.